HECO Exhibit 13.2
-----------------
Forward-Looking Statements
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This report and other presentations made by Hawaiian Electric Company, Inc.
(HECO) 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, expenses, earnings or losses or growth rates), ongoing business
strategies or prospects and possible future actions, which may be provided by
management, are also forward-looking statements. Forward-looking statements are
based on current expectations and projections about future events and are
subject to risks, uncertainties and assumptions about HECO and its subsidiaries,
the performance of the industry in which they do business and economic and
market factors, among other things. These forward-looking statements are not
guarantees of future performance.
Risks, uncertainties and other important factors that could cause actual
results to differ materially from those in forward-looking statements include,
but are not limited to, the following:
. the effects of international, national and local economic conditions,
including the condition of the Hawaii tourist and construction
industries and the Hawaii housing market;
. the effects of weather and natural disasters;
. the effects of terrorist acts and the war on terrorism;
. the timing and extent of changes in interest rates;
. product demand and market acceptance risks;
. increasing competition in the electric utility industry;
. capacity and supply constraints or difficulties;
. fuel oil price changes and the continued availability to HECO and its
subsidiaries of their energy cost adjustment clauses;
. new technological developments;
. federal and state governmental and regulatory actions, including
changes in laws, rules and regulations applicable to HECO and its
subsidiaries; decisions by the Hawaii Public Utilities Commission in
rate cases and other proceedings and by other agencies and courts on
land use, environmental and other permitting issues; required
corrective actions (such as with respect to environmental conditions,
capital adequacy and business practices); and changes in taxation;
. the effects of changes by securities rating agencies in the ratings of
the securities of HECO and its subsidiaries;
. the results of financing efforts;
. the ultimate outcome of tax positions taken; and
. other risks or uncertainties described elsewhere in this report and in
other periodic reports previously and subsequently filed by HECO and
its subsidiaries with the Securities and Exchange Commission.
Forward-looking statements speak only as of the date of the report,
presentation or filing in which they are made.
Background of the Company
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Hawaiian Electric Company, Inc. (HECO) is engaged in the business of generating,
purchasing, transmitting, distributing and selling electric energy on the island
of Oahu and, through its two electric utility subsidiaries, on the islands of
Maui, Lanai, Molokai and Hawaii in the State of Hawaii (State). HECO was
incorporated under the laws of the Kingdom of Hawaii (now State of Hawaii) on
October 13, 1891. On July 1, 1983, Hawaiian Electric Industries, Inc. (HEI),
through a corporate reorganization, became the parent company of HECO. HECO's
principal business and executive offices are in Honolulu, Hawaii.
HECO's electric utility subsidiaries are Maui Electric Company, Limited
(MECO), acquired in 1968, and Hawaii Electric Light Company, Inc. (HELCO),
acquired in 1970. HECO's nonoperating subsidiaries include two Delaware Business
Trusts, HECO Capital Trust I and HECO Capital Trust II (Trusts), which were
formed in connection with trust preferred security financings.
HECO, MECO and HELCO (collectively, the "Company") are regulated by the
Public Utilities Commission of the State of Hawaii (PUC).
The five islands on which HECO and its subsidiaries provide service have a
combined service area of 5,766 square miles and approximately 95% of the State's
total population. The generating plants and major load centers on each of the
five islands served by HECO and its subsidiaries are not interconnected.
Company Profile
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Hawaii
Hawaiian Maui Electric
Electric Electric Light
Company, Company, Company, Consoli-
Year ended December 31, 2001 Inc. Limited Inc. dated
- ------------------------------------------------------------------------------------
(dollars in millions)
Electricity sold -- KWH (millions) ..... 7,277 1,134 959 9,370
Operating revenues ..................... $ 885 $ 205 $ 194 $ 1,284
Operating income ....................... $ 84 $ 28 $ 23 $ 135
Gross plant* ........................... $ 2,039 $ 592 $ 640 $ 3,271
Service area (square miles) ............ 616 1,118 4,032 5,766
Service area population (thousands)**... 883 130 151 1,164
Customer accounts* ..................... 280,911 58,840 65,241 404,992
Average annual residential use -- KWH .. 7,816 7,654 6,692 7,620
Generating and firm purchased
capability -- MW* .................. 1,669 273 261 2,203
Peak load -- MW (noncoincident and
nonintegrated) ..................... 1,233 203 178 1,614
Number of employees* ................... 1,329 306 295 1,930
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* At December 31
** Estimated
2
Selected Financial Data
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Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31 2001 2000 1999 1998 1997
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(in thousands)
Income statement data
Operating revenues .... $1,284,312 $1,270,635 $1,050,323 $1,008,899 $1,098,755
Operating expenses .... 1,148,980 1,137,474 927,482 892,747 987,715
---------- ---------- ---------- ---------- ----------
Operating income ...... 135,332 133,161 122,841 116,152 111,040
Other income .......... 7,436 9,935 8,054 16,832 19,042
---------- ---------- ---------- ---------- ----------
Income before interest
and other charges .... 142,768 143,096 130,895 132,984 130,082
Interest and other
charges .............. 53,388 54,730 54,495 48,754 48,233
---------- ---------- ---------- ---------- ----------
Income before preferred
stock dividends of
HECO ................. 89,380 88,366 76,400 84,230 81,849
Preferred stock
dividends of HECO .... 1,080 1,080 1,178 3,454 3,660
---------- ---------- ---------- ---------- ----------
Net income for common
stock ................ $ 88,300 $ 87,286 $ 75,222 $ 80,776 $ 78,189
========== ========== ========== ========== ==========
At December 31 2001 2000 1999 1998 1997
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(dollars in thousands)
Balance sheet data
Utility plant .................. $ 3,270,855 $ 3,162,779 $ 3,034,517 $ 2,925,344 $ 2,797,886
Accumulated
depreciation .................. (1,266,332) (1,170,184) (1,076,373) (982,172) (904,781)
----------- ----------- ----------- ----------- -----------
Net utility plant .............. $ 2,004,523 $ 1,992,595 $ 1,958,144 $ 1,943,172 $ 1,893,105
=========== =========== =========== =========== ===========
Total assets ................... $ 2,389,738 $ 2,392,858 $ 2,302,809 $ 2,311,253 $ 2,212,314
=========== =========== =========== =========== ===========
Capitalization:/1/
Short-term borrowings
from non-affiliates
and affiliate ................. $ 48,297 $ 113,162 $ 107,013 $ 139,413 $ 95,581
Long-term debt ................. 685,269 667,731 646,029 621,998 627,621
Preferred stock
subject to mandatory
redemption .................... -- -- -- 33,080 35,770
Preferred stock not
subject to mandatory
redemption .................... 34,293 34,293 34,293 48,293 48,293
HECO-obligated preferred
securities of subsidiary
trusts ........................ 100,000 100,000 100,000 100,000 50,000
Common stock equity ............ 877,154 825,012 806,103 786,567 769,235
----------- ----------- ----------- ----------- -----------
Total capitalization ........... $ 1,745,013 $ 1,740,198 $ 1,693,438 $ 1,729,351 $ 1,626,500
=========== =========== =========== =========== ===========
Capital structure ratios (%)/1/
Debt ........................... 42.0 44.9 44.5 44.0 44.4
Preferred stock ................ 2.0 2.0 2.0 4.7 5.2
HECO-obligated preferred
securities of subsidiary
trusts ........................ 5.7 5.7 5.9 5.8 3.1
Common stock equity ............ 50.3 47.4 47.6 45.5 47.3
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/1/ Includes amounts due within one year, short-term borrowings from
nonaffiliates and affiliate, and sinking fund and optional redemption
payments.
HEI owns all of HECO's common stock. Therefore, per share data is not
meaningful.
See Note 11, "Commitments and Contingencies," in the "Notes to Consolidated
Financial Statements" for a discussion of certain contingencies that could
adversely affect the Company's future consolidated financial condition and
results of operations.
3
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes.
Strategy
--------
In addition to improvements in general economic conditions and growth in
tourism, keys to achieving returns from the electric utility business are
ensuring customer satisfaction and containing costs. With large power users in
the Company's 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 achieving kilowatthour (KWH) sales and revenue growth
in Hawaii over time. The Company has established programs that offer customers
specialized services and energy efficiency audits to aid them in saving on
energy costs. The Company has also undertaken cost containment measures to
control costs in the current economic environment. For example, the Company has
implemented an integrated computer system that has allowed the consolidation of
certain accounting and purchasing functions, thereby streamlining business
processes, cutting labor costs, lowering inventory and realizing savings from
purchase volume discounts.
Results of operations
---------------------
Net income for common stock for 2001 was $88.3 million compared to $87.3 million
for 2000 and $75.2 million for 1999. The 2001 net income represents a 10.4%
return on the average amount of common stock equity invested in the Company,
compared to returns of 10.7% in 2000 and 9.4% in 1999. Net income for 2001
increased 1.2% from 2000 due primarily to a 1.1% increase in KWH sales and a
HELCO rate increase. Net income for 2000 increased 16% from 1999 as KWH sales
increased by 3.2%, reflecting the then improving Hawaii economy.
The Company's operating results are significantly influenced by the
strength of Hawaii's economy, which in turn is influenced by economic conditions
in the mainland U.S. (particularly California) and Asia (particularly Japan) as
a result of the impact of those conditions on tourism. After a long and slow
recovery period, Hawaii's economy was showing signs of growth as evidenced by
the record high 7 million visitor arrivals in 2000. Since tourism accounts for
about a quarter of the state's economic output, Hawaii's economy weakened after
the September 11, 2001 terrorist attacks due to the downturn in air travel, both
domestically and internationally. Visitor arrivals to Hawaii in September 2001
fell by 34% compared with the same period a year ago. The downturn in
tourism-related businesses initially resulted in job layoffs throughout the
state, further weakening Hawaii's economy. However, Hawaii's economy has
partially recovered. By the end of December, visitor arrivals had recovered to
almost 90% of year-ago levels, with domestic arrivals above 2000 levels and
international arrivals, mainly from Japan, at 70% of 2000 levels. For 2001,
visitor arrivals declined by 9% from 2000. The State of Hawaii estimates that,
for the year 2001, total jobs have increased by 0.4% and real gross state
product has grown by 1.2%, less than one-half of the growth rate predicted prior
to September 11, 2001. The negative impact on the state's economy due to the
decline in tourism has been offset to some degree by strength in the
construction industry and the stability of expenditures by the federal
government.
Sales
Consolidated sales of electricity were 9,370 million KWHs for 2001, 9,272
million KWHs for 2000, and 8,985 million KWHs for 1999. The 1.1% increase in KWH
sales in 2001 was primarily due to warmer temperatures, which resulted in higher
residential and commercial air conditioning usage, and an increase in the number
of customers. Through August 2001, KWH sales were up 1.6%. However, declining
tourism and the weakened economy after the September 11, 2001 terrorist attacks
caused a 0.4% decrease in KWH sales in the fourth quarter compared to the same
period last year.
4
Management's Discussion and Analysis, continued
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The 3.2% increase in KWH sales in 2000 was primarily due to the improvement
in Hawaii's economy, an increase in the number of customers and warmer
temperatures. KWH sales increased in 2000 despite increases in rates resulting
primarily from increases in fuel prices. For the month of December 2000, HECO,
HELCO and MECO's average price per barrel of fuel oil increased between 31% and
47% over December 1999, while their customer's typical monthly residential bill
in December 2000 for 600 KWH increased between 11% and 27%.
Operating revenues
The rate schedules of the Company include energy cost adjustment clauses under
which electric rates are adjusted for changes in the weighted average price paid
for fuel oil and certain components of purchased power costs, and the relative
amounts of company-generated power and purchased power.
Operating revenues were $1,284.3 million in 2001, compared to $1,270.6
million in 2000 and $1,050.3 million in 1999. The 2001 increase in operating
revenues of $13.7 million, or 1.1% over 2000, was due to a 1.1% increase in KWH
sales ($12.2 million) and a HELCO rate increase ($6.0 million), partially offset
by lower energy prices which were passed through to customers ($8.7 million).
The 2000 increase in operating revenues of $220.3 million, or 21.0% over 1999,
was due to higher fuel oil prices which were passed through to customers ($186.9
million), and a 3.2% increase in KWH sales ($29.8 million), and the remainder
was due partly to higher rates at HELCO.
Operating expenses
Total operating expenses were $1,149.0 million in 2001 compared to $1,137.5
million in 2000 and $927.5 million in 1999. The increase in 2001 was due to
increases in expenses for purchased power, other operation, depreciation and
taxes other than income taxes, partly offset by a decrease in fuel oil and
maintenance expenses. The increase in 2000 was due to increases in expenses for
fuel oil, purchased power, maintenance, depreciation and taxes other than income
taxes, partly offset by a decrease in other operation expense.
Fuel oil expense was $346.7 million in 2001 compared to $362.9 million in
2000 and $216.7 million in 1999. The 4.5 % decrease in 2001 was due primarily to
lower KWHs generated. The 67.5% increase in 2000 was due primarily to higher
fuel oil prices and more KWHs generated. In 2001, the Company paid an average of
$33.49 per barrel for fuel oil, compared to $33.44 in 2000 and $20.46 in 1999.
Purchased power expense was $337.8 million in 2001 compared to $311.2
million in 2000 and $275.7 million in 1999. The increase in purchased power
expense in 2001 was due to higher purchased capacity payments resulting from
increased capacity (including a new independent power producer (IPP), Hamakua
Partners, in August 2000), higher availability and more KWH purchased, partially
offset by lower energy prices. The increase in 2000 was due to higher energy
prices and higher KWH purchased. Purchased KWH provided approximately 39.0% of
the total energy net generated and purchased in 2001 compared to 36.4% in 2000
and 35.7% in 1999.
Other operation expenses totaled $125.6 million in 2001, compared to $123.8
million in 2000 and $136.3 million in 1999. The increase in other operation
expenses in 2001 was primarily due to higher injuries and damages expense,
partially offset by lower production operation expenses. The decrease in other
operation expenses in 2000 was primarily due to a decrease of approximately $19
million in pension and other postretirement benefit expenses. The lower pension
and other postretirement benefit expenses were partly due to an increase in the
discount rate (from 6.50% at December 31, 1998 to 7.75% at December 31, 1999)
and a change in the method of determining market-related value of retirement
benefit plan assets. See Note 10 in the "Notes to Consolidated Financial
Statements." (The discount rate was lowered to 7.5% at December 31, 2000.) HEI
charges for general management, administrative and support services totaled $2.0
million in 2001 and $1.8 million each in 2000 and 1999.
5
Management's Discussion and Analysis, continued
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Maintenance expenses in 2001 of $61.8 million decreased by $4.3 million
from 2000 due primarily to lower production maintenance expenses largely due to
less station maintenance expenses and less transmission and distribution
maintenance work. Maintenance expenses in 2000 of $66.1 million increased by
$8.6 million over 1999 due primarily to higher production maintenance expenses
largely due to more station maintenance expenses and more transmission and
distribution maintenance work.
Depreciation expense was up 2.2% in 2001 to $100.7 million and up 5.6% in
2000 to $98.5 million. In both years, the increases reflect depreciation on
additions to plant in service in the previous year. Major additions to plant in
service included HECO's Archer-Kewalo 138 kilovolt (KV) Line #1 and MECO's 20MW
combustion turbine Maalaea Unit 19 in 2000 and HECO's Waialua-Kuilima 46KV line
and Kamehameha Highway 12KV underground conversion projects in 1999.
Taxes, other than income taxes, increased by 0.9% in 2001 to $120.9 million
and increased by 20.0% in 2000 to $119.8 million. These taxes consist primarily
of taxes based on revenues, and the increases in these taxes reflect the
corresponding increases in each year's operating revenues.
Operating income
Operating income for 2001 increased 1.6% compared to 2000 due to higher KWH
sales and lower maintenance expenses, partially offset by higher other operation
and depreciation expenses. Operating income for 2000 increased 8.4% compared to
1999 due to higher KWH sales and lower other operation expenses, partially
offset by higher maintenance, depreciation and income tax expenses.
Other income
Other income for 2001 totaled $7.4 million, compared to $9.9 million for 2000
and $8.1 million for 1999. The decrease in 2001 was due largely to lower
Allowance for Equity Funds Used During Construction (AFUDC-Equity). AFUDC-Equity
for 2001 was lower than 2000 due to a lower base on which AFUDC-Equity is
calculated. The increase in 2000 was due largely to higher AFUDC-Equity, due to
a higher base on which AFUDC-Equity is calculated.
Interest and other charges
Interest and other charges for 2001 totaled $53.4 million, compared to $54.7
million for 2000 and $54.5 million for 1999. Interest and other charges included
$7.7 million of preferred securities distributions by HECO's trust subsidiaries
in 2001, 2000 and 1999. See Note 3 in the "Notes to Consolidated Financial
Statements" for a discussion of the preferred securities issued by the trust
subsidiaries.
Interest on long-term debt for 2001 was in line with 2000 and 1999. Lower
bond interest rates were offset by interest on drawdowns of tax-exempt Special
Purpose Revenue Bonds (SPRB) during both years and the full year's interest on
the prior year's drawdowns of SPRB proceeds. In November 2000, $21 million of
7.6% Series 1990B SPRB and $45 million of 7 3/8% Series 1990C SPRB were
refinanced using proceeds from 5.7% Series 2000 SPRB.
Other interest charges for 2001 of $4.7 million were $2.3 million lower
than for 2000 primarily due to lower short-term borrowings and lower short-term
interest rates. Other interest charges for 2000 of $7.0 million were $0.3
million higher than for 1999 primarily due to higher interest charges on
short-term debt.
Preferred stock dividends of subsidiaries remained the same in 2001 and
decreased slightly in 2000 from the prior year. The decrease in dividends in
2000 is attributed to the scheduled sinking fund and optional redemptions of
preferred stock. See Note 2 in the "Notes to Consolidated Financial Statements."
Recent rate requests
HECO and its 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 February
13, 2002, the return on average common equity (ROACE) found by the PUC to
6
Management's Discussion and Analysis, continued
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be reasonable in the most recent final rate decision for each utility was 11.40%
for HECO (decision and order (D&O) issued on December 11, 1995, based on a 1995
test year), 11.50% for HELCO (D&O issued on February 8, 2001, based on a 2000
test year) and 10.94% for MECO (amended D&O issued on April 6, 1999, based on a
1999 test year). For 2001, the actual simple average ROACE (calculated under the
rate-making method and reported to the PUC) for HECO, HELCO and MECO were
11.46%, 7.89% and 10.34%, respectively.
HECO has not initiated a rate case for several years, but in 2001 it
committed to initiate a rate case within three years, using a 2003 or 2004 test
year, as part of the agreement described below under "Other regulatory matters."
The following are summaries of the most recent rate proceedings initiated
by HELCO and MECO.
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 needed for the delayed Keahole power plant expansion project that the
PUC had also found to be used or useful to support the existing generating units
at Keahole.
On June 1, 2001, the PUC issued an order approving a new standby service
rate schedule rider for HELCO. The standby service rider issue had been
bifurcated from the rest of the rate case. The rider provides the rates, terms
and conditions for obtaining backup and supplemental electric power from the
utility when a customer obtains all or part of its electric power from sources
other than HELCO.
The timing of a future HELCO rate increase request to recover costs
relating to the delayed Keahole power plant expansion project, i.e., adding two
combustion turbines (CT-4 and CT-5) at Keahole, including the remaining cost of
pre-air permit facilities, will depend on future circumstances. See "Certain
factors that may affect future results and financial condition-Other regulatory
and permitting contingencies" below and "HELCO power situation" in Note 11 of
the "Notes to Consolidated Financial Statements."
Maui Electric Company, Limited. In January 1998, MECO filed a request to
increase rates, based on a 1999 test year, primarily to recover costs relating
to the addition of generating unit M17 in late 1998. In November 1998, MECO
revised its requested increase to 11.9%, or $16.4 million, in annual revenues,
based on a 12.75% ROACE. In April 1999, MECO received an amended final D&O from
the PUC which authorized an 8.2%, or $11.3 million, increase in annual revenues,
based on a 1999 test year and a 10.94% ROACE.
Other regulatory matters
In October 2001, HECO and the Consumer Advocate finalized agreements, 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, under the agreements, HECO committed to file
within three years). The agreements for the temporary continuation of HECO's
existing DSM programs are in lieu of HECO continuing to seek approval of new
5-year DSM programs. Any DSM programs to be in place after HECO's next rate case
will be determined as part of the case. Under the agreements, HECO will cap the
recovery of lost margins and shareholder incentives if such recovery would cause
HECO to exceed its current authorized return on rate base. HECO also agrees it
will not pursue the continuation of lost margins recovery through a surcharge
mechanism or shareholder incentives in future rate cases. Consistent with the
HECO agreements, in October 2001, HELCO and MECO reached agreements with the
Consumer Advocate and filed requests to continue their four existing DSM
programs. In November 2001, the PUC issued orders (two of which were amended)
that, subject to certain reporting requirements and other conditions, approved
(1) the agreements regarding the temporary continuation of HECO's five existing
DSM programs until HECO's next rate
7
Management's Discussion and Analysis, continued
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case and (2) the agreements regarding the temporary continuation of HELCO's and
MECO's DSM programs until one year after the PUC makes a revenue requirements
determination in HECO's next rate case. Under the orders, however, HELCO and
MECO are allowed to recover only lost margins and shareholder incentives accrued
through the date that interim rates are established in HECO's next rate case,
but may request to extend the time of such accrual and recovery for up to one
additional year.
Collective bargaining agreements
In August 2000, HECO, HELCO and MECO employees represented by the International
Brotherhood of Electrical Workers, AFL-CIO, Local 1260, ratified new collective
bargaining agreements covering approximately 62% of the employees of HECO, HELCO
and MECO. The new collective bargaining agreements (including benefit
agreements) cover a three-year period from November 1, 2000 through October 31,
2003. The main provisions of the agreements include noncompounded wage increases
of 2.25% effective November 1, 2000, 2.5% effective November 1, 2001 and 2.5%
effective November 1, 2002. The agreements also included increased employee
contributions to medical premiums.
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 that could increase the domestic
supply of oil, as well as increase support for energy conservation programs.
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% by December 31, 2010. HECO, HELCO and MECO are permitted to aggregate
their renewable portfolios in order to achieve these goals. Any electric utility
whose percentage of sales of electricity represented by renewable energy does
not meet these goals will have to report to the PUC and provide an explanation
for not meeting the renewables portfolio standard. The PUC could then grant a
waiver from the standard or an extension for meeting the standard. The PUC may
also provide incentives to encourage electric utilities to exceed the standards
or meet the standards earlier, or both, but as yet no such incentives have been
proposed. The new law also requires that electric utilities offer net energy
metering to solar, wind turbine, biomass or hydroelectric generating systems (or
hybrid systems) with a capacity up to 10 kilowatts (i.e., a customer-generator
may be a net user or supplier of energy and will make payments to or receive
credit from the electric utility accordingly).
HECO and its subsidiaries currently support renewable sources in various
ways, including their solar water heating and heat pump programs and their
purchased power contracts with nonutility generators using renewable sources
(e.g., refuse-fired, geothermal, hydroelectric and wind turbine generating
systems). HECO and its subsidiaries continue to initiate and support many
renewable energy research and development projects to help develop these
technologies (e.g., photovoltaic projects). They are also conducting integrated
resource planning to evaluate the use of more renewables. Nevertheless, about
6.9% of electricity sales for 2001 were from renewable resources and the Company
believes it may be difficult to increase this percentage, particularly if sales
of electricity increase in future years as projected. Thus, at this time,
management cannot predict the impact of this law or of proposed legislation on
the Company or its customers.
Effects of inflation
U.S. inflation, as measured by the U.S. Consumer Price Index, averaged 1.6 % in
2001, 3.4% in 2000 and 2.2% in 1999. Hawaii inflation, as measured by the
Honolulu Consumer Price Index, averaged an estimated 1.2% in 2001, 1.7% in 2000
and 1.0% in 1999. Although the rate of inflation over the past three years has
been relatively low compared with the late 1970's and early 1980's, inflation
continues to have an impact on the Company's operations.
8
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
Inflation increases operating costs and the replacement cost of assets.
With significant physical assets, HECO and its subsidiaries replace assets at
much higher costs and must request and obtain rate increases to maintain
adequate earnings. In the past, the PUC has generally approved rate increases to
cover the effects of inflation. The PUC granted rate increases in 2001 and 2000
for HELCO, and in 1999 for MECO, in part to cover increases in construction
costs and operating expenses due to inflation.
Recent accounting pronouncements
See "Recent accounting pronouncements" in Note 1 of the "Notes to Consolidated
Financial Statements."
Liquidity and capital resources
-------------------------------
The Company 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 construction programs and to cover debt and
other cash requirements in the foreseeable future.
The Company's total assets were $2.4 billion at December 31, 2001 and 2000.
The consolidated capital structure of HECO was as follows:
December 31 2001 2000
- ---------------------------------------------------------------------------
(in millions)
Short-term borrowings from nonaffiliates
and affiliate .......................... $ 49 3% $ 113 7%
Long-term debt including amounts
due within one year .................... 685 39 668 38
HECO-obligated preferred securities of
trust subsidiaries ..................... 100 6 100 6
Preferred stock ........................... 34 2 34 2
Common stock equity ....................... 877 50 825 47
- ---------------------------------------------------------------------------
$1,745 100% $1,740 100%
===========================================================================
As of February 13, 2002, the Standard & Poor's (S&P) and Moody's Investors
Service's (Moody's) ratings of HECO securities were as follows:
S&P Moody's
- --------------------------------------------------------------------------------
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. S&P has a "Negative"
ratings outlook for HECO due in part to weakness in the Hawaii economy. Moody's
has a "Stable" ratings outlook for HECO. HECO management cannot predict with
certainty
9
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
future rating agency actions or their effects on the future availability and
cost of capital to HECO.
Capital expenditures requiring the use of cash, as shown on the
"Consolidated Statements of Cash Flows," totaled approximately $115.5 million in
2001, of which $69.3 million was attributable to HECO, $20.5 million to HELCO
and $25.7 million to MECO. Approximately 69% of the total 2001 capital
expenditures were for transmission and distribution projects and approximately
31% was for generation and general plant projects. Cash contributions in aid of
construction received in 2001 totaled $11.0 million.
In 2001, the Company's investing activities used $104.6 million in cash,
primarily for capital expenditures. Financing activities used net cash of $93.8
million, including $45.1 million for the payment of common and preferred stock
dividends and trust preferred securities distributions, $64.9 million net
decrease (excluding prepaid interest) in short-term borrowings, partly offset by
a $17.3 million net increase in long-term debt. Operating activities provided
$198.7 million.
The Companies' consolidated financing requirements for 2002 through 2006,
including net capital expenditures and long-term debt and preferred stock
retirements, are estimated to total $619 million. Consolidated internal sources,
after the payment of common stock and preferred stock dividends, are expected to
provide cash in excess of the consolidated financing requirements and may be
used to reduce the level of short-term borrowings.
As of December 31, 2001, $10.8 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 December
31, 2001, an additional $65 million of special purpose revenue bonds were
authorized by the Hawaii Legislature for issuance by the Department of Budget
and Finance of the State of Hawaii for the benefit of HECO and HELCO prior to
the end of 2003. HECO does not anticipate the need to issue common equity over
the five-year period 2002 through 2006. 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 that are required to
meet expected load growth, to improve reliability and to replace and upgrade
existing equipment. Net capital expenditures for the five-year period 2002
through 2006 are currently estimated to total $606 million. Approximately 60% 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 40% primarily for
generation projects.
For 2002, net capital expenditures are estimated to be $114 million. Gross
capital expenditures are estimated to be $132 million, including approximately
$88 million for transmission and distribution projects, approximately $30
million for generation projects and approximately $14 million for general plant
and other projects. Drawdowns of proceeds from previous and future sales of
tax-exempt special purpose revenue bonds and the generation of funds from
internal sources are expected to provide the cash needed for the net capital
expenditures in 2002.
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, DSM programs, the effects of
opposition to proposed construction projects and requirements of environmental
and other regulatory and permitting authorities.
10
Management's Discussion and Analysis, continued
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The Company utilizes short-term debt to support normal operations and other
temporary requirements. At December 31, 2001, HECO maintained bank lines of
credit which totaled $110 million (maturing in the first half of 2002). HECO
maintained these lines of credit, and anticipates arranging similar lines of
credit as the existing lines of credit mature (as deemed necessary), to support
the issuance of commercial paper and for other general corporate purposes. At
December 31, 2001, the lines of credit were unused. Management believes that if
HECO's commercial paper ratings were downgraded, HECO might not be able to sell
commercial paper under current market conditions. See S&P and Moody's ratings
above and Note 5 in the "Notes to Consolidated Financial Statements."
See Note 11 in the "Notes to Consolidated Financial Statements" for a
discussion of fuel and power purchase commitments.
Selected contractual obligations and commitments
- ------------------------------------------------
The following tables present aggregated information about certain contractual
obligations and commercial commitments:
December 31, 2001 Payment due by period
- ----------------------------------------------------------------------------------------------
Less
than 1-3 4-5 After
(in millions) 1 year years years 5 years Total
- ----------------------------------------------------------------------------------------------
Contractual obligations
Long-term debt................................... $ 15 $ -- $ -- $ 670 $ 685
HECO-obligated preferred
securities of trust subsidiaries.............. -- -- -- 100 100
Operating leases................................. 2 3 1 2 8
Fuel oil purchase obligations (estimate based
on January 1, 2002 fuel oil prices)............
195 390 -- -- 585
Purchase power obligations-
minimum fixed capacity
charges....................................... 123 246 232 1,724 2,325
- ----------------------------------------------------------------------------------------------
$335 $639 $233 $2,496 $3,703
==============================================================================================
December 31, 2001
- --------------------------------------------------------------------------------
(in millions)
Other commercial commitments (all expire in 2002)
Lines of credit......................................................... $110
The tables above do not include other categories of obligations and commitments,
such as trade payables, obligations under purchase orders and amounts that may
become payable in future periods under collective bargaining and other
employment agreements and employee benefit plans.
Certain factors that may affect future results and financial condition
----------------------------------------------------------------------
The Company's results of operations and financial condition can be affected by
numerous factors, many of which are beyond its control and could cause future
results of operations to differ materially from historical results. The
following is a discussion of certain of these factors.
Economic conditions
The Company's operating results are significantly influenced by the strength of
Hawaii's economy, which in turn is influenced by economic conditions in the
mainland U.S. (particularly California) and Asia (particularly Japan) as a
result of the impact of those conditions on tourism. For 2001, visitor arrivals
declined by 9% from 2000 and the State of Hawaii estimates that, for the year
2001, total
11
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
jobs have increased by 0.4% and real gross state product has grown by 1.2%, less
than one-half of the growth rate predicted prior to the events of September 11,
2001. The negative impact on the state's economy of the decline in tourism has
been offset to some degree by strength in the construction industry and the
stability of expenditures by the federal government.
HECO and its subsidiaries project that KWH sales growth in 2002 will be
1.1%. However, if KWH sales 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. If KWH sales decline and other negative
financial effects are experienced in an economic downturn, such as increases in
uncollected billings resulting from business closures and layoffs, HECO and its
subsidiaries will implement additional cost-controlling steps.
Federal and state governmental actions in response to the September 11,
2001 terrorist attacks and the subsequent economic downturn could benefit the
Hawaii economy. Because of the heightened concern over national security,
Hawaii's defense sector could benefit if Congress approves additional federal
spending for defense. The Governor 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. Appropriations were
authorized in the session for capital improvement and construction projects,
tourism marketing and emergency food and housing assistance, as well as to
strengthen security and make improvements at airports. The Hawaii legislature
reconvened in regular session in January 2002, but it is too early to determine
the nature (or the effect on the Hawaii economy or the Company) of any actions
it may take.
Hawaii's economic recovery is expected to be gradual. There are signs of
recovery in both the domestic and international visitor markets, and most
sectors of Hawaii's economy are expected to show consistent improvement by the
second quarter of 2002. However, because Hawaii's primary visitor markets, the
mainland U.S. and Japan, are expected to respectively show slow and negative
growth in the coming year, the current slowdown in Hawaii's economy may linger
for some time. Hawaii's recovery back to pre-September 11, 2001 levels of
economic activity may not be reached before 2003. A key to Hawaii's recovery
period will be how fast consumers and businesses return to pre-September 11,
2001 spending, travel and consumption patterns.
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 offering customers economic
alternatives to what their competitors offer that, among other things, employ
energy efficient electrotechnologies such as heat pump water heaters and high
efficiency chillers.
In 1996, the PUC instituted a proceeding to identify and examine the issues
surrounding electric competition and to determine the impact of competition on
the electric utility infrastructure in Hawaii. Several of the parties submitted
final statements of position to the PUC in 1998. HECO's position in the
proceeding was that retail competition is not feasible in Hawaii, but that some
of the benefits of competition 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.
12
Management's Discussion and Analysis, continued
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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 MECO filed an application with the PUC
seeking permission to implement PBR in future rate cases. In early 2001, the PUC
dismissed the PBR proposal without prejudice, indicating it declined at that
time to change its current cost of service/rate of return methodology for
determining electric utility rates.
In January 2000, the PUC submitted to the legislature a status report on
its investigation of competition. The report stated that competitive bidding for
new power supplies (i.e., wholesale generation competition) is a logical first
step to encourage competition in the state's electric industry and that the PUC
plans to proceed with an examination of the feasibility of competitive bidding
and to review specific policies to encourage renewable energy resources in the
power generation mix. The report states that "further steps" by the PUC "will
involve the development of specific policies to encourage wholesale competition
and the continuing examination of other areas suitable for the development of
competition." HECO is unable to predict the ultimate outcome of the proceeding,
which (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 (other than the legislation described above under "Results of
operations-Legislation").
U.S. capital markets and interest rate environment
Changes in the U.S. capital markets can have significant effects on the Company.
For example, HECO and its subsidiaries estimate pension income for 2002, net of
amounts capitalized and income taxes, will be $2 million lower than in 2001
primarily as a result of the effect of the stock market decline on the
performance of the assets in HEI's master pension trust and a decrease at
December 31, 2001 in the discount rate used to determine the service and
interest cost components of the net periodic pension benefit return for 2002.
HECO and its subsidiaries are exposed to interest rate risk primarily due
to their borrowings. They attempt to manage this risk in part by incurring or
refinancing debt in periods of low interest rates and by usually issuing
fixed-rate rather than floating-rate long-term debt. As of December 31, 2001,
the Company had no commercial paper outstanding.
Technological developments
New technological developments (e.g., the commercial development of fuel cells
or distributed generation) may impact the Company's results of operations and
financial condition.
Limited insurance
In the ordinary course of business, the Company purchases insurance coverages
(e.g., property and liability coverages) to protect itself against loss of or
damage to its properties and against claims made by third-parties and employees
for property damage or personal injuries. However, the protection provided by
such insurance is limited in significant respects and, in some instances, the
Company has no coverage. For example the Company's overhead and underground
transmission and distribution systems (with the exception of substation
buildings and contents) have a replacement value roughly estimated at $2 billion
and are uninsured because the amount of transmission and distribution system
insurance available is limited and the premiums are cost prohibitive. Similarly,
the Company has no business interruption insurance as the premiums for such
insurance would be cost prohibitive, particularly since the utilities are not
interconnected to other systems. If a hurricane or other uninsured catastrophic
natural disaster should occur, and the PUC does not allow the Company to recover
from ratepayers restoration costs and revenues lost from business interruption,
the Company's
13
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
results of operations and financial condition could be materially adversely
impacted. Also, certain of the Company's insurance has substantial "deductibles"
or has limits on the maximum amounts that may be recovered. If a series of
losses occurred, such as from a series of lawsuits in the ordinary course of
business each of which were subject to the deductible amount, or if the maximum
limit of the available insurance were substantially exceeded, the Company could
incur losses in amounts that have a material adverse effect on its results of
operations or financial condition.
Environmental matters
The Company is subject to environmental laws and regulations that regulate the
operation of existing facilities, the construction and operation of new
facilities and the proper cleanup and disposal of hazardous waste and toxic
substances. These laws and regulations, among other things, require that certain
environmental permits be obtained as a condition to constructing or operating
certain facilities, and obtaining such permits can entail significant expense
and cause substantial construction delays. Also, these laws and regulations may
be amended from time to time, including amendments that increase the burden and
expense of compliance. Management believes that the recovery through rates of
most, if not all, of any costs incurred by HECO and its subsidiaries in
complying with environmental requirements would be allowed by the PUC.
An ongoing environmental investigation is the Honolulu Harbor environmental
investigation described in Note 11 in the "Notes to Consolidated Financial
Statements." Although this investigation is expected to entail significant
expense over the next several years, management does not believe, based on
information available to the Company, that the costs of this investigation or
any other contingent liabilities relating to environmental matters will have a
material adverse effect on the Company. However, there can be no assurance that
a significant environmental liability will not be incurred by the Company,
including with respect to the Honolulu Harbor environmental investigation.
Regulation of electric utility rates
The PUC has broad discretion in its regulation of the rates charged by HECO and
its utility subsidiaries and in other matters. Any adverse D&O by the PUC
concerning the level or method of determining electric utility rates, the
authorized returns on equity or other matters, or any prolonged delay in
rendering a D&O in a rate or other proceeding, could have a material adverse
effect on the Company's 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. At December 31, 2001, HECO and its subsidiaries
had recognized $12 million of revenues with respect to interim orders regarding
certain integrated resource planning costs, which revenues are subject to
refund, with interest, to the extent they exceed the amounts allowed in final
orders.
Management cannot predict with certainty when D&Os in future rate cases
will be rendered or the amount of any interim or final rate increase that may be
granted. There are no rate cases pending at this time. HECO, however, has
committed to file a rate increase application within three years using a 2003 or
2004 test year.
The rate schedules of HECO and its subsidiaries include energy cost
adjustment clauses under which electric rates charged to customers are
automatically adjusted for changes in the weighted-average price paid for fuel
oil and certain components of purchased power, and the relative amounts of
company-generated power and purchased power. In 1997 PUC decisions approving the
electric utilities' fuel supply contracts, the PUC noted that, in light of the
length of the fuel supply contracts and the relative stability of fuel prices,
the need for continued use of energy cost adjustment clauses would be the
subject of investigation in a generic docket or in a future rate case. HECO and
its subsidiaries believe that the energy cost adjustment clauses continue to be
necessary. These clauses were continued in the most recent HELCO and MECO rate
cases.
14
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
Consultants periodically conduct depreciation studies for the Company to
determine whether the existing approved rates and methods used to calculate
depreciation accruals are appropriate for the production, transmission,
distribution and general plant accounts. If it is determined that the existing
rates and methods are not appropriate, changes to those rates are recommended as
part of the study. The PUC must approve the implementation of any recommended
changes.
Fuel oil and purchased power
HECO and its subsidiaries rely on fuel oil suppliers and independent power
producers to deliver fuel oil and power, respectively. The Company estimates
that 76% of the net energy generated and purchased in 2002 will be generated
from the burning of oil. Purchased KWHs provided approximately 39.0% of the
total net energy generated and purchased in 2001 compared to 36.4% in 2000 and
35.7% in 1999.
Failure by the Company's oil suppliers to provide fuel pursuant to existing
supply contracts, or failure by a major independent power producer to deliver
the firm capacity anticipated in its power purchase agreement, could interrupt
the ability of the Company to deliver electricity, thereby materially adversely
affecting the Company's results of operations and financial condition. HECO,
however, maintains an inventory of fuel oil in excess of one month's supply, and
HELCO and MECO maintain approximately a one month's supply of both medium sulfur
fuel oil and diesel fuel. Some, but not all, of the Company's power purchase
agreements require that the independent power producers maintain minimum fuel
inventory levels and all of the firm capacity power purchase agreements include
provisions imposing substantial penalties for failure to produce the firm
capacity anticipated by those agreements.
Other regulatory and permitting contingencies
Many public utility projects require PUC approval and various permits (e.g.,
environmental and land use permits) from other agencies. Delays in obtaining PUC
approval or permits can result in increased costs. If a project does not proceed
or if the PUC disallows costs of the project, the project costs may need to be
written off in amounts that could have a material adverse effect on the Company.
The following two major capital improvement projects have encountered opposition
and one of them has been seriously delayed.
Keahole project. In 1991, 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 megawatt (MW) combustion turbines (CT-4 and CT-5),
followed by an 18 MW heat steam recovery generator, at which time these units
would be converted to a 56 MW (net) dual-train combined-cycle unit. The timing
of the installation of HELCO's phased units has been revised on several
occasions due to delays in obtaining an air permit and a land use permit
amendment, in addition to delays caused by the commencement of lawsuits and
administrative proceedings, many of which are on appeal or otherwise have not
been finally resolved. See Note 11 in the "Notes to Consolidated Financial
Statements" for a more detailed description of the history and status of this
project.
In November 2001, a final air permit became effective. The principal
remaining hurdle is an extension of the construction period under the amendment
to the land use permit, which extension has to be a approved by the Board of
Land and Natural Resources of the State of Hawaii (BLNR). Management believes
that the issues surrounding the amendment to the land use permit and other
related issues will be satisfactorily resolved and will not prevent HELCO from
ultimately constructing CT-4 and CT-5. Management currently projects an
in-service date toward the end of 2002 for CT-4 and CT-5.
There can be no assurances, however, that these results will be achieved or
that this time frame will be met. In addition, 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 December 31, 2001. However, if it becomes probable
that CT-4 and/or CT-5 will not be installed or probable that, even if CT-4 and
CT-5 are installed, the PUC will disallow certain costs for rate-making
purposes, HELCO may be required
15
Management's Discussion and Analysis, continued
- -----------------------------------------------
to write off a material portion of the costs incurred in its efforts to put
these units into service. As of December 31, 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 permitted to be transferred to plant-in-service for pre-air permit
facilities) amounted to approximately $75 million, including $29 million for
equipment and material purchases, $26 million for planning, engineering,
permitting, site development and other costs and $20 million for AFUDC. HELCO
discontinued accruing AFUDC on this project in 1998.
Kamoku-Pukele transmission line. HECO plans to construct a part underground/part
overhead 138 kv transmission line from the Kamoku substation to the Pukele
substation in order to close the gap between two major transmission corridors
and provide a third 138 kv transmission line to the Pukele substation. The
proposed Kamoku to Pukele transmission line project requires the BLNR to approve
a Conservation District Use Permit (CDUP) for the overhead portion of the line
that is in conservation district lands. Several community and environmental
groups have opposed the project, particularly the overhead portion of the line.
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 was held in November 2001. The hearings officer
submitted his report, findings of fact and conclusions of law and recommended
that HECO's request for the CDUP be denied. He concluded that HECO had failed to
establish that there is a need that outweighs the transmission line's adverse
impacts on conservation district lands and that there are practical alternatives
that could be pursued, including an all-underground route outside the
conservation district lands. The BLNR will consider exceptions from the
respective parties to the proposed findings, conclusions and recommendations
before rendering a decision on the CDUP. A BLNR decision on the CDUP is
anticipated by July 14, 2002, the expiration date for processing the CDUP
application. If the BLNR denies HECO's request for a CDUP, HECO plans to pursue
an alternative all-underground route on land not designated as conservation
land.
The Kamoku to Pukele transmission line is scheduled to be in service by the
second half of 2005 if construction is started by the first quarter of 2004. The
actual construction start date will depend on permitting and approval processes,
including approval from the PUC. Management believes that the required permits
and approvals necessary to complete the Kamoku to Pukele transmission line,
along the proposed route or an alternate route, will be obtained.
As of December 31, 2001, the accumulated costs related to the Kamoku to
Pukele transmission line amounted to $15 million, including $11 million for
planning, engineering and permitting costs and $4 million for an allowance for
funds used during construction. These costs are recorded in construction in
progress. The recovery of costs relating to the Kamoku to Pukele transmission
line project is subject to the rate-making process governed by the PUC.
Management believes no adjustment to costs incurred to put the Kamoku to Pukele
transmission line into service is required as of December 31, 2001. However, if
it becomes probable that the Kamoku to Pukele transmission line will not be
installed, or probable that the PUC will disallow some or all of the incurred
costs for rate-making purposes, HECO may be required to write off a material
portion or all of the costs incurred in its efforts to put the Kamoku to Pukele
transmission line into service. See "Oahu transmission system" in Note 11 of the
"Notes to Consolidated Financial Statements."
Material estimates and critical accounting policies
---------------------------------------------------
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the case of the Company include the amounts reported for regulatory assets,
pension
16
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
and other postretirement benefit obligations, current and deferred taxes,
contingencies and litigation.
In accordance with SEC Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," management has identified the
following accounting policies to be the most critical to the Company's financial
statements--that is, management believes that these policies are both the most
important to the portrayal of the Company's financial condition and results of
operations, and currently require management's most difficult, subjective or
complex judgments.
Utility plant
Utility plant is reported at cost. Self-constructed electric utility plant
includes engineering, supervision, and administrative and general costs, and an
allowance for the cost of funds used during the construction period. These costs
are recorded in construction in progress and are transferred to utility plant
when construction is completed and the facilities are either placed in service
or become useful for public utility purposes. Upon the retirement or sale of
electric utility plant, no gain or loss is recognized. The cost of the plant
retired or sold and the cost of removal (net of salvage value) are charged to
accumulated depreciation.
Management believes that the PUC will allow recovery of utility plant in
its electric rates. If the PUC does not allow recovery of any such costs, the
Company would be required to write off the disallowed costs at that time. See
the discussion above concerning costs recorded in construction in progress for
CT-4 and CT-5 at Keahole and the proposed Kamoku-Pukele transmission line under
"Certain factors that may affect future results and financial condition-Other
regulatory and permitting contingencies."
Retirement benefits
Pension and other postretirement benefit costs/(returns) are charged/(credited)
primarily to expense and electric utility plant. The Company's policy is to fund
pension costs in amounts consistent with the requirements of the Employee
Retirement Income Security Act of 1974. Certain significant assumptions used to
determine retirement benefit costs/(returns) are identified in Note 10 of the
"Notes to Consolidated Financial Statements." The assumptions used by management
are based on current economic conditions. Any changes in economic conditions
will impact the underlying assumptions in determining pension and other
postretirement benefit costs/(returns) on a prospective basis. HECO and its
subsidiaries estimate pension income for 2002, net of amounts capitalized and
income taxes, will be $2 million lower than in 2001 primarily as a result of the
effect of the stock market decline on the performance of the assets in HEI's
master pension trust and a decrease at December 31, 2001 in the discount rate
used to determine the service and interest cost components of the net periodic
pension benefit return for 2002.
Environmental expenditures
In general, environmental contamination treatment costs are charged to expense,
unless it is probable that the PUC would allow such costs to be recovered in
future rates, in which case such costs would be capitalized as regulatory
assets. Also, environmental costs are capitalized if the costs extend the life,
increase the capacity, or improve the safety or efficiency of property; the
costs mitigate or prevent future environmental contamination; or the costs are
incurred in preparing
17
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
the property for sale. Liabilities are recorded when environmental assessments
and/or remedial efforts are probable, and the cost can be reasonably estimated.
Estimated costs are based upon an expected level of contamination and
remediation efforts. Should the level of contamination and remediation efforts
be different than initially expected, the ultimate costs will differ. See
"Environmental regulation" in Note 11 of the "Notes to Consolidated Financial
Statements" for a description of the Honolulu Harbor investigation.
Income taxes
Deferred income tax assets and liabilities are established for the temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such deferred tax assets or liabilities are realized or settled. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible.
Governmental tax authorities could challenge a tax return position taken by
management. If the Company's position does not prevail, the Company's results of
operations and financial condition may be adversely affected as the related
deferred or current income tax asset would be impaired.
Regulation by the PUC
The Company is regulated by the PUC. In accordance with Statement of Financial
Accounting Standards (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.
The actions of regulators can affect the timing of recognition of revenues,
expenses, assets and liabilities. 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 and financial position may result as the regulatory assets would be
charged to expense. As of December 31, 2001, regulatory assets amounted to $111
million. These regulatory assets are itemized in Note 6 of the "Notes to
Consolidated Financial Statements."
Electric utility revenues
Electric utility revenues are based on rates authorized by the PUC and include
revenues applicable to energy consumed in the accounting period but not yet
billed to the customers. At December 31, 2001, revenues applicable to energy
consumed, but not yet billed, to the customers amounted to $53 million.
Revenue amounts recorded pursuant to a PUC interim order are subject to
refund, with interest, pending a final order. At December 31, 2001, HECO and its
subsidiaries had recognized $12 million of revenues with respect to interim
orders regarding certain integrated resource planning costs, which revenues are
subject to refund, with interest, to the extent they exceed the amounts allowed
in final orders. If a refund were required, the revenues to be refunded would be
immediately reversed on the income statement.
The rate schedules of HECO and its subsidiaries include energy cost
adjustment clauses under which electric rates are adjusted for changes in the
weighted-average price paid for fuel oil and certain components of purchased
power, and the relative amounts of company-generated power and purchased power.
If the energy cost adjustment clauses were discontinued, the Company`s results
of operations could fluctuate significantly as a result of increases and
decreases in fuel oil and purchased energy prices.
18
Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------------
The Company manages various market risks in the ordinary course of business,
including credit risk and liquidity risk, and believes its exposures to these
risks are not material as of December 31, 2001. Because the Company does not
have a portfolio of trading assets, the Company is not exposed to market risk
from trading activities. The Company is exposed to some commodity price risk,
which is mitigated by the energy cost adjustment clauses in the Company's rate
schedules. 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. Interest rate risk can be defined
as the exposure of the Company's earnings to adverse movements in interest
rates. The Company does not currently use derivatives to manage interest rate
risk. The Company's general policy is to manage interest rate risk through use
of a combination of short- and long-term debt (primarily fixed-rate debt) and
preferred securities. The tables below provide information about the Company's
market sensitive financial instruments in U.S. dollars, including contractual
balances at the stated maturity dates as well as the estimated fair values as of
December 31, 2001 and 2000, and constitute "forward-looking statements."
19
Quantitative and Qualitative Disclosures about Market Risk, continued
- --------------------------------------------------------------------------------
See Note 15 in the "Notes to Consolidated Financial Statements" for
descriptions of the methods and assumptions used to estimate fair value of each
applicable class of financial instruments.
Expected maturity December 31, 2001
- ---------------------------------------------------------------------------------------------------
Estimated
There- fair
(dollars in millions) 2002 2003 2004 2005 2006 after Total value
- ---------------------------------------------------------------------------------------------------
Interest-sensitive
liabilities
Short-term borrowings $48 -- -- -- -- -- $ 48 $ 48
Average interest
rate 2.0% -- -- -- -- -- 2.0%
Long-term debt-
fixed rate $15 -- -- -- -- $670 $685 $666
Average interest
rate 7.9% -- -- -- -- 5.9% 5.9%
HECO-obligated mandatorily
redeemable trust
preferred securities
of subsidiary trusts -- -- -- -- -- $100 $100 $100
Average distribu-
tion rate -- -- -- -- -- 7.7% 7.7%
Expected maturity December 31, 2000
- ---------------------------------------------------------------------------------------------------
Estimated
There- fair
(dollars in millions) 2001 2002 2003 2004 2005 after Total value
- ---------------------------------------------------------------------------------------------------
Interest-sensitive
liabilities
Short-term borrowings $104 -- -- -- -- -- $104 $104
Average interest
rate 7.5% -- -- -- -- -- 7.5%
Long-term debt-
fixed rate -- $2 $3 -- -- $663 $668 $687
Average interest
rate -- 7.9% 7.8% -- -- 5.9% 5.9%
HECO-obligated mandatorily
redeemable trust
preferred securities
of subsidiary trusts -- -- -- -- -- $100 $100 $ 93
Average distribu-
tion rate -- -- -- -- -- 7.7% 7.7%
20
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholder
Hawaiian Electric Company, Inc.:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Hawaiian Electric Company, Inc. (a
wholly owned subsidiary of Hawaiian Electric Industries, Inc.) and subsidiaries
as of December 31, 2001 and 2000, and the related consolidated statements of
income, retained earnings and cash flows for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hawaiian
Electric Company, Inc. and subsidiaries as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Honolulu, Hawaii
January 23, 2002
21
Consolidated Statements of Income
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31 2001 2000 1999
- ---------------------------------------------------------------------------------------
(in thousands)
Operating revenues.............................. $1,284,312 $1,270,635 $1,050,323
---------- ---------- ----------
Operating expenses:
Fuel oil........................................ 346,728 362,905 216,693
Purchased power................................. 337,844 311,207 275,691
Other operation................................. 125,565 123,779 136,303
Maintenance..................................... 61,801 66,069 57,425
Depreciation.................................... 100,714 98,517 93,301
Taxes, other than income taxes.................. 120,894 119,784 99,788
Income taxes.................................... 55,434 55,213 48,281
---------- ---------- ----------
1,148,980 1,137,474 927,482
---------- ---------- ----------
Operating income................................ 135,332 133,161 122,841
---------- ---------- ----------
Other income:
Allowance for equity funds used during
construction................................... 4,239 5,380 4,228
Other, net ..................................... 3,197 4,555 3,826
---------- ---------- ----------
7,436 9,935 8,054
---------- ---------- ----------
Income before interest and other charges ....... 142,768 143,096 130,895
---------- ---------- ----------
Interest and other charges:
Interest on long-term debt...................... 40,296 40,134 40,133
Amortization of net bond premium and
expense........................................ 2,063 1,938 1,634
Other interest charges ......................... 4,697 6,990 6,694
Allowance for borrowed funds used during
construction................................... (2,258) (2,922) (2,576)
Preferred stock dividends of subsidiaries....... 915 915 945
Preferred securities distributions of
trust subsidiaries............................. 7,675 7,675 7,665
---------- ---------- ----------
53,388 54,730 54,495
---------- ---------- ----------
Income before preferred stock dividends
of HECO........................................ 89,380 88,366 76,400
Preferred stock dividends of HECO............... 1,080 1,080 1,178
---------- ---------- ----------
Net income for common stock..................... $ 88,300 $ 87,286 $ 75,222
========== ========== ==========
Consolidated Statements of Retained Earnings
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31 2001 2000 1999
- ---------------------------------------------------------------------------------------
(in thousands)
Retained earnings, January 1.................... $ 443,970 $ 425,206 $ 405,836
Net income for common stock..................... 88,300 87,286 75,222
Common stock dividends.......................... (36,309) (68,522) (55,852)
---------- ---------- ----------
Retained earnings, December 31.................. $ 495,961 $ 443,970 $ 425,206
========== ========== ==========
- ---------------------------------------------------------------------------------
See accompanying "Notes to Consolidated Financial Statements."
22
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
December 31 2001 2000
- -------------------------------------------------------------------------------------------
(in thousands)
Assets
Utility plant, at cost:
Land........................................................... $ 31,689 $ 31,037
Plant and equipment............................................ 3,068,254 2,974,153
Less accumulated depreciation.................................. (1,266,332) (1,170,184)
Plant acquisition adjustment, net.............................. 354 406
Construction in progress....................................... 170,558 157,183
----------- -----------
Net utility plant...................................... 2,004,523 1,992,595
----------- -----------
Current assets:
Cash and equivalents........................................... 1,858 1,534
Customer accounts receivable, net.............................. 81,872 88,546
Accrued unbilled revenues, net................................. 52,623 64,020
Other accounts receivable, net................................. 2,652 5,426
Fuel oil stock, at average cost................................ 24,440 37,124
Materials and supplies, at average cost........................ 19,702 16,787
Prepayments and other.......................................... 53,744 29,033
----------- -----------
Total current assets................................... 236,891 242,470
----------- -----------
Other assets:
Regulatory assets.............................................. 111,376 116,623
Unamortized debt expense....................................... 12,443 13,455
Long-term receivables and other................................ 24,505 27,715
----------- -----------
Total other assets..................................... 148,324 157,793
----------- -----------
$ 2,389,738 $ 2,392,858
=========== ===========
Capitalization and liabilities
Capitalization (see Consolidated Statements of Capitalization):
Common stock equity............................................ $ 877,154 $ 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, net............................................ 670,674 667,731
----------- -----------
Total capitalization................................... 1,682,121 1,627,036
----------- -----------
Current liabilities:
Long-term debt due within one year............................. 14,595 --
Short-term borrowings-nonaffiliates............................ -- 104,398
Short-term borrowings-affiliate................................ 48,297 8,764
Accounts payable............................................... 53,966 71,698
Interest and preferred dividends payable....................... 11,765 10,483
Taxes accrued.................................................. 86,058 78,186
Other.......................................................... 29,799 34,895
----------- -----------
Total current liabilities.............................. 244,480 308,424
----------- -----------
Deferred credits and other liabilities:
Deferred income taxes.......................................... 145,608 137,066
Unamortized tax credits........................................ 48,512 47,603
Other.......................................................... 55,460 61,211
----------- -----------
Total deferred credits and other liabilities........... 249,580 245,880
----------- -----------
Contributions in aid of construction........................... 213,557 211,518
----------- -----------
$ 2,389,738 $ 2,392,858
=========== ===========
See accompanying "Notes to Consolidated Financial Statements."
23
Consolidated Statements of Capitalization
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
December 31 2001 2000 1999
- ---------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
Common stock equity:
Common stock of $6 2/3 par value.
Authorized: 50,000,000 shares. Outstanding:
2001, 2000 and 1999, 12,805,843 shares....... $ 85,387 $ 85,387 $ 85,387
Premium on capital stock........................ 295,806 295,655 295,510
Retained earnings............................... 495,961 443,970 425,206
-------- -------- --------
Common stock equity..................... 877,154 825,012 806,103
-------- -------- --------
Cumulative preferred stock
not subject to mandatory redemption:
Authorized: 5,000,000 shares of $20 par
value and 7,000,000 shares of $100 par value.
Outstanding: 2001 and 2000, 1,234,657 shares.
Shares
outstanding
Par December 31,
Series value 2001 2001 2000
- ------------------------------------------------------------------
C_4 1/4% $ 20 (HECO) ...... 150,000 ..... 3,000 3,000
D_5% 20 (HECO) ...... 50,000 ..... 1,000 1,000
E_5% 20 (HECO) ...... 150,000 ..... 3,000 3,000
H_5 1/4% 20 (HECO) ...... 250,000 ..... 5,000 5,000
I_5% 20 (HECO) ...... 89,657 ..... 1,793 1,793
J_4 3/4% 20 (HECO) ...... 250,000 ..... 5,000 5,000
K_4.65% 20 (HECO) ...... 175,000 ..... 3,500 3,500
G_7 5/8% 100 (HELCO) ..... 70,000 ..... 7,000 7,000
H_7 5/8% 100 (MECO) ...... 50,000 ..... 5,000 5,000
--------- ------- -------
1,234,657 ..... $34,293 $34,293
--------- ------- -------
(continued)
See accompanying "Notes to Consolidated Financial Statements."
24
Consolidated Statements of Capitalization, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
December 31 2001 2000
- -------------------------------------------------------------------------------------
(in thousands)
HECO-obligated mandatorily redeemable trust preferred
securities of subsidiary trusts holding solely HECO
and HECO-guaranteed debentures.......................... $ 100,000 $ 100,000
---------- ----------
Long-term debt:
First mortgage bonds:
HELCO: 7 3/4-7 7/8%, due 2002 through 2003.............. 5,000 5,000
---------- ----------
Obligations to the State of Hawaii for the repayment
of Special Purpose Revenue Bonds:
HECO, 5.70%, refunding series 2000, due 2020............ 46,000 46,000
MECO, 5.70%, refunding series 2000, due 2020............ 20,000 20,000
HECO, 6.15%, refunding series 1999D, due 2020........... 16,000 16,000
HELCO, 6.15%, refunding series 1999D, due 2020.......... 3,000 3,000
MECO, 6.15%, refunding series 1999D, due 2020........... 1,000 1,000
HECO, 6.20%, series 1999C, due 2029..................... 35,000 35,000
HECO, 5.75%, refunding series 1999B, due 2018........... 30,000 30,000
HELCO, 5.75% refunding series 1999B, due 2018........... 11,000 11,000
MECO, 5.75%, refunding series 1999B, due 2018........... 9,000 9,000
HELCO, 5.50%, refunding series 1999A, due 2014.......... 11,400 11,400
HECO, 4.95%, refunding series 1998A, due 2012........... 42,580 42,580
HELCO, 4.95%, refunding series 1998A, due 2012.......... 7,200 7,200
MECO, 4.95%, refunding series 1998A, due 2012........... 7,720 7,720
HECO, 5.65%, series 1997A, due 2027..................... 50,000 50,000
HELCO, 5.65%, series 1997A, due 2027.................... 30,000 30,000
MECO, 5.65%, series 1997A, due 2027..................... 20,000 20,000
HECO, 5 7/8%, series 1996B, due 2026.................... 14,000 14,000
HELCO, 5 7/8%, series 1996B, due 2026................... 1,000 1,000
MECO, 5 7/8%, series 1996B, due 2026.................... 35,000 35,000
HECO, 6.20%, series 1996A, due 2026..................... 48,000 48,000
HELCO, 6.20%, series 1996A, due 2026.................... 7,000 7,000
MECO, 6.20%, series 1996A, due 2026..................... 20,000 20,000
HECO, 6.60%, series 1995A, due 2025..................... 40,000 40,000
HELCO, 6.60%, series 1995A, due 2025.................... 5,000 5,000
MECO, 6.60%, series 1995A, due 2025..................... 2,000 2,000
HECO, 5.45%, series 1993, due 2023...................... 50,000 50,000
HELCO, 5.45%, series 1993, due 2023..................... 20,000 20,000
MECO, 5.45%, series 1993, due 2023...................... 30,000 30,000
HECO, 6.55%, series 1992, due 2022...................... 40,000 40,000
HELCO, 6.55%, series 1992, due 2022..................... 12,000 12,000
MECO, 6.55%, series 1992, due 2022...................... 8,000 8,000
HELCO, 7 3/8%, series 1990C, due 2020................... 10,000 10,000
HELCO, 7.60%, series 1990B, due 2020.................... 4,000 4,000
---------- ----------
685,900 685,900
Less funds on deposit with trustees..................... 10,808 18,549
---------- ----------
Total obligations to the State of Hawaii........... 675,092 667,351
---------- ----------
Other long-term debt - unsecured:
HECO, 7.9% note, due in 2012............................ 9,595 --
---------- ---------
Total other long-term debt - unsecured............. 9,595 --
---------- ---------
Total long-term debt............................... 689,687 672,351
Less unamortized discount.................................. 4,418 4,620
Less amounts due within one year........................... 14,595 --
---------- ---------
Long-term debt, net................................. 670,674 667,731
---------- ----------
Total capitalization............................... $1,682,121 $1,627,036
========== ==========
See accompanying "Notes to Consolidated Financial Statements."
25
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31 2001 2000 1999
- ----------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Income before preferred stock dividends of
HECO.............................................. $ 89,380 $ 88,366 $ 76,400
Adjustments to reconcile income before
preferred stock dividends of HECO to
net cash provided by operating activities:
Depreciation of utility plant.................. 100,714 98,517 93,301
Other amortization.............................. 12,740 8,808 6,330
Deferred income taxes........................... 8,557 5,961 2,778
Tax credits, net................................ 2,476 982 1,671
Allowance for equity funds used during
construction................................... (4,239) (5,380) (4,228)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable.... 9,448 (23,032) 2,312
Decrease (increase) in accrued unbilled
revenues..................................... 11,397 (10,190) (10,385)
Decrease (increase) in fuel oil stock......... 12,684 (2,170) (18,176)
Decrease (increase) in materials and
supplies..................................... (2,915) 3,259 (2,780)
Increase in regulatory assets, net............ (4,036) (5,748) (3,565)
Increase (decrease) in accounts
payable...................................... (17,732) 19,582 12,108
Other......................................... (19,725) (9,509) 2,891
--------- --------- ---------
Net cash provided by operating activities........... 198,749 169,446 158,657
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures................................ (115,540) (130,089) (108,109)
Contributions in aid of construction................ 10,958 8,484 13,784
Proceeds from sales of assets....................... -- -- 1,525
Payments on notes receivable........................ -- 138 1,609
--------- --------- ---------
Net cash used in investing activities............... (104,582) (121,467) (91,191)
--------- --------- ---------
Cash flows from financing activities:
Common stock dividends.............................. (36,309) (68,522) (55,852)
Preferred stock dividends........................... (1,080) (1,080) (1,178)
Preferred securities distributions of trust
subsidiaries....................................... (7,675) (7,675) (7,665)
Proceeds from issuance of long-term debt............ 17,336 87,507 105,256
Repayment of long-term debt......................... -- (66,000) (81,400)
Redemption of preferred stock....................... -- -- (47,080)
Net increase (decrease) in short-term borrowings
from nonaffiliates and affiliate with original
maturities of three months or less................. (61,869) 3,153 (32,400)
Proceeds from other short-term borrowings........... -- 57,499 --
Repayment of other short-term borrowings............ (3,000) (55,682) --
Other............................................... (1,246) 2,389 36
--------- --------- ---------
Net cash used in financing activities............... (93,843) (48,411) (120,283)
--------- --------- ---------
Net increase (decrease) in cash and equivalents..... 324 (432) (52,817)
Cash and equivalents, January 1..................... 1,534 1,966 54,783
--------- --------- ---------
Cash and equivalents, December 31................... $ 1,858 $ 1,534 $ 1,966
========= ========= =========
See accompanying "Notes to Consolidated Financial Statements."
26
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
1. Summary of significant accounting policies
- --------------------------------------------------------------------------------
General
Hawaiian Electric Company, Inc. is engaged in the business of generating,
purchasing, transmitting, distributing and selling electric energy on the island
of Oahu and, through its two electric utility subsidiaries, on the islands of
Hawaii, Maui, Lanai and Molokai in the State of Hawaii.
Basis of presentation
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change
include the amounts reported for regulatory assets, pension and other
postretirement benefit obligations, current and deferred taxes, contingencies
and litigation.
Consolidation
The consolidated financial statements include the accounts of Hawaiian Electric
Company, Inc. (HECO) and its subsidiaries (collectively, the "Company"), Maui
Electric Company, Limited (MECO), Hawaii Electric Light Company, Inc. (HELCO),
HECO Capital Trust I and HECO Capital Trust II (Trusts). HECO is a wholly-owned
subsidiary of Hawaiian Electric Industries, Inc. (HEI).
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Regulation by the Public Utilities Commission of the State of Hawaii (PUC)
The Company is regulated by the PUC and accounts for the effects of regulation
under Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." The actions of regulators can
affect the timing of recognition of revenues, expenses, assets and liabilities.
Utility plant
Utility plant is reported at cost. Self-constructed plant includes engineering,
supervision, and administrative and general costs, and an allowance for the cost
of funds used during the construction period. These costs are recorded in
construction in progress and are transferred to utility plant when construction
is completed and the facilities are either placed in service or become useful
for public utility purposes. Upon the retirement or sale of electric utility
plant, no gain or loss is recognized. The cost of the plant retired or sold and
the cost of removal (net of salvage value) are charged to accumulated
depreciation.
Depreciation
Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the assets being depreciated. Electric utility plant
has useful lives ranging from 20 to 45 years for production plant, from 25 to 50
years for transmission and distribution plant and from 8 to 45 years for general
plant. The composite annual depreciation rate was 3.9% in 2001, 2000 and 1999.
Cash and equivalents
The Company considers cash on hand, deposits in banks, money market accounts,
certificates of deposit, short-term commercial paper and liquid investments
(with original maturities of three months or less) to be cash and equivalents.
Retirement benefits
Pension and other postretirement benefit costs/(returns) are charged/(credited)
primarily to expense and electric utility plant. The Company's policy is to fund
pension costs in amounts consistent with the requirements of the Employee
Retirement Income Security Act of 1974. Certain health care and/or life
insurance benefits are provided to eligible retired employees and the employees'
beneficiaries and covered dependents.
27
Notes to Consolidated Financial Statements,continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Premium, discount and expense
The expenses of issuing long-term debt securities and the premiums or discounts
at which they were sold are amortized against income over the terms of the
respective securities. Unamortized issue costs and discounts or premiums on
long-term debt retired prior to maturity are classified as regulatory assets or
liabilities and are amortized over the remaining term of the retired debt.
Contributions in aid of construction
The Company receives contributions from customers for special construction
requirements. As directed by the PUC, the Company amortizes contributions on a
straight-line basis over 30 years as an offset against depreciation expense.
Revenues
Revenues are based on rates authorized by the PUC and include revenues
applicable to energy consumed in the accounting period but not yet billed to the
customers. Revenue amounts recorded pursuant to a PUC interim order are subject
to refund, with interest, pending a final order.
The rate schedules of the Company include energy cost adjustment (ECA)
clauses under which electric rates are adjusted for changes in the
weighted-average price paid for fuel oil and certain components of purchased
power, and the relative amounts of company-generated power and purchased power.
Allowance for Funds Used During Construction (AFUDC)
AFUDC is an accounting practice whereby the costs of debt (AFUDC-Debt) and
equity (AFUDC-Equity) funds used to finance plant construction are credited on
the statement of income and charged to construction in progress on the balance
sheet.
The weighted-average AFUDC rate was 8.7% in 2001, 8.6% in 2000 and 8.7% in
1999 and reflected quarterly compounding.
Environmental expenditures
The Company is subject to numerous federal and state environmental statutes and
regulations. In general, environmental contamination treatment costs are charged
to expense, unless it is probable that the PUC would allow such costs to be
recovered in future rates, in which case such costs would be capitalized as
regulatory assets. Also, environmental costs are capitalized if the costs extend
the life, increase the capacity, or improve the safety or efficiency of
property; the costs mitigate or prevent future environmental contamination; or
the costs are incurred in preparing the property for sale. Liabilities are
recorded when environmental assessments and/or remedial efforts are probable,
and the cost can be reasonably estimated.
Income taxes
HECO and its subsidiaries are included in the consolidated income tax returns of
HECO's parent, HEI. Income tax expense has been computed for financial statement
purposes as if HECO and its subsidiaries filed separate consolidated HECO income
tax returns.
Deferred income tax assets and liabilities are established for the
temporary differences between the financial reporting bases and the tax bases of
the Company's assets and liabilities at enacted tax rates expected to be in
effect when such deferred tax assets or liabilities are realized or settled. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible.
Federal and state tax credits are deferred and amortized over the estimated
useful lives of the properties which qualified for the credits.
Governmental tax authorities could challenge a tax return position taken by
management. If the Company's position does not prevail, the Company's results of
operations and financial condition may be adversely affected as the related
deferred or current income tax asset would be impaired.
28
Notes to Consolidated Financial Statements,continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Impairment of long-lived assets and long-lived assets to be disposed of
The Company accounts for long-lived assets in accordance with the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
Recent accounting pronouncements
Adopted in 2001
Derivative instruments and hedging activities. The Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended, on
January 1, 2001 with no resulting material impact to consolidated results of
operations, financial condition 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.
To be adopted
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.
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 requirements 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. Operations discontinued after
January 1, 2002 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
29
Notes to Consolidated Financial Statements,contiuned
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
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 adopted the provisions of SFAS No. 144 on January
1, 2002 with no resulting material impact on the Company's results of
operations, financial condition or liquidity.
Reclassifications
Certain reclassifications have been made to prior years' financial statements to
conform to the 2001 presentation.
2. Cumulative preferred stock
- --------------------------------------------------------------------------------
The following series of cumulative preferred stock are redeemable only at the
option of the respective company and are subject to voluntary liquidation
provisions as follows:
Voluntary
liquidation Redemption
price price
December 31, December 31,
Series 2001 2001
- --------------------------------------------------------------------------------
C, D, E, H, J and K (HECO) ...................... $ 20.00 $ 21.00
I (HECO) ........................................ 20.00 20.00
G (HELCO) ....................................... 100.00 --
H (MECO) ........................................ 100.00 --
- --------------------------------------------------------------------------------
HELCO's series G and MECO's series H preferred stock may not be redeemed by
the respective subsidiary prior to December 2003.
On December 15, 1998, the Company announced that it would redeem all
outstanding shares of four series of cumulative preferred stock. In January
1999, HECO redeemed all 80,000 shares of its Series M preferred stock, HELCO
redeemed all 30,000 shares of its Series A preferred stock and MECO redeemed all
20,000 and 10,000 shares of its Series A and Series B preferred stock,
respectively.
On December 15, 1998, the Company announced that it would redeem all
outstanding shares of seven series of cumulative preferred stock which are
subject to mandatory sinking fund provisions. In January 1999, HECO redeemed all
76,000 and 130,000 shares of its Series Q and R preferred stock, respectively.
HELCO redeemed all 4,500, 5,500 and 60,000 shares of its Series D, E and F
preferred stock, respectively. MECO redeemed all 4,800 and 50,000 shares of its
Series D and G preferred stock, respectively.
HECO is obligated to make dividend, redemption and liquidation payments on
the preferred stock of either of its subsidiaries if the respective subsidiary
is unable to make such payments, provided that such obligation is subordinated
to any obligation to make payments on HECO's own preferred stock.
30
Notes to Consolidated Financial Statements,continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
3. HECO-obligated mandatorily redeemable trust preferred securities of
subsidiary trusts holding solely HECO and HECO-guaranteed debentures
- --------------------------------------------------------------------------------
In March 1997, HECO Capital Trust I (Trust I), a grantor trust which is a
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 which
is a 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
(see Note 2).
Contractual arrangements (the "Back-up Undertakings") entered into by HECO
in connection with the issuance of the 1997 and 1998 trust preferred securities,
considered together, constitute a full and unconditional guarantee by HECO, on a
subordinated basis, of the periodic distributions due on the 1997 and 1998 trust
preferred securities and of amounts due upon the redemption thereof or upon
liquidation of the Trusts. The Back-up Undertakings include HECO's (i) guarantee
that the Trusts will make their respective periodic distributions and redemption
and liquidation payments to the extent the Trusts have funds available therefor,
(ii) the subsidiary guarantees, (iii) obligations under an agreement to pay all
expenses and liabilities of the Trusts (other than the obligation of the Trusts
to pay amounts due to the holders of the 1997 and 1998 trust preferred
securities) and (iv) obligations under the trust agreements, HECO's 1997 and
1998 junior subordinated debentures and the respective indentures pursuant to
which the 1997 and 1998 junior subordinated debentures were issued. The 1997 and
1998 junior deferrable debentures and the common securities of the Trusts have
been eliminated
31
Notes to Consolidated Financial Statements,continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
in HECO's consolidated balance sheets as of December 31, 2001 and 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).
4. Long-term debt
- --------------------------------------------------------------------------------
The first mortgage bonds of HELCO are secured by a mortgage which purports to be
a lien on substantially all of the real and personal property now owned or
hereafter acquired by HELCO. The remaining two series of HELCO's first mortgage
bonds were redeemed in early 2002.
For special purpose revenue bonds, the funds on deposit with trustees
represent the undrawn proceeds from the issuance of the special purpose revenue
bonds and earn interest at market rates. These funds are available only to pay
(or reimburse payment of) expenditures in connection with certain authorized
construction projects and certain expenses related to the bonds.
At December 31, 2001, the aggregate payments of principal required on
long-term debt during the next five years are $14,595,000 in 2002 and nil in
2003, 2004, 2005 and 2006.
5. Short-term borrowings
- --------------------------------------------------------------------------------
There were no short-term borrowings from nonaffiliates at December 31, 2001.
Short-term borrowings from nonaffiliates at December 31, 2000 had a weighted
average interest rate of 7.5%, and consisted entirely of commercial paper.
At December 31, 2001 and 2000, the Company maintained bank lines of credit
which totaled $110 million ($10 million maturing in February 2002, $50 million
maturing in April 2002 and $50 million maturing in May 2002) and $110 million,
respectively. The Company maintains lines of credit to support the issuance of
commercial paper and for other general corporate purposes. None of the lines are
secured. The Company borrowed and repaid $8,800,000 under a line of credit in
2001. There were no borrowings under any line of credit at December 31, 2001 or
during 2000.
6. Regulatory assets
- --------------------------------------------------------------------------------
In accordance with SFAS No. 71, the Company's consolidated financial statements
reflect assets and costs based on current cost-based rate-making regulations.
Continued accounting under SFAS No. 71 requires that certain criteria be met.
Management believes the Company's operations currently satisfy the criteria.
However, if events or circumstances should change so that the 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
the regulatory assets would be charged to expense.
32
Notes to Consolidated Financial Statements,continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Regulatory assets are expected to be fully recovered through rates over PUC
authorized periods ranging from one to 36 years, and included the following
deferred costs:
December 31 2001 2000
- -------------------------------------------------------------------------------
(in thousands)
Income taxes ............................................ $ 62,467 $ 60,263
Postretirement benefits other than pensions.............. 19,687 21,477
Unamortized expense and premiums on retired debt and
equity issuances ....................................... 12,100 12,383
Integrated resource planning costs ...................... 6,243 10,592
Vacation earned, but not yet taken ...................... 4,929 5,919
Other ................................................... 5,950 5,989
-------- --------
$111,376 $116,623
======== ========
Regulatory asset related to Barbers Point Tank Farm 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 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 over a five-year period, which HECO began in
October 2001.
Integrated Resource Planning costs
In 1992, the PUC established a framework for Integrated Resource Planning (IRP)
and ordered the companies to develop an integrated resource plan in accordance
with the IRP framework. The framework also provides that the utilities are
entitled to recover appropriate IRP and implementation costs. Each year, the
electric utilities submit a budget of the IRP costs for the upcoming year, and
request subsequent recovery of the actual costs incurred. Actual IRP costs
incurred since 1995 have been recorded as a regulatory asset, and the electric
utilities have been awaiting PUC approval for recovery of those costs.
In August 2000, pursuant to a stipulation filed by the electric utilities
and the parties in the IRP cost proceedings, the PUC issued an order allowing
the electric utilities to begin recovering the 1995 through 1999 IRP costs (over
a 12 month period for HECO and a 24 month period for HELCO and MECO). The
utilities were allowed to begin recovering the 2000 IRP costs (over a 1 month
period for HECO and a 10 month period for HELCO and MECO) under a stipulation
filed in February 2001. Recovery of IRP costs is subject to refund with
interest, pending the PUC's final decision and order approving recovery of each
respective year's IRP costs. On September 1, 2000, the electric utilities began
recovering 1995 through 1999 IRP costs, and on November 1, 2001 began recovering
2000 IRP costs, through a surcharge on customers bills. As of December 31, 2001,
the amount of revenues recorded, subject to refund with interest, amounted to
$11.9 million.
33
Notes to Consolidated Financial Statements,continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
7. Income taxes
- --------------------------------------------------------------------------------
The components of income taxes charged to operating expenses were as follows:
Years ended December 31 2001 2000 1999
- --------------------------------------------------------------------------------
(in thousands)
Federal:
Current ...................................... $41,120 $43,206 $39,678
Deferred ..................................... 8,584 6,243 3,841
Deferred tax credits, net .................... (1,567) (1,585) (1,596)
------- ------- -------
48,137 47,864 41,923
------- ------- -------
State:
Current ...................................... 3,272 5,446 4,181
Deferred ..................................... 1,549 921 506
Deferred tax credits, net .................... 2,476 982 1,671
------- ------- -------
7,297 7,349 6,358
------- ------- -------
Total ........................................... $55,434 $55,213 $48,281
======= ======= =======
Income tax benefits related to nonoperating activities, included in "Other,
net" on the consolidated statements of income, amounted to $18,000, $162,000 and
$234,000 for 2001, 2000 and 1999, respectively.
A reconciliation between income taxes charged to operating expenses and the
amount of income taxes computed at the federal statutory rate of 35% on income
before income taxes and preferred stock dividends follows:
Years ended December 31 2001 2000 1999
- --------------------------------------------------------------------------------
(in thousands)
Amount at the federal statutory income tax rate .. $51,005 $50,573 $43,969
State income taxes on operating income, net of
effect on federal income taxes .................. 4,743 4,777 4,133
Other ............................................ (314) (137) 179
------- ------- -------
Income taxes charged to operating expenses ....... $55,434 $55,213 $48,281
======= ======= =======
The tax effects of temporary differences which give rise to deferred tax
assets and liabilities were as follows:
December 31 2001 2000
- -------------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
Property, plant and equipment ........................ $ 12,488 $ 11,676
Contributions in aid of construction and customer
advances ............................................. 47,546 49,240
Other ................................................. 12,382 12,295
-------- --------
72,416 73,211
-------- --------
Deferred tax liabilities:
Property, plant and equipment ......................... 170,559 172,216
Regulatory assets ..................................... 24,313 23,672
Other ................................................. 23,152 14,389
-------- --------
218,024 210,277
-------- --------
Net deferred income tax liability ........................ $145,608 $137,066
======== ========
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Based upon historical taxable income, projections
for future taxable income and tax planning strategies, management believes it is
more likely than not the Company will realize the benefits of the deferred tax
assets and provided no valuation allowance for deferred tax assets during 2001,
2000 and 1999.
34
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
8. Cash flows
- --------------------------------------------------------------------------------
Supplemental disclosures of cash flow information Cash paid during 2001, 2000
and 1999 for interest (net of AFUDC-Debt) and income taxes was as follows:
Years ended December 31 2001 2000 1999
- -------------------------------------------------------------------------------
(in thousands)
Interest ........................................ $43,519 $44,020 $48,163
======= ======= =======
Income taxes .................................... $38,392 $56,875 $38,856
======= ======= =======
Supplemental disclosures of noncash activities
The allowance for equity funds used during construction, which was charged
primarily to construction in progress, amounted to $4,239,000, $5,380,000 and
$4,228,000 in 2001, 2000 and 1999, respectively.
The estimated fair value of noncash contributions in aid of construction
amounted to $2,364,000, $6,550,000 and $2,859,000 in 2001, 2000 and 1999,
respectively.
9. Major customers
- --------------------------------------------------------------------------------
HECO and its subsidiaries derived approximately 10% of their operating revenues
from the sale of electricity to various federal government agencies in 2001 and
2000, and 9% in 1999. These revenues amounted to $127,405,000 in 2001,
$122,969,000 in 2000 and $98,192,000 in 1999.
10. Retirement benefits
- --------------------------------------------------------------------------------
Pensions
The Company has several defined benefit pension plans which cover substantially
all employees. In general, benefits are based on the employees' years of service
and base compensation.
Postretirement benefits other than pensions
The Company provides various postretirement benefits other than pensions to
eligible employees upon retirement. HECO and its subsidiaries provide eligible
employees health and life insurance benefits upon retirement. The amount of
health benefits is based on retirees' years of service and retirement date.
Generally, employees are eligible for these benefits if, upon retirement, they
participate in one of the Company's defined benefit pension plans.
Change in method of calculating market-related value of retirement benefit plan
assets
Since 1993, the Company has determined the market-related value of retirement
benefit (pension and other postretirement benefits) plan assets by calculating
the difference between the expected return and the actual return on the fair
value of the plan assets, then amortizing the difference over future years -- 0%
in the first year and 25% in years two to five, and finally adding or
subtracting the unamortized differences for the past four years from fair value.
For the year 2000 and future years, the method of calculating the market-related
value of the plan assets was changed to include a 15% range around the fair
value of such assets (i.e., 85% to 115% of fair value). If the market-related
value is outside the 15% range, then the amount outside the range will be
recognized immediately in the calculation of annual net periodic benefit cost.
If the market-related value remains within the 15% range, the Company will
continue to amortize the difference over future years using the amortization
method used from 1993 to 1999. This change in accounting principle is preferable
because it results in calculated asset values of the plans that more closely
approximate fair value, while still mitigating the effect of annual fair value
fluctuations. No range was used in
35
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
prior years as the market-related value of the plan assets was within the 15%
range at each year end from 1993 to 1998. Therefore, the cumulative effect of
this change was nil. The effect of the change in accounting principle on 2000
was to increase net income approximately $4.2 million.
The changes in benefit obligations and plan assets, the funded status of
the plans and the unrecognized and recognized amounts in the balance sheet were
as follows:
Pension benefits Other benefits
-----------------------------------------------
(in thousands) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------
Benefit obligation, January 1 ..................... $552,030 $ 509,943 $ 122,161 $ 116,958
Service cost ...................................... 16,317 15,385 2,951 2,737
Interest cost ..................................... 40,073 38,526 9,128 8,742
Amendments ........................................ (217) -- -- --
Actuarial loss .................................... 15,170 18,319 15,344 5
Benefits paid ..................................... (32,337) (30,143) (6,529) (6,281)
- -----------------------------------------------------------------------------------------------------
Benefit obligation, December 31 ................... 591,036 552,030 $ 143,055 122,161
- -----------------------------------------------------------------------------------------------------
Fair value of plan assets, January 1 .............. 788,955 842,872 102,265 110,643
Actual loss on plan assets ........................ (79,291) (23,904) (11,264) (6,029)
Employer contribution ............................. 242 165 3,976 3,932
Benefits paid ..................................... (32,316) (30,178) (6,529) (6,281)
- -----------------------------------------------------------------------------------------------------
Fair value of plan assets, December 31 ............ 677,590 788,955 88,448 102,265
- -----------------------------------------------------------------------------------------------------
Funded status ..................................... 86,554 236,925 (54,607) (19,896)
Unrecognized net actuarial gain ................... (32,930) (211,224) (6,915) (46,002)
Unrecognized net transition obligation ............ 3,223 5,496 35,907 39,171
Unrecognized prior service gain ................... (8,781) (9,313) -- --
- -----------------------------------------------------------------------------------------------------
Net amount recognized, December 31 ................ $ 48,066 $ 21,884 $ (25,615) $ (26,727)
=====================================================================================================
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost .......................... $ 50,626 $ 24,493 $ -- $ --
Accrued benefit liability ..................... (2,751) (2,740) (25,615) (26,727)
Intangible asset .............................. -- 90 -- --
Accumulated other comprehensive
income ...................................... 191 41 -- --
- -----------------------------------------------------------------------------------------------------
Net amount recognized, December 31 ................ $ 48,066 $ 21,884 $ (25,615) $ (26,727)
=====================================================================================================
The following weighted-average assumptions were used in the accounting for
the plans:
Pension benefits Other benefits
------------------------------------------------
December 31 2001 2000 1999 2001 2000 1999
- -----------------------------------------------------------------------------------
Discount rate .................. 7.25% 7.50% 7.75% 7.25% 7.50% 7.75%
Expected return on plan assets.. 10.0 10.0 10.0 10.0 10.0 10.0
Rate of compensation increase... 4.6 4.6 4.6 4.6 4.6 4.6
At December 31, 2001, the assumed health care trend rates for 2002 and
future years were as follows: medical, 8.69%, grading down to 4.75%; dental,
4.75%; and vision, 3.75%.
36
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
The components of the net periodic benefit cost (return) were as follows:
Pension benefits Other benefits
-----------------------------------------------------------------
(in thousands) 2001 2000 1999 2001 2000 1999
- -----------------------------------------------------------------------------------------------
Service cost .............. $ 16,317 $ 15,385 $ 19,475 $ 2,951 $ 2,737 $ 3,172
Interest cost ............. 40,073 38,526 36,384 9,128 8,742 7,685
Expected return on plan
assets .................. (75,644) (70,460) (57,104) (9,882) (9,189) (7,644)
Amortization of unre-
cognized transition
obligation .............. 2,273 2,273 2,273 3,264 3,264 3,264
Amortization of prior
service gain ............ (750) (703) (703) -- -- --
Recognized actuarial
loss (gain) ............. (8,210) (9,398) 9 (2,597) (3,112) (1,464)
- -----------------------------------------------------------------------------------------------
Net periodic benefit
cost (return) ........... $(25,941) $(24,377) $ 334 $ 2,864 $ 2,442 $ 5,013
===============================================================================================
Of the net periodic pension benefit costs (returns), the Company recorded
income of $19.8 million in 2001 and $18.7 million in 2000 and recorded expense
of $0.2 million in 1999, respectively, and credited or charged the remaining
amounts primarily to electric utility plant. Of the net periodic other benefit
costs, the Company expensed $2.2 million, $1.9 million and $3.7 million in 2001,
2000 and 1999, respectively, and charged the remaining amounts primarily to
electric utility plant.
At December 31, 2001 and 2000, the Company had pension plans in which the
accumulated benefit obligations exceeded plan assets at fair value, but such
plans did not have material benefit obligations.
The health care cost trend rate assumptions can have a significant effect
on the amounts reported for other benefits. At December 31, 2001, a
one-percentage-point increase in the assumed health care cost trend rates would
have increased the total service and interest cost by $0.4 million and the
postretirement benefit obligation by $4.4 million, and a one-percentage-point
decrease would have reduced the total service and interest cost by $0.5 million
and the postretirement benefit obligation by $5.3 million.
11. Commitments and contingencies
- --------------------------------------------------------------------------------
Fuel contracts
The Company has contractual agreements to purchase minimum quantities of fuel
oil and diesel fuel through 2004 (at prices tied to the market prices of
petroleum products in Singapore and Los Angeles). Based on the average price per
barrel at January 1, 2002, the estimated cost of minimum purchases under the
fuel supply contracts for 2002 is $195 million. The actual cost of purchases in
2002 could vary substantially from this estimate as a result of changes in
market prices, quantities actually purchased and/or other factors. The Company
purchased $328 million, $359 million and $229 million of fuel under contractual
agreements in 2001, 2000 and 1999, respectively.
Power purchase agreements
At December 31, 2001, the Company had power purchase agreements for 534 MW of
firm capacity. The PUC allows rate recovery for energy and firm capacity
payments under these agreements. Assuming that each of the agreements remains in
place for its current term and the minimum availability criteria in the power
purchase agreements are met, aggregate minimum fixed capacity charges are
expected to be approximately $123 million each in 2002, 2003 and 2004, $116
million in 2005 and 2006 and a total of $1.7 billion in the period from 2007
through 2030.
37
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
In general, the Company bases its payments under the power purchase
agreements upon available capacity and energy and is generally not required to
make payments for capacity if the contracted capacity is not available, and
payments are reduced, under certain conditions, if available capacity drops
below contracted levels. In general, the payment rates for capacity have been
predetermined for the terms of the agreements. Energy payments will vary over
the terms of the agreements and the Company passes on changes in the fuel
component of the energy charges to customers through the ECA clause in the rate
schedules. The Company does not operate nor participate in the operation of any
of the facilities that provide power under the agreements. Title to the
facilities does not pass to the Company upon expiration of the agreements, and
the agreements do not contain bargain purchase options for the facilities.
Interim increases
At December 31, 2001, HECO and its subsidiaries recognized $11.9 million of
revenues with respect to interim orders regarding certain integrated resource
planning costs, which revenues are subject to refund, with interest, to the
extent they exceed the amounts allowed in final orders.
HELCO power situation
In 1991, 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 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; and (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.
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, there are
currently three rulings that 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
38
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
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, as applied to it, are unconstitutional. 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. In a document dated
November 5, 2001, the hearings officer recommended that the BLNR approve HELCO's
request for extension of the construction deadline. The recommendation did not
state a time period for the extension, but concluded that an extension is
warranted, "under such conditions as the Board may deem advisable." In a
document dated November 7, 2001, the hearings officer issued rulings on the
opponents' proposed findings of fact, conclusions of law and motions. On
November 30, 2001, each of the parties filed exceptions to the recommendation
and rulings. HELCO's exceptions requested that the November 7, 2001 rulings not
be adopted, as many of them are arguably inconsistent with the November 5, 2001
recommendation. Oral arguments before the BLNR were conducted in January 2002.
The BLNR has not yet issued a decision in this matter.
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.
Air permit. In 1997, the DOH issued a final air permit for the Keahole expansion
project. Nine appeals of the issuance of the permit were filed with the EPA's
Environmental Appeals Board (EAB). In November 1998, the EAB denied the appeals
on most of the grounds stated, but directed the DOH to reopen the permit for
limited purposes. The EPA and DOH required additional data collection, which was
satisfactorily completed in April 2000. A final air permit was reissued by the
DOH in July 2001. Six appeals were filed with the EAB, but those appeals were
denied. On November 27, 2001, the final air permit became effective. In December
2001, opponents filed a Motion for Reconsideration with the EAB, which the EAB
denied in January 2002.
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. HELCO can terminate the PPA with HCPC early.
39
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
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, including extension of the construction period, and related matters
will be satisfactorily resolved and will not prevent HELCO from ultimately
constructing CT-4 and CT-5. Management 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 stay is lifted by the Circuit Court, with a
projected in-service date toward the end 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 December 31,
2001. However, if it becomes probable that CT-4 and/or CT-5 will not be
installed or probable that, even if CT-4 and CT-5 are installed, the PUC will
disallow certain costs for rate-making purposes, 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 December 31, 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
permitted to be transferred to plant-in-service for pre-air permit facilities)
amounted to approximately $75 million, including $29 million for equipment and
material purchases, $26 million for planning, engineering, permitting, site
development and other costs and $20 million for 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 2006. No
costs for ST-7 are included in construction in progress.
Oahu transmission system
Oahu's power sources are located primarily in West Oahu. The bulk of HECO's
system load is in the Honolulu/East Oahu area. HECO transmits bulk power to the
Honolulu/East Oahu area over two major transmission corridors (Northern and
Southern). HECO plans to extend the Southern corridor to the Kamoku substation
by late 2002. The Northern corridor ends at the Pukele substation, which serves
18% of Oahu's electrical load, including Waikiki. If one of the two existing 138
kv transmission lines to the Pukele substation fails while the other is out for
maintenance, a major system outage would result. HECO plans to construct a part
underground/part overhead 138 kv transmission line from the Kamoku substation to
the Pukele substation, in order to close the gap between the Southern and
Northern corridors and provide a third 138 kv transmission line to the Pukele
substation.
The proposed Kamoku to Pukele transmission line project requires the BLNR
to approve a Conservation District Use Permit (CDUP) for the overhead portion of
the line that is in conservation district lands. Several community and
environmental groups have opposed the project, particularly the overhead portion
of the line.
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 was held in November 2001. The hearings officer
submitted his report, findings of fact and conclusions of law and recommended
that HECO's request for the CDUP be denied. He concluded that HECO had failed to
establish that there is a need that outweighs the transmission line's adverse
impacts on conservation district lands and that there are practical alternatives
that could be pursued, including an all-underground route outside the
conservation district lands. The BLNR will consider exceptions from the
respective parties to
40
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
the proposed findings, conclusions and recommendations before rendering a
decision on the CDUP. A BLNR decision on the CDUP is anticipated by July 14,
2002, the expiration date for processing the CDUP application. If the BLNR
denies HECO's request for a CDUP, HECO plans to pursue an alternative
all-underground route on land not designated as conservation land.
In November 2000, the DLNR accepted a Revised Final Environmental Impact
Statement (RFEIS) prepared in support of HECO's application for a CDUP. In
January 2001, three organizations and an individual filed a complaint
challenging the DLNR's acceptance of the RFEIS and seeking, among other things,
a judicial declaration that the RFEIS is inadequate and null and void. 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
second half of 2005 if construction is started by the first quarter of 2004. The
actual construction start date will depend on permitting and approval processes,
including approval from the PUC. Management believes that the required permits
and approvals necessary to complete the Kamoku to Pukele transmission line,
along the proposed route or an alternate route, will be obtained.
As of December 31, 2001, the accumulated costs related to the Kamoku to
Pukele transmission line amounted to $15 million, including $11 million for
planning, engineering and permitting costs and $4 million for an allowance for
funds used during construction. These costs are recorded in construction in
progress. The recovery of costs relating to the Kamoku to Pukele transmission
line project is subject to the rate-making process governed by the PUC.
Management believes no adjustment to costs incurred to put the Kamoku to Pukele
transmission line into service is required as of December 31, 2001. However, if
it becomes probable that the Kamoku to Pukele transmission line will not be
installed, or probable that the PUC will disallow some or all of the incurred
costs for rate-making purposes, HECO may be required to write off a material
portion or all of the costs incurred in its efforts to put the Kamoku to Pukele
transmission line into service.
Environmental regulation
In early 1995, the DOH initially advised HECO 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, 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. In response
to the DOH's request for technical assistance, the EPA became involved with the
harbor investigation in June 2000.
In 2000, the DOH issued notices to over 20 other PRPs regarding the
on-going 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. The group is now called the
Honolulu Harbor Participating Parties. The Participating Parties agreed to fund
remediation work using an interim cost allocation method.
In July 2001, the EPA issued a notice of interest (Initial NOI) under the
Oil Pollution Act of 1990 to HECO and others regarding the Iwilei Unit of the
Honolulu
41
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Harbor site. In the Initial NOI, the EPA stated that immediate subsurface
investigation and assessment (also known as the Rapid Assessment Work) must be
conducted to delineate the extent of contamination at the site. The
Participating Parties substantially completed the Rapid Assessment Work. Based
on the Rapid Assessment Work and input from the DOH and EPA, the Participating
Parties will develop proposals for additional investigation, if needed, and
recommend remedial activities.
In September 2001, the EPA and DOH concurrently issued notices of interest
(collectively, the Second NOI) to the members of the Participating Parties,
including HECO. The Second NOI identified several investigative and preliminary
oil removal tasks to be taken at certain valve control facilities associated
with historic pipelines in the Iwilei Unit of the Honolulu Harbor site. The
Participating Parties have substantially performed the tasks identified in the
Second NOI. Once evaluation of the work performed under the Second NOI has been
completed, the Participating Parties will develop proposals for additional
investigation, if needed, and recommend remedial activities in the areas
identified in the Second NOI.
Management has developed a preliminary estimate of costs for continuing
investigative work, remedial activities and monitoring at the Iwilei Unit of the
site. Management estimates that HECO will incur approximately $1.1 million in
connection with work to be performed at the site primarily from January 2002
through December 2003. This amount has been expensed in 2001. However, because
(1) the full scope and extent of additional investigative work, remedial
activities and monitoring are unknown at this time, (2) the final cost
allocation method has not yet been determined and (3) management cannot estimate
the costs to be incurred (if any) for the sites other than the Iwilei Unit
(including its Honolulu Power Plant site), the cost estimate may be subject to
significant change.
12. Regulatory restrictions on distributions to parent
- --------------------------------------------------------------------------------
At December 31, 2001, net assets (assets less liabilities and preferred stock)
of approximately $441 million were not available for transfer to HEI in the form
of dividends, loans or advances without regulatory approval.
13. Related-party transactions
- --------------------------------------------------------------------------------
HEI charged HECO and its subsidiaries $2,010,000, $1,805,000 and $1,793,000 for
general management and administrative services in 2001, 2000 and 1999,
respectively. The amounts charged by HEI to its subsidiaries are allocated
primarily on the basis of actual labor hours expended in providing such
services.
HEI also charged HECO $2,179,000, $2,508,000 and $3,016,000 for data
processing services in 2001, 2000 and 1999, respectively.
HECO's borrowings from HEI fluctuate during the year, and totaled
$48,297,000 and $8,764,000 at December 31, 2001 and 2000, respectively. The
interest charged on short-term borrowings from HEI is computed based on HECO's
short-term borrowing interest rate. Interest charged by HEI to HECO totaled
$1,202,000, $135,000 and $89,000 in 2001, 2000 and 1999, respectively.
14. Significant group concentrations of credit risk
- --------------------------------------------------------------------------------
HECO and its utility subsidiaries are regulated operating electric public
utilities engaged in the generation, purchase, transmission, distribution and
sale of electricity on the islands of Oahu, Hawaii, Maui, Lanai and Molokai in
the State of Hawaii. HECO and its subsidiaries provide the only electric public
utility service on the islands they serve. HECO and its subsidiaries grant
credit to customers, all of whom reside or conduct business in the State of
Hawaii.
42
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
15. Fair value of financial instruments
- --------------------------------------------------------------------------------
The Company used the following methods and assumptions to estimate the fair
value of each applicable class of financial instruments for which it is
practicable to estimate that value:
Cash and equivalents and short-term borrowings
The carrying amount approximated fair value because of the short maturity of
these instruments.
Long-term debt
Fair value was estimated based on quoted market prices for the same or similar
issues of debt.
HECO-obligated mandatorily redeemable trust preferred securities of subsidiary
trusts holding solely HECO and HECO-guaranteed debentures
Fair value was based on quoted market prices.
The estimated fair values of the financial instruments held or issued by
the Company were as follows:
December 31 2001 2000
- ---------------------------------------------------------------------------------------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
- ---------------------------------------------------------------------------------------
(in thousands)
Financial assets:
Cash and equivalents ................... $ 1,858 $ 1,858 $ 1,534 $ 1,534
Financial liabilities:
Short-term borrowings from
nonaffiliates and affiliate ........... 48,297 48,297 113,162 113,162
Long-term debt, net, including amounts
due within one year ................. 685,269 665,849 667,731 687,426
HECO-obligated mandatorily redeemable
trust preferred securities of
subsidiary trusts holding solely
HECO and HECO-guaranteed
debentures ............................. 100,000 100,400 100,000 92,500
- ---------------------------------------------------------------------------------------
Limitations
The Company makes fair value estimates at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result if the
Company were to sell its entire holdings of a particular financial instrument at
one time. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are provided for certain financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses could have a significant effect on fair value estimates and
have not been considered.
43
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
16. Consolidating financial information (unaudited)
- --------------------------------------------------------------------------------
Consolidating balance sheet
December 31, 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 .................................. $ 25,369 $ 2,752 $ 3,568 $ -- $ -- $ -- $ 31,689
Plant and equipment ................... 1,943,378 550,671 574,205 -- -- -- 3,068,254
Less accumulated depreciation ......... (810,187) (238,962) (217,183) -- -- -- (1,266,332)
Plant acquisition adjustment, net ..... -- -- 354 -- -- -- 354
Construction in progress .............. 70,501 85,913 14,144 -- -- -- 170,558
---------- --------- --------- ------- ------- --------- -----------
Net utility plant .................... 1,229,061 400,374 375,088 -- -- -- 2,004,523
---------- --------- --------- ------- ------- --------- -----------
Investment in wholly owned
subsidiaries,
at equity ............................. 341,186 -- -- -- -- (341,186) [2] --
---------- --------- --------- ------- ------- --------- -----------
Current assets
Cash and equivalents .................. 9 1,282 567 -- -- -- 1,858
Advances to affiliates ................ 12,600 -- 7,000 51,546 51,546 (122,692) [1] --
Customer accounts receivable, net ..... 56,227 13,644 12,001 -- -- -- 81,872
Accrued unbilled revenues, net ........ 35,072 8,855 8,696 -- -- -- 52,623
Other accounts receivable, net ........ 2,537 497 352 -- -- (734) [1] 2,652
Fuel oil stock, at average cost ....... 15,840 3,007 5,593 -- -- -- 24,440
Materials & supplies, at average cost.. 9,168 1,982 8,552 -- -- -- 19,702
Prepayments and other ................. 43,326 7,028 3,390 -- -- -- 53,744
---------- --------- --------- ------- ------- --------- -----------
Total current assets ................. 174,779 36,295 46,151 51,546 51,546 (123,426) 236,891
---------- --------- --------- ------- ------- --------- -----------
Other assets
Regulatory assets ..................... 76,153 18,376 16,847 -- -- -- 111,376
Unamortized debt expense .............. 7,756 2,040 2,647 -- -- -- 12,443
Long-term receivable and other ........ 17,119 3,880 3,506 -- -- -- 24,505
---------- --------- --------- ------- ------- --------- -----------
Total other assets ................... 101,028 24,296 23,000 -- -- -- 148,324
---------- --------- --------- ------- ------- --------- -----------
$1,846,054 $ 460,965 $ 444,239 $51,546 $51,546 $(464,612) $ 2,389,738
========== ========= ========= ======= ======= ========= ===========
Capitalization and liabilities
Capitalization
Common stock equity ................... $ 877,154 $ 165,655 $ 172,439 $ 1,546 $ 1,546 $(341,186) [2] $ 877,154
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 & HECO-guaranteed debentures -- -- -- 50,000 50,000 -- 100,000
Long-term debt, net ................... 461,173 140,962 171,631 -- -- (103,092) [1] 670,674
---------- --------- --------- ------- ------- --------- -----------
Total capitalization ................. 1,360,620 313,617 349,070 51,546 51,546 (444,278) 1,682,121
---------- --------- --------- ------- ------- --------- -----------
Current liabilities
Long-term debt due within one year .... 9,595 5,000 -- -- -- -- 14,595
Short-term borrowings-affiliate ....... 55,297 12,600 -- -- -- (19,600) [1] 48,297
Accounts payable ...................... 34,860 10,108 8,998 -- -- -- 53,966
Interest and preferred
dividends payable .................... 7,664 1,698 2,433 -- -- (30) [1] 11,765
Taxes accrued ......................... 52,216 15,841 18,001 -- -- 86,058
Other ................................. 23,712 2,852 3,939 -- -- (704) [1] 29,799
---------- --------- --------- ------- ------- --------- -----------
Total current liabilities ............ 183,344 48,099 33,371 -- -- (20,334) 244,480
---------- --------- --------- ------- ------- --------- -----------
Deferred credits and other liabilities
Deferred income taxes ................. 123,097 11,984 10,527 -- -- -- 145,608
Unamortized tax credits ............... 28,538 8,644 11,330 -- -- -- 48,512
Other ................................. 15,557 25,309 14,594 -- -- -- 55,460
---------- --------- --------- ------- ------- --------- -----------
Total deferred credits and
other liabilities ................... 167,192 45,937 36,451 -- -- -- 249,580
---------- --------- --------- ------- ------- --------- -----------
Contributions in aid of construction ... 134,898 53,312 25,347 -- -- -- 213,557
---------- --------- --------- ------- ------- --------- -----------
$1,846,054 $ 460,965 $ 444,239 $51,546 $51,546 $(464,612) $ 2,389,738
========== ========= ========= ======= ======= ========= ===========
44
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating balance sheet
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 wholly owned
subsidiaries, at equity................ 333,809 -- -- -- -- (333,809) [2] --
---------- ---------- --------- -------- -------- --------- -----------
Current assets
Cash and equivalents .................. 1,398 4 132 -- -- -- 1,534
Advances to affiliates ................ 21,800 -- -- 51,546 51,546 (124,892) [1] --
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) [1] 5,426
Fuel oil stock, at average cost ....... 24,176 3,439 9,509 -- -- -- 37,124
Materials & supplies, at average cost . 6,958 2,365 7,464 -- -- -- 16,787
Prepayments and other ................. 23,862 4,112 1,059 -- -- -- 29,033
---------- ---------- --------- -------- -------- --------- -----------
Total current assets ................. 187,437 36,006 40,863 51,546 51,546 (124,928) 242,470
---------- ---------- --------- -------- -------- --------- -----------
Other assets
Regulatory assets ..................... 77,717 19,838 19,068 -- -- -- 116,623
Unamortized debt expense .............. 8,350 2,345 2,760 -- -- -- 13,455
Long-term receivable and other ........ 19,393 3,478 4,844 -- -- -- 27,715
---------- ---------- --------- -------- -------- --------- -----------
Total other assets ................... 105,460 25,661 26,672 -- -- -- 157,793
---------- ---------- --------- -------- -------- --------- -----------
$1,847,402 $ 462,307 $ 438,794 $ 51,546 $ 51,546 $(458,737) $ 2,392,858
========== ========== ========= ======== ======== ========= ===========
Capitalization and liabilities
Capitalization
Common stock equity ................... $ 825,012 $ 162,901 $ 167,816 $ 1,546 $ 1,546 $(333,809) [2] $ 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
subsidiary trusts holding solely
HECO & HECO-guaranteed debentures -- -- -- 50,000 50,000 -- 100,000
Long-term debt, net ................... 453,310 145,931 171,582 -- -- (103,092) [1] 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) [1] 8,764
Accounts payable ...................... 51,249 10,146 10,303 -- -- -- 71,698
Interest and preferred
dividends payable .................... 6,779 1,790 2,045 -- -- (131) [1] 10,483
Taxes accrued ......................... 46,094 15,572 16,520 -- -- -- 78,186
Other ................................. 27,075 3,395 4,330 -- -- 95 [1] 34,895
---------- ---------- --------- -------- -------- --------- -----------
Total current liabilities ............ 244,359 51,203 34,698 -- -- (21,836) 308,424
---------- ---------- --------- -------- -------- --------- -----------
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
---------- ---------- --------- -------- -------- --------- -----------
$1,847,402 $ 462,307 $ 438,794 $ 51,546 $ 51,546 $(458,737) $ 2,392,858
========== ========== ========= ======== ======== ========= ===========
45
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of income
Year ended December 31, 2001
----------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
- -----------------------------------------------------------------------------------------------------------------------
Operating revenues ............... $885,244 $193,876 $205,192 $ -- $ -- $ -- $1,284,312
-------- -------- -------- -------- ------ -------- ----------
Operating expenses
Fuel oil ......................... 237,394 28,079 81,255 -- -- -- 346,728
Purchased power .................. 263,502 69,023 5,319 -- -- -- 337,844
Other operation .................. 80,825 19,181 25,559 -- -- -- 125,565
Maintenance ...................... 39,258 9,444 13,099 -- -- -- 61,801
Depreciation ..................... 60,799 18,522 21,393 -- -- -- 100,714
Taxes, other than income taxes ... 83,310 18,315 19,269 -- -- -- 120,894
Income taxes ..................... 35,774 8,362 11,298 -- -- -- 55,434
-------- -------- -------- -------- ------ -------- ----------
800,862 170,926 177,192 -- -- -- 1,148,980
-------- -------- -------- -------- ------ -------- ----------
Operating income ................. 84,382 22,950 28,000 -- -- -- 135,332
-------- -------- -------- -------- ------ -------- ----------
Other income
Allowance for equity funds used
during construction ............. 3,506 286 447 -- -- -- 4,239
Equity in earnings of subsidiaries 31,097 -- -- -- -- (31,097) [2] --
Other, net ....................... 3,447 486 210 4,149 3,763 (8,858) [1] 3,197
-------- -------- -------- -------- ------ -------- ----------
38,050 772 657 4,149 3,763 (39,955) 7,436
-------- -------- -------- -------- ------ -------- ----------
Income before interest and
other charges ................... 122,432 23,722 28,657 4,149 3,763 (39,955) 142,768
-------- -------- -------- -------- ------ -------- ----------
Interest and other charges
Interest on long-term debt ....... 23,850 7,628 8,818 -- -- -- 40,296
Amortization of net bond premium
and expense ..................... 1,310 346 407 -- -- -- 2,063
Other interest charges ........... 9,775 2,411 1,369 -- -- (8,858) [1] 4,697
Allowance for borrowed funds used
during construction ............. (1,883) (174) (201) -- -- -- (2,258)
Preferred stock dividends of ..... -- -- -- -- -- 915 [3] 915
subsidiaries
Preferred securities distributions
of trust subsidiaries ........... -- -- -- -- -- 7,675 [3] 7,675
-------- -------- -------- -------- ------ -------- ----------
33,052 10,211 10,393 -- -- (268) 53,388
-------- -------- -------- -------- ------ -------- ----------
Income before preferred stock
dividends of HECO ............... 89,380 13,511 18,264 4,149 3,763 (39,687) 89,380
Preferred stock dividends of HECO 1,080 534 381 4,025 3,650 (8,590) [3] 1,080
-------- -------- -------- -------- ------ -------- ----------
Net income for common stock ...... $ 88,300 $ 12,977 $ 17,883 $ 124 $ 113 $(31,097) $ 88,300
======== ======== ======== ======== ====== ======== ==========
Consolidating statement of retained earnings
Year ended December 31, 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 [2] $443,970
Net income for common stock ........... 88,300 12,977 17,883 124 113 (31,097) [2] 88,300
Common stock dividends ................ (36,309) (10,249) (13,287) (124) (113) 23,773 [2] (36,309)
-------- -------- -------- ----- ----- --------- --------
Retained earnings, end of period ...... $495,961 $ 65,690 $ 78,182 $ -- $ -- $(143,872) $495,961
======== ======== ======== ===== ===== ========= ========
46
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of income
Year ended December 31, 2000
------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
- -------------------------------------------------------------------------------------------------------------------------
Operating revenues ............... $883,414 $192,918 $ 194,303 $ -- $ -- $ -- $1,270,635
-------- -------- --------- -------- ------ -------- ----------
Operating expenses
Fuel oil ......................... 236,298 49,439 77,168 -- -- -- 362,905
Purchased power .................. 262,764 41,668 6,775 -- -- -- 311,207
Other operation .................. 82,743 20,335 20,701 -- -- -- 123,779
Maintenance ...................... 43,504 9,328 13,237 -- -- -- 66,069
Depreciation ..................... 59,608 19,341 19,568 -- -- -- 98,517
Taxes, other than income taxes ... 83,169 18,222 18,393 -- -- -- 119,784
Income taxes ..................... 34,256 9,480 11,477 -- -- -- 55,213
-------- -------- --------- -------- ------ -------- ----------
802,342 167,813 167,319 -- -- -- 1,137,474
-------- -------- --------- -------- ------ -------- ----------
Operating income ................. 81,072 25,105 26,984 -- -- -- 133,161
-------- -------- --------- -------- ------ -------- ----------
Other income
Allowance for equity funds used
during construction ............. 4,245 232 903 -- -- -- 5,380
Equity in earnings of subsidiaries 32,985 -- -- -- -- (32,985) [2] --
Other, net ....................... 4,810 736 958 4,149 3,763 (9,861) [1] 4,555
-------- -------- --------- -------- ------ -------- ----------
42,040 968 1,861 4,149 3,763 (42,846) 9,935
-------- -------- --------- -------- ------ -------- ----------
Income before interest and
other charges ................... 123,112 26,073 28,845 4,149 3,763 (42,846) 143,096
-------- -------- --------- -------- ------ -------- ----------
Interest and other charges
Interest on long-term debt ....... 23,369 7,621 9,144 -- -- -- 40,134
Amortization of net bond premium
and expense ..................... 1,262 315 361 -- -- -- 1,938
Other interest charges ........... 12,459 3,007 1,385 -- -- (9,861) [1] 6,990
Allowance for borrowed funds used
during construction ............. (2,344) (139) (439) -- -- -- (2,922)
Preferred stock dividends of -- -- -- -- -- 915 [3] 915
subsidiaries
Preferred securities distributions
of trust subsidiaries ........... -- -- -- -- -- 7,675 [3] 7,675
-------- -------- --------- -------- ------ -------- ----------
34,746 10,804 10,451 -- -- (1,271) 54,730
-------- -------- --------- -------- ------ -------- ----------
Income before preferred stock
dividends of HECO ............... 88,366 15,269 18,394 4,149 3,763 (41,575) 88,366
Preferred stock dividends of HECO 1,080 534 381 4,025 3,650 (8,590) [3] 1,080
-------- -------- --------- -------- ------ -------- ----------
Net income for common stock ...... $ 87,286 $ 14,735 $ 18,013 $ 124 $ 113 $(32,985) $ 87,286
======== ======== ========= ======== ====== ======== ==========
Consolidating statement of retained earnings
Year ended December 31, 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) [2] $425,206
Net income for common stock ........... 87,286 14,735 18,013 124 113 (32,985) [2] 87,286
Common stock dividends ................ (68,522) (11,579) (14,060) (124) (113) 25,876 [2] (68,522)
-------- -------- -------- ----- ----- --------- --------
Retained earnings, end of period ...... $443,970 $ 62,962 $ 73,586 $ -- $ -- $(136,548) $443,970
======== ======== ======== ===== ===== ========= ========
47
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of income
Year ended December 31, 1999
------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Operating revenues .................. $732,410 $159,681 $ 158,232 $ -- $ -- $ -- $1,050,323
-------- -------- --------- ------ ------ --------- ----------
Operating expenses
Fuel oil ............................ 137,058 32,378 47,257 -- -- -- 216,693
Purchased power ..................... 240,108 30,244 5,339 -- -- -- 275,691
Other operation ..................... 90,028 24,596 21,679 -- -- -- 136,303
Maintenance ......................... 32,590 9,639 15,196 -- -- -- 57,425
Depreciation ........................ 56,338 17,906 19,057 -- -- -- 93,301
Taxes, other than income taxes ...... 69,727 14,974 15,087 -- -- -- 99,788
Income taxes ........................ 30,861 7,671 9,749 -- -- -- 48,281
-------- -------- --------- ------ ------ --------- ----------
656,710 137,408 133,364 -- -- -- 927,482
-------- -------- --------- ------ ------ --------- ----------
Operating income .................... 75,700 22,273 24,868 -- -- -- 122,841
-------- -------- --------- ------ ------ --------- ----------
Other income
Allowance for equity funds used
during construction ................ 3,191 328 709 -- -- -- 4,228
Equity in earnings of subsidiaries... 27,336 -- -- -- -- (27,336) [2] --
Other, net .......................... 3,703 962 811 4,149 3,753 (9,552) [1] 3,826
-------- -------- --------- ------ ------ --------- ----------
34,230 1,290 1,520 4,149 3,753 (36,888) 8,054
-------- -------- --------- ------ ------ --------- ----------
Income before interest and
other charges ...................... 109,930 23,563 26,388 4,149 3,753 (36,888) 130,895
-------- -------- --------- ------ ------ --------- ----------
Interest and other charges
Interest on long-term debt .......... 22,637 8,168 9,328 -- -- -- 40,133
Amortization of net bond premium
and expense ........................ 1,068 229 337 -- -- -- 1,634
Other interest charges .............. 11,850 2,943 1,453 -- -- (9,552) [1] 6,694
Allowance for borrowed funds used
during construction ................ (2,025) (204) (347) -- -- -- (2,576)
Preferred stock dividends of
subsidiaries ....................... -- -- -- -- -- 945 [3] 945
Preferred securities distributions
of trust subsidiaries .............. -- -- -- -- -- 7,665 [3] 7,665
-------- -------- --------- ------ ------ --------- ----------
33,530 11,136 10,771 -- -- (942) 54,495
-------- -------- --------- ------ ------ --------- ----------
Income before preferred stock
dividends of HECO .................. 76,400 12,427 15,617 4,149 3,753 (35,946) 76,400
Preferred stock dividends of HECO ... 1,178 534 411 4,025 3,640 (8,610) [3] 1,178
-------- -------- --------- ------ ------ --------- ----------
Net income for common stock ......... $ 75,222 $ 11,893 $ 15,206 $ 124 $ 113 $ (27,336) $ 75,222
======== ======== ========= ====== ====== ========= ==========
Consolidating statement of retained earnings
Year ended December 31, 1999
---------------------------------------------------------------------------------
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 $405,836 $57,210 $62,992 $ -- $ -- $(120,202) $405,836
Net income for common stock ........... 75,222 11,893 15,206 124 113 (27,336) [2] 75,222
Common stock dividends ................ (55,852) (9,297) (8,565) (124) (113) 18,099 [2] (55,852)
-------- ------- ------- ----- ----- --------- --------
Retained earnings, end of period ...... $425,206 $59,806 $69,633 $ -- $ -- $(129,439) $425,206
======== ======= ======= ===== ===== ========= ========
48
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of cash flows
Year ended December 31, 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 ........................ $ 89,380 $ 13,511 $ 18,264 $ 4,149 $ 3,763 $(39,687) [2] $ 89,380
Adjustments to reconcile income before
preferred stock dividends of HECO to
net cash provided by operating
activities:
Equity in earnings ....................... (31,097) -- -- -- -- 31,097 [2] --
Common stock dividends received
from subsidiaries ....................... 23,773 -- -- -- -- (23,773) [2] --
Depreciation of property,
plant and equipment ..................... 60,799 18,522 21,393 -- -- -- 100,714
Other amortization ....................... 5,157 2,054 5,529 -- -- -- 12,740
Deferred income taxes .................... 6,471 1,448 638 -- -- -- 8,557
Tax credits, net ......................... 1,429 (95) 1,142 -- -- -- 2,476
Allowance for equity funds used
during construction ..................... (3,506) (286) (447) -- -- -- (4,239)
Changes in assets and liabilities:
Decrease in accounts receivable .......... 6,031 1,801 918 -- -- 698 [1] 9,448
Decrease in accrued unbilled
revenues ................................ 9,376 1,289 732 -- -- -- 11,397
Decrease in fuel oil stock ............... 8,336 432 3,916 -- -- -- 12,684
Decrease (increase) in materials and
supplies ................................ (2,210) 383 (1,088) -- -- -- (2,915)
Increase in regulatory assets ............ (1,212) (255) (2,569) -- -- -- (4,036)
Decrease in accounts payable ............. (16,389) (38) (1,305) -- -- -- (17,732)
Changes in other assets and
liabilities ............................. (23,426) (2,104) (1,172) -- -- 6,977 [2] (19,725)
-------- -------- -------- ------- ------- -------- ---------
Net cash provided by operating
activities ............................... 132,912 36,662 45,951 4,149 3,763 (24,688) 198,749
-------- -------- -------- ------- ------- -------- ---------
Cash flows from investing activities:
Capital expenditures ...................... (69,353) (20,503) (25,684) -- -- -- (115,540)
Contributions in aid of construction ...... 4,343 4,279 2,336 -- -- -- 10,958
Advances to affiliates .................... 9,200 -- (7,000) -- -- (2,200) [1] --
-------- -------- -------- ------- ------- -------- ---------
Net cash used in investing activities ..... (55,810) (16,224) (30,348) -- -- (2,200) (104,582)
-------- -------- -------- ------- ------- -------- ---------
Cash flows from financing activities:
Common stock dividends .................... (36,309) (10,249) (13,287) (124) (113) 23,773 [2] (36,309)
Preferred stock dividends ................. (1,080) (534) (381) -- -- 915 [2] (1,080)
Preferred securities distributions
of trust subsidiaries .................... -- -- -- (4,025) (3,650) -- (7,675)
Proceeds from issuance of long-term debt .. 17,336 -- -- -- -- -- 17,336
Net decrease in short-term borrowings
from nonaffiliates and affiliate with
original maturities of three
months or less ........................... (54,869) (7,700) (1,500) -- -- 2,200 [1] (61,869)
Repayment of other short-term
borrowings ............................... (3,000) -- -- -- -- -- (3,000)
Other ..................................... (569) (677) -- -- -- -- (1,246)
-------- -------- -------- ------- ------- -------- ---------
Net cash used in financing activities ..... (78,491) (19,160) (15,168) (4,149) (3,763) 26,888 (93,843)
-------- -------- -------- ------- ------- -------- ---------
Net increase (decrease) in
cash and equivalents ..................... (1,389) 1,278 435 -- -- -- 324
Cash and equivalents, beginning
of period ................................ 1,398 4 132 -- -- -- 1,534
-------- -------- -------- ------- ------- -------- ---------
Cash and equivalents, end of period ....... $ 9 $ 1,282 $ 567 $ -- $ -- $ -- $ 1,858
======== ======== ======== ======= ======= ======== =========
49
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of cash flows
Year ended December 31, 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 ....................... $ 88,366 $ 15,269 $ 18,394 $ 4,149 $ 3,763 $(41,575) [2] $ 88,366
Adjustments to reconcile income before
preferred stock dividends of HECO to
net cash provided by operating
activities:
Equity in earnings ...................... (32,985) -- -- -- -- 32,985 [2] --
Common stock dividends received
from subsidiaries ...................... 25,876 -- -- -- -- (25,876) [2] --
Depreciation of property,
plant and equipment .................... 59,608 19,341 19,568 -- -- -- 98,517
Other amortization ...................... 4,835 1,335 2,638 -- -- -- 8,808
Deferred income taxes ................... 5,297 122 542 -- -- -- 5,961
Tax credits, net ........................ 997 (28) 13 -- 982
Allowance for equity funds used
during construction .................... (4,245) (232) (903) -- -- -- (5,380)
Changes in assets and liabilities:
Increase in accounts receivable ......... (17,865) (2,867) (3,128) -- -- 828 [1] (23,032)
Increase in accrued unbilled
revenues ............................... (6,994) (1,220) (1,976) -- -- -- (10,190)
Decrease (increase) in fuel oil stock ... 262 171 (2,603) -- -- -- (2,170)
Decrease in materials and supplies ...... 2,138 830 291 -- -- -- 3,259
Increase in regulatory assets ........... (2,595) (696) (2,457) -- -- -- (5,748)
Increase in accounts payable ............ 14,591 3,169 1,822 -- -- -- 19,582
Changes in other assets and
liabilities ............................ (17,310) 2,446 (1,492) -- -- 6,847 [2] (9,509)
-------- -------- -------- ------- ------- -------- ---------
Net cash provided by operating
activities .............................. 119,976 37,640 30,709 4,149 3,763 (26,791) 169,446
-------- -------- -------- ------- ------- -------- ---------
Cash flows from investing activities:
Capital expenditures ..................... (78,786) (22,791) (28,512) -- -- -- (130,089)
Contributions in aid of construction ..... 3,773 3,289 1,422 -- -- -- 8,484
Advances to affiliates ................... 4,400 -- 8,400 -- -- (12,800) [1] --
Payments on notes receivable ............. -- 138 -- -- -- -- 138
-------- -------- -------- ------- ------- -------- ---------
Net cash used in investing activities .... (70,613) (19,364) (18,690) -- -- (12,800) (121,467)
-------- -------- -------- ------- ------- -------- ---------
Cash flows from financing activities:
Common stock dividends ................... (68,522) (11,579) (14,060) (124) (113) 25,876 [2] (68,522)
Preferred stock dividends ................ (1,080) (534) (381) -- -- 915 [2] (1,080)
Preferred securities distributions
of trust subsidiaries ................... -- -- -- (4,025) (3,650) -- (7,675)
Proceeds from issuance of long-term debt.. 67,081 91 20,335 -- -- -- 87,507
Repayment of long-term debt .............. (46,000) -- (20,000) -- -- -- (66,000)
Net decrease in short-term borrowings
from nonaffiliates and affiliate with
original maturities of three
months or less .......................... (5,247) (5,900) 1,500 -- -- 12,800 [1] 3,153
Proceeds from other short-term
borrowings .............................. 57,499 -- -- -- -- -- 57,499
Repayment of other short-term
borrowings .............................. (55,682) -- -- -- -- -- (55,682)
Other .................................... 2,947 (548) (10) -- -- -- 2,389
-------- -------- -------- ------- ------- -------- ---------
Net cash used in financing activities .... (49,004) (18,470) (12,616) (4,149) (3,763) 39,591 (48,411)
-------- -------- -------- ------- ------- -------- ---------
Net increase (decrease) in
cash and equivalents .................... 359 (194) (597) -- -- -- (432)
Cash and equivalents, beginning
of period ............................... 1,039 198 729 -- -- -- 1,966
-------- -------- ------- ------- ------- -------- ---------
Cash and equivalents, end of period ...... $ 1,398 $ 4 $ 132 $ -- $ -- $ -- $ 1,534
======== ======== ======== ======= ======= ======== =========
50
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of cash flows
Year ended December 31, 1999
----------------------------------------------------------------------------------
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 ..................... $ 76,400 $ 12,427 $ 15,617 $ 4,149 $ 3,753 $(35,946) [2] $ 76,400
Adjustments to reconcile income before
preferred stock dividends of HECO to
net cash provided by operating
activities:
Equity in earnings .................... (27,336) -- -- -- -- 27,336 [2] --
Common stock dividends received
from subsidiaries .................. 18,099 -- -- -- -- (18,099) [2] --
Depreciation of property,
plant and equipment ................ 56,338 17,906 19,057 -- -- -- 93,301
Other amortization .................... 3,138 735 2,457 -- -- -- 6,330
Deferred income taxes ................. 4,091 370 (1,683) -- -- -- 2,778
Tax credits, net ...................... 509 862 300 -- -- -- 1,671
Allowance for equity funds used
during construction ................ (3,191) (328) (709) -- -- -- (4,228)
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable ......................... 3,058 105 (992) -- 178 (37) [2] 2,312
Increase in accrued unbilled revenues (6,120) (2,423) (1,842) -- -- -- (10,385)
Increase in fuel oil stock ............ (13,324) (1,377) (3,475) -- -- -- (18,176)
Increase in materials and supplies .... (2,159) (439) (182) -- -- -- (2,780)
Decrease (increase) in regulatory
assets ............................. 379 (1,289) (2,655) -- -- -- (3,565)
Increase (decrease) in accounts
payable ............................ 9,670 (168) 2,606 -- -- -- 12,108
Changes in other assets
and liabilities .................... (3,449) (7,171) 5,987 -- (178) 7,702 [2] 2,891
-------- -------- -------- ------- ------- -------- ---------
Net cash provided by operating
activities ............................ 116,103 19,210 34,486 4,149 3,753 (19,044) 158,657
-------- -------- -------- ------- ------- -------- ---------
Cash flows from investing activities:
Capital expenditures ..................... (63,260) (20,605) (24,244) -- -- -- (108,109)
Contributions in aid of construction ..... 5,710 6,387 1,687 -- -- -- 13,784
Repayments from affiliates ............... (1,000) -- (8,400) -- -- 9,400 [1] --
Proceeds from sale of assets ........... 1,525 -- -- -- -- -- 1,525
Payments on notes receivable ............. -- 1,609 -- -- -- -- 1,609
-------- -------- -------- ------- ------- -------- ---------
Net cash used in investing activities .... (57,025) (12,609) (30,957) -- -- 9,400 (91,191)
-------- -------- -------- ------- ------- -------- ---------
Cash flows from financing activities:
Common stock dividends ................... (55,852) (9,297) (8,565) (124) (113) 18,099 [2] (55,852)
Preferred stock dividends ................ (1,178) (534) (411) -- -- 945 [2] (1,178)
Preferred securities distributions
of trust subsidiaries ................. -- -- -- (4,025) (3,640) -- (7,665)
Proceeds from issuance of long-term debt.. 67,517 27,843 9,896 -- -- -- 105,256
Repayment of long-term debt .............. (46,000) (25,400) (10,000) -- -- -- (81,400)
Redemption of preferred stock ............ (28,600) (10,000) (8,480) -- -- -- (47,080)
Net decrease in short-term borrowings
from nonaffiliates and affiliate with
original maturities of three months
or less ............................... (24,000) 1,000 -- -- -- (9,400) [1] (32,400)
Other .................................... 321 (39) (246) -- -- -- 36
-------- -------- -------- ------- ------- -------- ---------
Net cash used in financing activities .... (87,792) (16,427) (17,806) (4,149) (3,753) 9,644 (120,283)
-------- -------- -------- ------- ------- -------- ---------
Net decrease in cash and equivalents ..... (28,714) (9,826) (14,277) -- -- -- (52,817)
Cash and equivalents, beginning of
period ................................ 29,753 10,024 15,006 -- -- -- 54,783
-------- -------- -------- ------- ------- -------- ---------
Cash and equivalents, end of period ...... $ 1,039 $ 198 $ 729 $ -- $ -- $ -- $ 1,966
======== ======== ======== ======= ======= ======== =========
51
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Explanation of reclassifications and eliminations on consolidating
schedules
[1] Eliminations of intercompany receivables and payables and other
intercompany transactions.
[2] Elimination of investment in subsidiaries, carried at equity.
[3] Reclassification of preferred stock dividends of Hawaii Electric Light
Company, Inc. and Maui Electric Company, Limited and of preferred
securities distributions of HECO Capital Trust I and HECO Capital
Trust II for financial statement presentation.
HECO has not provided separate financial statements and other disclosures
concerning HELCO and MECO because management has concluded that such financial
statements and other information are not material to holders of the 1997 and
1998 junior deferrable debentures issued by HELCO and MECO to HECO Capital Trust
I and HECO Capital Trust II, which debentures have been fully and
unconditionally guaranteed by HECO.
17. Consolidated quarterly financial information (unaudited)
- --------------------------------------------------------------------------------
Selected quarterly consolidated financial information for 2001 and 2000 follows:
Quarters ended
----------------------------------------- Year ended
2001 March 31 June 30 Sept. 30 Dec. 31 Dec. 31
- ------------------------------------------------------------------------------
(in thousands)
Operating revenues .. $317,293 $312,455 $340,231 $314,333 $1,284,312
Operating income .... 33,457 34,627 37,526 29,722 135,332
Net income for common
stock .............. 21,425 22,716 25,695 18,464 88,300
Quarters ended
----------------------------------------- Year ended
2000 March 31 June 30 Sept. 30 Dec. 31 Dec. 31
- ------------------------------------------------------------------------------
(in thousands)
Operating revenues .. $288,421 $306,483 $335,263 $340,468 $1,270,635
Operating income .... 35,878 35,325 35,502 26,456 133,161
Net income for common
stock .............. 23,725 24,014 25,020 14,527 87,286
- --------------------------------------------------------------------------------
Note: HEI owns all of HECO's common stock, therefore, per share data is not
meaningful.
52
Directors and Executive Officers
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC.
DIRECTORS
Robert F. Clarke, 59, 1990 Anne M. Takabuki, 45, 1997 [1]
T. Michael May, 55, 1995 Barry K. Taniguchi, 54, 2001 [1]
Diane J. Plotts, 66, 1991 [1] Jeffrey N. Watanabe, 59, 1999
James K. Scott, 50, 1999
[1] Audit committee member.
Note: Year indicates first year elected or appointed. All directors serve one
year terms.
OFFICERS
Robert F. Clarke Chris M. Shirai
Chairman of the Board Vice President-Energy Delivery
T. Michael May Richard A. von Gnechten
President and Chief Executive Officer Financial Vice President
Robert A. Alm Patricia U. Wong
Senior Vice President-Public Affairs Vice President-Corporate Excellence
Thomas L. Joaquin Lorie Ann K. Nagata
Senior Vice President-Operations Treasurer
William A. Bonnet Ernest T. Shiraki
Vice President-Government & Community Affairs Controller
Jackie Mahi Erickson Molly M. Egged
Vice President-Customer Operations & General Counsel Secretary
Charles M. Freedman
Vice President-Corporate Relations
HAWAII ELECTRIC LIGHT COMPANY, INC.
DIRECTORS ADVISORY BOARD MEMBERS
T. Michael May Carol R. Ignacio
Robert F. Clarke Barry K. Taniguchi
Warren H. W. Lee Thomas D. Whittemore
Donald K. Yamada
OFFICERS
T. Michael May Lorie Ann K. Nagata
Chairman of the Board Treasurer
Warren H. W. Lee Molly M. Egged
President Secretary
Richard A. von Gnechten
Financial Vice President
William A. Bonnet
Vice President
MAUI ELECTRIC COMPANY, LIMITED
DIRECTORS ADVISORY BOARD MEMBERS
T. Michael May Gladys C. Baisa
Robert F. Clarke Sanford J. Langa
Edward L. Reinhardt B. Martin Luna
Anne M. Takabuki
OFFICERS
T. Michael May Lorie Ann K. Nagata
Chairman of the Board Treasurer
Edward L. Reinhardt Molly M. Egged
President Secretary
Richard A. von Gnechten
Financial Vice President
William A. Bonnet
Vice President
Information provided as of February 13, 2002
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