-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vq0IG1T+CHLONDuuw6h7ZrnuCSFGN0Hlxe72HAPWsIoxsWHSuUGCXbNy/uPDq/0R D8pReddxTqejS4tEB1QnpA== 0000898430-98-002935.txt : 19980814 0000898430-98-002935.hdr.sgml : 19980814 ACCESSION NUMBER: 0000898430-98-002935 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC INDUSTRIES INC CENTRAL INDEX KEY: 0000354707 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990208097 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-58820 FILM NUMBER: 98684626 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085435662 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC CO INC CENTRAL INDEX KEY: 0000046207 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990040500 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04955 FILM NUMBER: 98684627 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085437771 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FORMER COMPANY: FORMER CONFORMED NAME: HAWAIIAN ELECTRIC CO LTD DATE OF NAME CHANGE: 19670212 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Exact Name of Registrant as Commission I.R.S. Employer Specified in Its Charter File Number Identification No. - ----------------------------- ----------- ------------------ HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097 and Principal Subsidiary HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500 STATE OF HAWAII - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 900 RICHARDS STREET, HONOLULU, HAWAII 96813 - -------------------------------------------------------------------------------- (Address of principal executive offices and zip code) HAWAIIAN ELECTRIC INDUSTRIES, INC. ----- (808) 543-5662 Hawaiian Electric Company, Inc. ------- (808) 543-7771 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NONE - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ____ ------ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class of Common Stock Outstanding August 10, 1998 - -------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. (Without Par Value).................... 32,010,493 Shares Hawaiian Electric Company, Inc. ($6 2/3 Par Value)..................... 12,805,843 Shares (not publicly traded) ================================================================================ Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended June 30, 1998 INDEX
Page No. Glossary of terms............................................................ii PART I. FINANCIAL INFORMATION Item 1. Financial statements Hawaiian Electric Industries, Inc. and subsidiaries --------------------------------------------------- Consolidated balance sheets (unaudited) - June 30, 1998 and December 31, 1997......................... 1 Consolidated statements of income (unaudited) - three and six months ended June 30, 1998 and 1997........... 2 Consolidated statements of retained earnings (unaudited) - three and six months ended June 30, 1998 and 1997........... 2 Consolidated statements of cash flows (unaudited) - six months ended June 30, 1998 and 1997..................... 3 Notes to consolidated financial statements (unaudited)....... 4 Hawaiian Electric Company, Inc. and subsidiaries ------------------------------------------------ Consolidated balance sheets (unaudited) - June 30, 1998 and December 31, 1997......................... 10 Consolidated statements of income (unaudited) - three and six months ended June 30, 1998 and 1997........... 11 Consolidated statements of retained earnings (unaudited) - three and six months ended June 30, 1998 and 1997........... 11 Consolidated statements of cash flows (unaudited) - six months ended June 30, 1998 and 1997..................... 12 Notes to consolidated financial statements (unaudited)....... 13 Item 2. Management's discussion and analysis of financial condition and results of operations................................... 19 Item 3. Quantitative and qualitative disclosures about market risk... 30 PART II. OTHER INFORMATION Item 1. Legal proceedings............................................ 30 Item 5. Other information............................................ 30 Item 6. Exhibits and reports on Form 8-K............................. 32 Signatures................................................................ 33
i Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended June 30, 1998 GLOSSARY OF TERMS
TERMS DEFINITIONS - ----- ----------- AFUDC Allowance for funds used during construction ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corp., ASB Service Corporation, AdCommunications, Inc., American Savings Mortgage Co., Inc. and ASB Realty Corporation (incorporated on March 27, 1998) ASBR ASB Realty Corporation BIF Bank Insurance Fund BLNR Board of Land and Natural Resources of the State of Hawaii BOA Bank of America, FSB CDUP Conservation District Use Permit COMPANY Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc., Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I, HEI Investment Corp., Malama Pacific Corp. and its subsidiaries, Hawaiian Tug & Barge Corp., Young Brothers, Limited, HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, HEIDI Real Estate Corp., Pacific Energy Conservation Services, Inc., HEI Power Corp. and its subsidiaries, Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II and Hawaiian Electric Industries Capital Trust III CONSUMER Division of Consumer Advocacy, Department of Commerce and Consumer ADVOCATE Affairs of the State of Hawaii D&O Decision and order DLNR Department of Land and Natural Resources of the State of Hawaii DOH Department of Health of the State of Hawaii ENCOGEN Encogen Hawaii, L.P., an affiliate of Enserch Development Corporation ENSERCH Enserch Development Corporation EPA Environmental Protection Agency - federal FASB Financial Accounting Standards Board FDIC Federal Deposit Insurance Corporation FEDERAL U.S. Government
ii GLOSSARY OF TERMS, CONTINUED
TERMS DEFINITIONS - ----- ----------- FHLB Federal Home Loan Bank FICO Financing Corporation FUNDS ACT Deposit Insurance Funds Act of 1996 GAAP Generally accepted accounting principles GPA Guam Power Authority HCPC Hilo Coast Power Company HECO Hawaiian Electric Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited, Hawaii Electric Light Company, Inc. and HECO Capital Trust I HEI Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., HEI Investment Corp., Malama Pacific Corp., Hawaiian Tug & Barge Corp., HEI Diversified, Inc., Pacific Energy Conservation Services, Inc., HEI Power Corp., Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II and Hawaiian Electric Industries Capital Trust III HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B. and HEIDI Real Estate Corp. HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc., and the parent company of several subsidiaries HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. HIG The Hawaiian Insurance & Guaranty Company, Limited, an insurance company which was placed in state rehabilitation proceedings. HEI Diversified, Inc. was the holder of record of HIG's common stock prior to August 16, 1994 HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power Corp. HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of Young Brothers, Limited IPP Independent power producer KCP Kawaihae Cogeneration Partners KWH Kilowatthour
iii GLOSSARY OF TERMS, CONTINUED
TERMS DEFINITIONS - ----- ----------- MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several real estate subsidiaries MW Megawatt NOV Notice of Violation OTS Office of Thrift Supervision, Department of Treasury PSD PERMIT Prevention of Significant Deterioration/Covered Source permit PUC Public Utilities Commission of the State of Hawaii REIT Real estate investment trust ROACE Return on average common equity ROR Simple average return on rate base SAIF Savings Association Insurance Fund SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian Tug & Barge Corp.
FORWARD-LOOKING INFORMATION This report and other presentations made by HEI and its subsidiaries contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Except for historical information contained herein, the matters set forth are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include, but are not limited to, such factors as the effect of international, national and local economic conditions, including the condition of the Hawaii tourist and construction industries and the Hawaii housing market; the effects of weather and natural disasters; product demand and market acceptance risks; increasing competition in the electric utility industry; capacity and supply constraints or difficulties; new technological developments; governmental and regulatory actions, including decisions in rate cases and on permitting issues; the results of financing efforts; the timing and extent of changes in interest rates; and the results of integration of the acquired BoA - Hawaii operations with the operations of ASB. Investors are also referred to other risks and uncertainties discussed in other periodic reports filed by HEI and/or HECO in 1998 with the Securities and Exchange Commission. iv
PART I - FINANCIAL INFORMATION - ----------------------------------------------------------------------------------------------------------------- Item 1. Financial statements - ----------------------------- Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30, December 31, (in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------ ASSETS - ------ Cash and equivalents............................................ $ 253,886 $ 254,356 Accounts receivable and unbilled revenues, net.................. 150,098 158,292 Inventories, at average cost.................................... 39,206 45,412 Real estate developments........................................ 30,122 30,143 Investment and mortgage-backed securities....................... 2,132,890 1,971,886 Other investments............................................... 68,643 73,769 Loans receivable, net........................................... 3,058,849 3,035,847 Property, plant and equipment, net of accumulated depreciation and amortization of $1,022,929 and $974,759..... 2,047,739 2,019,558 Regulatory assets............................................... 110,069 104,079 Other........................................................... 152,448 138,048 Goodwill and other intangibles.................................. 119,347 122,492 ---------- ---------- $8,163,297 $7,953,882 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ---------------------------------------------------------------- LIABILITIES Accounts payable................................................ $ 106,955 $ 149,266 Deposit liabilities............................................. 3,816,787 3,916,600 Short-term borrowings........................................... 333,151 298,016 Securities sold under agreements to repurchase.................. 525,590 375,366 Advances from Federal Home Loan Bank............................ 790,581 736,474 Long-term debt.................................................. 918,861 802,575 Deferred income taxes........................................... 185,220 186,241 Unamortized tax credits......................................... 51,628 49,904 Contributions in aid of construction............................ 201,398 197,596 Other........................................................... 177,257 193,100 ---------- ---------- 7,107,428 6,905,138 ---------- ---------- HEI- and HECO-obligated preferred securities of trust subsidiaries directly or indirectly holding solely HEI and HEI-guaranteed and HECO and HECO-guaranteed subordinated debentures.................................... 150,000 150,000 Preferred stock of electric utility subsidiaries Subject to mandatory redemption............................. 33,370 35,770 Not subject to mandatory redemption......................... 48,293 48,293 ---------- ---------- 231,663 234,063 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock, no par value, authorized 10,000 shares; issued: none............................................... -- -- Common stock, no par value, authorized 100,000 shares; issued and outstanding: 32,009 shares and 31,895 shares............ 659,399 654,819 Retained earnings............................................... 164,807 159,862 ---------- ---------- 824,206 814,681 ---------- ---------- $8,163,297 $7,953,882 ========== ========== See accompanying notes to consolidated financial statements.
1
Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months ended Six months ended June 30, June 30, (in thousands, except per share amounts and ---------------------- -------------------------- ratio of earnings to fixed charges) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- REVENUES Electric utility...................................... $244,548 $275,324 $502,810 $549,080 Savings bank.......................................... 101,268 69,674 203,095 138,586 Other................................................. 16,656 15,255 32,188 31,780 -------- -------- -------- -------- 362,472 360,253 738,093 719,446 -------- -------- -------- -------- EXPENSES Electric utility...................................... 202,850 234,928 418,551 470,090 Savings bank.......................................... 88,638 57,438 174,414 114,065 Other................................................. 17,194 17,717 35,320 35,769 -------- -------- -------- -------- 308,682 310,083 628,285 619,924 -------- -------- -------- -------- OPERATING INCOME (LOSS) Electric utility...................................... 41,698 40,396 84,259 78,990 Savings bank.......................................... 12,630 12,236 28,681 24,521 Other................................................. (538) (2,462) (3,132) (3,989) -------- -------- -------- -------- 53,790 50,170 109,808 99,522 -------- -------- -------- -------- Interest expense--electric utility and other.......... (18,674) (15,680) (36,815) (32,145) Allowance for borrowed funds used during construction................................ 1,703 1,609 3,319 3,136 Preferred stock dividends of electric utility subsidiaries............................... (1,500) (1,563) (3,008) (3,134) Preferred securities distributions of trust subsidiaries................................. (3,096) (3,104) (6,192) (4,439) Allowance for equity funds used during construction....................................... 2,866 2,752 5,642 5,425 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES............................ 35,089 34,184 72,754 68,365 Income taxes.......................................... 12,696 14,389 28,138 28,907 -------- -------- -------- -------- NET INCOME............................................ $ 22,393 $ 19,795 $ 44,616 $ 39,458 ======== ======== ======== ======== Basic earnings per common share....................... $ 0.70 $ 0.63 $ 1.40 $ 1.27 ======== ======== ======== ======== Diluted earnings per common share..................... $ 0.70 $ 0.63 $ 1.39 $ 1.27 ======== ======== ======== ======== Dividends per common share............................ $ 0.62 $ 0.61 $ 1.24 $ 1.22 ======== ======== ======== ======== Weighted average number of common shares outstanding................................. 32,007 31,237 31,982 31,099 Effect of dilutive securities-- Stock options and dividend equivalents....... 136 82 138 85 -------- -------- -------- -------- Adjusted weighted average shares...................... 32,143 31,319 32,120 31,184 ======== ======== ======== ======== Ratio of earnings to fixed charges (SEC method) Excluding interest on ASB deposits................. 1.82 1.82 ======== ======== Including interest on ASB deposits................. 1.44 1.54 ======== ========
Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three months ended Six months ended June 30, June 30, --------------------------------- ------------------------------- (in thousands) 1998 1997 1998 1997 - ----------------------------------------------------------- ---------------------------------------------------------------------- RETAINED EARNINGS, BEGINNING OF PERIOD................ $162,259 $150,697 $159,862 $149,907 Net income............................................ 22,393 19,795 44,616 39,458 Common stock dividends................................ (19,845) (19,037) (39,671) (37,910) -------- -------- -------- -------- RETAINED EARNINGS, END OF PERIOD...................... $164,807 $151,455 $164,807 $151,455 ======== ======== ======== ======== See accompanying notes to consolidated financial statements.
2
Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six months ended June 30, ------------------------------ (in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................................... $ 44,616 $ 39,458 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization of property, plant and equipment.......... 49,543 45,592 Other amortization...................................................... 7,850 7,943 Deferred income taxes and tax credits, net.............................. 1,513 1,676 Allowance for equity funds used during construction..................... (5,642) (5,425) Changes in assets and liabilities Decrease in accounts receivable and unbilled revenues, net........ 8,194 2,679 Decrease in inventories........................................... 6,206 1,619 Increase in regulatory assets..................................... (3,265) (4,456) Decrease in accounts payable...................................... (42,311) (9,606) Changes in other assets and liabilities........................... (22,899) (18,046) ---------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES..................................... 43,805 61,434 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Loans receivable originated and purchased..................................... (301,420) (146,280) Principal repayments on loans receivable...................................... 238,987 73,733 Proceeds from sale of loans receivable........................................ 3,065 2,487 Held-to-maturity mortgage-backed securities purchased......................... (278,784) (94,788) Principal repayments on held-to-maturity mortgage-backed securities........... 237,356 132,712 Held-to-maturity investment securities purchased.............................. (117,982) -- Capital expenditures.......................................................... (72,685) (66,925) Contributions in aid of construction.......................................... 5,560 2,864 Proceeds from loans returned to Bank of America, FSB.......................... 27,514 -- Other......................................................................... 156 785 ---------- --------- NET CASH USED IN INVESTING ACTIVITIES......................................... (258,233) (95,412) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposit liabilities................................ (101,028) 52,317 Net increase (decrease) in short-term borrowings with original maturities of three months or less................................ 36,174 (84,796) Proceeds from other short-term borrowings..................................... 1,326 479 Repayment of other short-term borrowings...................................... (2,365) (1,363) Proceeds from securities sold under agreements to repurchase.................. 412,812 494,500 Repurchase of securities sold under agreements to repurchase.................. (263,000) (453,100) Proceeds from advances from Federal Home Loan Bank............................ 335,700 354,000 Principal payments on advances from Federal Home Loan Bank.................... (281,593) (407,500) Proceeds from issuance of long-term debt...................................... 175,482 7,388 Repayment of long-term debt................................................... (59,400) (14,900) Proceeds from issuance of HEI- and HECO-obligated preferred securities of trust subsidiaries........................................................... -- 150,000 Redemption of electric utility subsidiaries' preferred stock.................. (2,400) (2,695) Net proceeds from issuance of common stock.................................... 4,514 12,294 Common stock dividends........................................................ (39,671) (30,600) Other......................................................................... (2,593) (10,065) ---------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES..................................... 213,958 65,959 ---------- --------- Net increase (decrease) in cash and equivalents............................... (470) 31,981 Cash and equivalents, beginning of period..................................... 254,356 97,417 ---------- --------- CASH AND EQUIVALENTS, END OF PERIOD........................................... $ 253,886 $ 129,398 ========= ========= See accompanying notes to consolidated financial statements.
3 Hawaiian Electric Industries, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 and 1997 (Unaudited) (1) BASIS OF PRESENTATION - ------------------------- The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Securities and Exchange Commission (SEC) Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HEI's Annual Report on SEC Form 10-K for the year ended December 31, 1997 and the consolidated financial statements and the notes thereto in HEI's Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 1998. In the opinion of HEI's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the Company's financial position as of June 30, 1998 and December 31, 1997, the results of its operations for the three months and six months ended June 30, 1998 and 1997, and its cash flows for the six months ended June 30, 1998 and 1997. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. (2) ELECTRIC UTILITY SUBSIDIARY - -------------------------------- For Hawaiian Electric Company, Inc.'s consolidated financial information, including its commitments and contingencies, see pages 10 through 19. (3) SAVINGS BANK SUBSIDIARY - ---------------------------- SELECTED CONSOLIDATED FINANCIAL INFORMATION American Savings Bank, F.S.B. and subsidiaries Income statement data
Three months ended Six months ended June 30, June 30, ---------------------------------------- ------------------------- (in thousands) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Interest income................................. $ 94,781 $ 65,834 $190,052 $131,034 Interest expense................................ 53,910 38,662 107,051 76,482 -------- -------- -------- -------- NET INTEREST INCOME............................. 40,871 27,172 83,001 54,552 Provision for losses............................ (3,424) (1,603) (6,348) (2,792) Other income.................................... 6,487 3,840 13,043 7,552 Operating, administrative and general expenses.. (31,304) (17,173) (61,015) (34,791) -------- -------- -------- -------- OPERATING INCOME................................ 12,630 12,236 28,681 24,521 Income taxes.................................... 3,928 5,064 10,269 10,250 -------- -------- -------- -------- INCOME BEFORE PREFERRED STOCK DIVIDENDS......... 8,702 7,172 18,412 14,271 Preferred stock dividends....................... 1,350 -- 2,700 -- -------- -------- -------- -------- NET INCOME...................................... $ 7,352 $ 7,172 $ 15,712 $ 14,271 ======== ======== ======== ========
4 American Savings Bank, F.S.B. and subsidiaries Balance sheet data
June 30, December 31, (in thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------- ASSETS Cash and equivalents................................................ $ 246,897 $ 249,607 Held-to-maturity investment securities.............................. 225,988 105,596 Held-to-maturity mortgage-backed securities......................... 1,905,702 1,865,027 Loans receivable, net............................................... 3,058,849 3,035,847 Other............................................................... 183,264 169,843 Goodwill and other intangibles...................................... 119,347 122,492 ---------- ---------- $5,740,047 $5,548,412 ========== ========== LIABILITIES AND EQUITY Deposit liabilities................................................. $3,816,787 $3,916,600 Securities sold under agreements to repurchase...................... 525,590 375,366 Advances from Federal Home Loan Bank................................ 790,581 736,474 Other............................................................... 201,747 124,185 ---------- ---------- 5,334,705 5,152,625 Preferred stock held by parent...................................... 75,000 75,000 Common stock equity................................................. 330,342 320,787 ---------- ---------- $5,740,047 $5,548,412 ========== ==========
ACQUISITION OF MOST OF THE HAWAII OPERATIONS OF BANK OF AMERICA, FSB (BOA) Effective December 6, 1997, ASB acquired certain loans and other assets and assumed certain deposits and other liabilities of the Hawaii operations of BoA pursuant to a Purchase and Assumption Agreement executed by both parties on May 26, 1997, as amended. ASB used the purchase method of accounting to account for the transaction. Accordingly, the accompanying financial statements include the results of operations related to the assets acquired and liabilities assumed from the acquisition date. The purchase price relative to this transaction was $1.8 billion, comprised of $1.7 billion estimated fair value of liabilities assumed and $0.1 billion premium paid on certain transferred deposit liabilities. In conjunction with this acquisition, the estimated fair value of tangible and intangible assets acquired, including cash of $0.8 billion, amounted to $1.8 billion. ASB recorded the excess of the purchase price over the estimated fair value of the identifiable net assets acquired of $71 million as goodwill and is amortizing it over 25 years using the straight-line method. ASB recorded the core deposit premium of approximately $20 million as an intangible asset and is amortizing it annually at the greater of the actual attrition rate of the acquired core deposits or 10% of the original premium amount. DEPOSIT-INSURANCE PREMIUMS AND REGULATORY DEVELOPMENTS The Savings Association Insurance Fund (SAIF) insures the deposit accounts of ASB and other thrifts. The Bank Insurance Fund (BIF) insures the deposit accounts of commercial banks. The Federal Deposit Insurance Corporation (FDIC) administers the SAIF and BIF. In September 1996, President Clinton signed into law the Deposit Insurance Funds Act of 1996 (Funds Act), which required the FDIC to impose a one-time special assessment on SAIF members. In addition, effective January 1, 1997, the Funds Act provided that the assessment base for raising funds to pay interest on obligations issued by the Financing Corporation (FICO) is to be expanded to include the deposits of banks as well as thrifts. The provisions of the Funds Act should enable SAIF institutions to achieve, over time, parity with BIF institutions in the schedules of the premiums to be paid for deposit insurance coverage and to fund FICO interest obligations. In December 1996, the FDIC adopted a risk-based assessment schedule for SAIF institutions, effective January 1, 1997, that was identical to the existing base rate schedule for BIF institutions: zero to 27 cents per $100 of deposits. Added to this base rate schedule through 1999 will be the assessment to fund FICO's interest obligations which was initially set at 6.48 cents per $100 of deposits for SAIF institutions and 1.3 cents per $100 of deposits for BIF institutions (subject to quarterly adjustment). By 5 law, the FICO rate on BIF-assessable deposits must be one-fifth the rate on SAIF-assessable deposits until the insurance funds are merged or until January 1, 2000, whichever occurs first, at which time the FICO interest obligation for both banks and thrifts should thereafter be identical, at an estimated rate of 2.4 cents per $100 of deposits. In December 1997, ASB acquired BIF-assessable deposits as well as SAIF-assessable deposits from BoA. As a "well-capitalized" thrift, ASB's base deposit insurance premium effective for the June 30, 1998 quarterly payment is zero and its assessment for funding FICO interest payments is 6.10 cents per $100 of SAIF-assessable deposits and 1.22 cents per $100 of BIF-assessable deposits, on an annual basis, based on deposits as of March 31, 1998. ASB's assessment for funding FICO interest payments is subject to change quarterly. The Funds Act provides that the SAIF and BIF will be merged into the Deposit Insurance Fund by January 1, 1999, but only if no insured depository institution is a thrift on that date. The Funds Act leaves to subsequent legislation, however, the manner in which thrift charters might be eliminated in favor of a bank or some other form of charter. Certain of the legislative proposals advanced to address this issue, if adopted, could have a material adverse effect on the Company. For example, if thrift charters were eliminated and ASB obtained a bank charter, HEI and its subsidiaries might become subject to the restrictions on the permissible activities of a bank holding company. While certain of the proposals that have been advanced would grandfather the activities of existing savings and loan holding companies such as HEI, management cannot predict whether or in what form any of these proposals might ultimately be adopted or the extent to which the business of HEI or ASB might be affected. (4) REAL ESTATE SUBSIDIARY - ---------------------------- MPC and its subsidiaries' total real estate project inventory, equity investment in real estate joint ventures and loans and advances to unconsolidated joint ventures or joint venture partners amounted to $41 million and $40 million at June 30, 1998 and December 31, 1997, respectively. The amounts MPC will ultimately realize relative to these real estate investments could differ materially from the recorded amounts as of June 30, 1998. At June 30, 1998, MPC or its subsidiaries had issued (i) guarantees under which they were jointly and severally contingently liable with their joint venture partners for $0.1 million of outstanding loans and (ii) payment guarantees under which MPC or its subsidiaries were severally contingently liable for $3.0 million of outstanding loans and $0.5 million of additional undrawn loan facilities. All such loans are collateralized by real property. At June 30, 1998, HEI had agreed with the lenders of construction loans and loan facilities, of which approximately $4.0 million was outstanding and $1.3 million was undrawn, that it will maintain ownership of l00% of the stock of MPC and that it intends, subject to good and prudent business practices, to keep MPC financially sound and responsible to meet its obligations as guarantor. (5) HEI- AND HECO-OBLIGATED PREFERRED SECURITIES OF TRUST SUBSIDIARIES - ------------------------------------------------------------------------ DIRECTLY OR INDIRECTLY HOLDING SOLELY HEI AND HEI-GUARANTEED AND HECO --------------------------------------------------------------------- AND HECO-GUARANTEED SUBORDINATED DEBENTURES ------------------------------------------- In February 1997, Hawaiian Electric Industries Capital Trust I, a grantor trust and wholly owned subsidiary of HEI, issued and sold, in an underwritten registered public offering, 4 million of its HEI-obligated 8.36% preferred securities (trust preferred securities), with an aggregate liquidation value of $100 million. The trust preferred securities have no scheduled maturity and are not redeemable at the option of the holders, but may be redeemed by Hawaiian Electric Industries Capital Trust I, in whole or in part, from time to time, after February 4, 2002. In March 1997, HECO Capital Trust I, a grantor trust and wholly owned subsidiary of HECO, issued and sold, in an underwritten registered public offering, 2 million of its HECO-obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997, with an aggregate liquidation value of $50 million. The HECO-obligated Cumulative Quarterly Income 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 HECO Capital Trust I, in whole or in part, from time to time, after March 27, 2002. 6 (6) CASH FLOWS - ---------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest (net of capitalized amounts) and income taxes was as follows:
Six months ended June 30, ---------------------------------- (in thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------- Interest (including interest paid by savings bank, but excluding interest paid on nonrecourse debt on leveraged leases)................ $138,753 $106,341 ======== ======== Interest on nonrecourse debt from leveraged leases..................... $ 3,136 $ 3,801 ======== ======== Income taxes........................................................... $ 26,625 $ 30,846 ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES Under the HEI Dividend Reinvestment and Stock Purchase Plan, common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to $7.3 million for the six months ended June 30, 1997. Beginning in March 1998, HEI acquired for cash its common shares in the open market to satisfy the requirements of the HEI Dividend Reinvestment and Stock Purchase Plan. The allowance for equity funds used during construction, which was capitalized as part of the cost of electric utility plant, amounted to $5.6 million and $5.4 million for the six months ended June 30, 1998 and 1997, respectively. (7) ACCOUNTING CHANGES - ------------------------ EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which requires the presentation of "basic" earnings per share, computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period, and "diluted" earnings per share, which reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company adopted SFAS No. 128 in the fourth quarter of 1997 and has restated all prior period earnings per share data presented. The adoption of SFAS No. 128 did not have a material effect on the Company's previously reported earnings per share information. COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company adopted SFAS No. 130 in the first quarter of 1998, but had no material "other" comprehensive income items for the income statement periods presented or accumulated as of the balance sheet dates presented. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. The Company adopted SFAS No. 131 in the first quarter of 1998. No modification to the Company's reporting segments was required. 7 COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE In March 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which requires that certain costs, including certain payroll and payroll-related costs, be capitalized and amortized over the estimated useful life of the software. The provisions of SOP 98-1 are effective for fiscal years beginning after December 15, 1998 and earlier application is encouraged. The Company has not determined when it will adopt SOP 98-1. Management currently believes that the adoption of SOP 98-1 will not have a material effect on the Company's financial condition, results of operations or liquidity. COSTS OF START-UP ACTIVITIES In April 1998, the AICPA Accounting Standards Executive Committee issued SOP 98- 5, "Reporting on the Costs of Start-up Activities," which requires that costs of start-up activities, including organization costs, be expensed as incurred. The provisions of SOP 98-5 are effective for fiscal years beginning after December 15, 1998 and earlier application is encouraged. The Company has not determined when it will adopt SOP 98-5. Management currently believes that the adoption of SOP 98-5 will not have a material effect on the Company's financial condition, results of operations or liquidity. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which 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 statement of financial position and measure those instruments at fair value. The provisions of SFAS No. 133 are effective for all fiscal quarters of fiscal years beginning after June 15, 1999 and earlier application is encouraged. The Company has not determined when it will adopt SFAS No. 133 and has not yet determined the impact of adoption. (8) CONTINGENCIES - ------------------ ENVIRONMENTAL REGULATION In early 1995, the Department of Health of the State of Hawaii (DOH) initially advised HECO, HTB, YB and others that it was conducting an investigation to determine the nature and extent of actual or potential releases of hazardous substances, oil, pollutants or contaminants at or near Honolulu Harbor. The DOH issued letters in December 1995, indicating that it had identified a number of parties, including HECO, HTB and YB, who appear to be potentially responsible for the contamination and/or to operate their facilities upon contaminated land. The DOH met with these identified parties in January 1996 to inform them of its findings and to establish the framework to determine remedial and cleanup requirements. Certain parties identified in the December 1995 DOH letter (including HECO, Chevron Products Company, Shell Oil Products Company, State of Hawaii Department of Transportation Harbors Division and others) formed a Technical Workgroup to conduct independent voluntary investigations relative to this issue. Effective January 30, 1998, the Technical Workgroup 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. On June 1, 1998, the Technical Work Group agreed in principle to sign Ogden Environmental's consultant contract authorizing the start of Phase 1. The Technical Work Group met in June 1998 to discuss with Ogden Environmental its proposed work plan and schedule, and subsequently met with and informed the DOH of the work plan. The Technical Work Group now anticipates that the Phase I report will be completed by the end of November 1998. Because the process for determining appropriate remedial and cleanup action, if any, is at an early stage, management cannot predict at this time the costs of further site analysis or future remediation and cleanup requirements, nor can it estimate when such costs would be incurred. Certain of the costs incurred may be claimed and covered under insurance policies, but such coverage is not determinable at this time. 8 THE HAWAIIAN INSURANCE & GUARANTY COMPANY, LIMITED The Hawaiian Insurance & Guaranty Company, Limited (HIG) and its subsidiaries (collectively, the HIG Group) were property and casualty insurance companies. In December 1992, due to a significant increase in the estimate of policyholder claims from Hurricane Iniki, the HEI Board of Directors concluded it would not contribute additional capital to HIG and the remaining investment in the HIG Group was written off. On December 24, 1992, a formal rehabilitation order vested full control over the HIG Group in the Insurance Commissioner of the State of Hawaii (the Rehabilitator) and her deputies. HEI Diversified, Inc. (HEIDI) was the holder of record of all the common stock of HIG until August 16, 1994. A lawsuit stemming from this situation was settled in 1994, with the Company making a settlement payment of $32 million to the Rehabilitator. HEI and HEIDI sought reimbursement for the settlement, interest and defense costs from three director and officer liability insurance carriers. The primary director and officer liability insurance carrier filed a declaratory relief action in the U.S. District Court for Hawaii seeking resolution of insurance coverage and other policy issues, and HEI and HEIDI filed counterclaims. In early August 1998, the Company settled all claims with the three former insurance carriers relating to the 1994 settlement payment. The Company will receive $24.5 million ($14 million net of estimated expenses and income taxes or approximately $0.43 per share for the third quarter of 1998), and will record the settlement as income from discontinued operations in the third quarter of 1998. All parties have denied, and continue to deny, liability. 9
Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30, December 31, (in thousands, except par value) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Utility plant, at cost Land.................................................................. $ 32,238 $ 32,222 Plant and equipment................................................... 2,605,404 2,559,655 Less accumulated depreciation......................................... (946,305) (904,781) Plant acquisition adjustment, net..................................... 536 562 Construction in progress.............................................. 224,137 205,447 ---------- ---------- NET UTILITY PLANT............................................... 1,916,010 1,893,105 ---------- ---------- Current assets Cash and equivalents.................................................. 1,478 1,676 Customer accounts receivable, net..................................... 62,515 69,378 Accrued unbilled revenues, net........................................ 44,818 45,980 Other accounts receivable, net........................................ 4,806 4,195 Fuel oil stock, at average cost....................................... 19,402 25,058 Materials and supplies, at average cost............................... 18,163 18,975 Prepayments and other................................................. 3,737 3,335 ---------- ---------- TOTAL CURRENT ASSETS............................................ 154,919 168,597 ---------- ---------- Other assets Regulatory assets..................................................... 107,838 101,809 Other................................................................. 51,323 48,803 ---------- ---------- TOTAL OTHER ASSETS.............................................. 159,161 150,612 ---------- ---------- $2,230,090 $2,212,314 ========== ========== CAPITALIZATION AND LIABILITIES Capitalization Common stock, $6 2/3 par value, authorized 50,000 shares; outstanding 12,806 shares........................... $ 85,387 $ 85,387 Premium on capital stock.............................................. 296,332 296,266 Retained earnings..................................................... 410,207 387,582 ---------- ---------- COMMON STOCK EQUITY............................................. 791,926 769,235 Cumulative preferred stock Not subject to mandatory redemption................................ 48,293 48,293 Subject to mandatory redemption.................................... 31,775 33,175 HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely HECO and HECO-guaranteed debentures......................................................... 50,000 50,000 Long-term debt, net................................................... 603,307 597,621 ---------- ---------- TOTAL CAPITALIZATION............................................ 1,525,301 1,498,324 ---------- ---------- Current liabilities Long-term debt due within one year.................................... 30,000 30,000 Preferred stock sinking fund payments................................. 1,595 2,595 Short-term borrowings-nonaffiliates.................................. 108,945 95,181 Short-term borrowings-affiliate...................................... -- 400 Accounts payable...................................................... 40,802 49,805 Interest and preferred dividends payable.............................. 11,786 12,225 Taxes accrued......................................................... 44,184 59,952 Other................................................................. 21,627 21,633 ---------- ---------- TOTAL CURRENT LIABILITIES....................................... 258,939 271,791 ---------- ---------- Deferred credits and other liabilities Deferred income taxes................................................. 126,672 125,509 Unamortized tax credits............................................... 50,418 48,675 Other................................................................. 67,362 70,419 ---------- ---------- TOTAL DEFERRED CREDITS AND OTHER LIABILITIES.................... 244,452 244,603 ---------- ---------- Contributions in aid of construction..................................... 201,398 197,596 ---------- ---------- $2,230,090 $2,212,314 ========== ========== See accompanying notes to HECO's consolidated financial statements.
10
Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months ended Six months ended (in thousands, except for ratio of earnings June 30, June 30, to fixed charges) ------------------------------- ------------------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- OPERATING REVENUES................................ $242,204 $272,972 $498,247 $544,569 -------- -------- -------- -------- OPERATING EXPENSES Fuel oil.......................................... 44,449 65,112 101,180 134,332 Purchased power................................... 69,091 72,473 135,674 143,224 Other operation................................... 33,879 36,536 69,965 73,447 Maintenance....................................... 10,866 14,351 21,230 26,414 Depreciation and amortization..................... 21,446 20,506 42,888 41,003 Taxes, other than income taxes.................... 23,054 25,818 47,346 51,455 Income taxes...................................... 12,558 12,073 25,560 23,777 -------- -------- -------- -------- 215,343 246,869 443,843 493,652 -------- -------- -------- -------- OPERATING INCOME.................................. 26,861 26,103 54,404 50,917 -------- -------- -------- -------- OTHER INCOME Allowance for equity funds used during construction............................ 2,866 2,752 5,642 5,425 Other, net........................................ 2,320 2,189 4,322 4,260 -------- -------- -------- -------- 5,186 4,941 9,964 9,685 -------- -------- -------- -------- INCOME BEFORE INTEREST AND OTHER CHARGES.......... 32,047 31,044 64,368 60,602 -------- -------- -------- -------- INTEREST AND OTHER CHARGES Interest on long-term debt........................ 10,514 9,851 20,692 19,710 Amortization of net bond premium and expense...... 373 321 722 648 Other interest charges............................ 1,667 1,789 3,301 3,895 Allowance for borrowed funds used during construction............................ (1,703) (1,609) (3,319) (3,136) Preferred stock dividends of subsidiaries......... 639 650 1,277 1,300 Preferred securities distributions of trust subsidiary............................... 1,007 1,014 2,013 1,072 -------- -------- -------- -------- 12,497 12,016 24,686 23,489 -------- -------- -------- -------- INCOME BEFORE PREFERRED STOCK DIVIDENDS OF HECO........................................ 19,550 19,028 39,682 37,113 Preferred stock dividends of HECO................. 861 913 1,731 1,834 -------- -------- -------- -------- NET INCOME FOR COMMON STOCK....................... $ 18,689 $ 18,115 $ 37,951 $ 35,279 ======== ======== ======== ======== Ratio of earnings to fixed charges (SEC method)................................... 3.13 3.08 ======== ========
Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three months ended Six months ended June 30, June 30, ------------------------------ ------------------------------- (in thousands) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ RETAINED EARNINGS, BEGINNING OF PERIOD............ $391,518 $369,872 $387,582 $367,770 Net income for common stock....................... 18,689 18,115 37,951 35,279 Common stock dividends............................ -- (12,873) (15,326) (27,935) -------- -------- -------- -------- RETAINED EARNINGS, END OF PERIOD.................. $410,207 $375,114 $410,207 $375,114 ======== ======== ======== ======== HEI owns all the common stock of HECO. Therefore, per share data with respect to shares of common stock of HECO are not meaningful. See accompanying notes to HECO's consolidated financial statements.
11
Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six months ended June 30, ---------------------------------------- (in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Income before preferred stock dividends of HECO...................... $ 39,682 $ 37,113 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Depreciation and amortization of property, plant and equipment......................................... 42,888 41,003 Other amortization............................................. 3,625 5,924 Deferred income taxes.......................................... 1,163 (162) Tax credits, net............................................... 2,553 1,474 Allowance for equity funds used during construction............ (5,642) (5,425) Changes in assets and liabilities Decrease in accounts receivable........................... 6,252 4,505 Decrease in accrued unbilled revenues..................... 1,162 145 Decrease in fuel oil stock................................ 5,656 2,533 Decrease (increase) in materials and supplies............. 812 (719) Increase in regulatory assets............................. (3,265) (4,456) Decrease in accounts payable.............................. (9,003) (12,834) Decrease in interest and preferred dividends payable...... (439) (550) Changes in other assets and liabilities................... (30,343) (23,507) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 55,101 45,044 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures................................................. (60,542) (56,377) Contributions in aid of construction................................. 5,560 2,864 Payments on notes receivable......................................... 756 1,553 -------- -------- NET CASH USED IN INVESTING ACTIVITIES................................ (54,226) (51,960) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Common stock dividends............................................... (15,326) (27,935) Preferred stock dividends............................................ (1,731) (1,834) Proceeds from issuance of HECO-obligated mandatorily redeemable preferred securities of trust subsidiary............................ -- 50,000 Proceeds from issuance of long-term debt............................. 62,982 7,388 Repayment of long-term debt.......................................... (57,500) (13,000) Redemption of preferred stock........................................ (2,400) (2,695) Net increase in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less.... 13,364 4 Other................................................................ (462) (4,355) -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................. (1,073) 7,573 -------- -------- Net increase (decrease) in cash and equivalents...................... (198) 657 Cash and equivalents, beginning of period............................ 1,676 823 -------- -------- CASH AND EQUIVALENTS, END OF PERIOD.................................. $ 1,478 $ 1,480 ======== ======== See accompanying notes to HECO's consolidated financial statements.
12 Hawaiian Electric Company, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 and 1997 (Unaudited) (1) BASIS OF PRESENTATION - -------------------------- The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HECO's Annual Report on SEC Form 10-K for the year ended December 31, 1997 and the consolidated financial statements and the notes thereto in HECO's Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 1998. In the opinion of HECO's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the financial position of HECO and its subsidiaries as of June 30, 1998 and December 31, 1997, the results of their operations for the three months and six months ended June 30, 1998 and 1997, and their cash flows for the six months ended June 30, 1998 and 1997. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. (2) HECO-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF TRUST - ------------------------------------------------------------------------ SUBSIDIARY HOLDING SOLELY HECO AND HECO-GUARANTEED SUBORDINATED DEBENTURES -------------------------------------------------------------------------- In March 1997, HECO Capital Trust I (Trust), a grantor trust and a wholly owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO- Obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997 (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 trust preferred securities and the common securities were used by the Trust to purchase 8.05% Junior Subordinated Deferrable Interest Debentures, Series 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 principal amounts of $10 million. The junior deferrable debentures, which 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 the Trust. Contractual arrangements entered into by HECO in connection with the issuance of the trust preferred securities, considered together, constitute a full and unconditional guarantee by HECO, on a subordinated basis, of the periodic distributions due on the trust preferred securities and of amounts due upon the redemption thereof or upon liquidation of the Trust. The junior deferrable debentures and the common securities of the Trust have been eliminated in HECO's consolidated balance sheets as of June 30, 1998 and December 31, 1997. The trust preferred securities are subject to mandatory redemption upon redemption of the junior deferrable debentures. The 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 or (ii) at the option of HECO, in whole, upon the occurrence of a "Special Event" (relating to certain changes in laws or regulations). 13 (3) CASH FLOWS - --------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest (net of capitalized amounts) and income taxes was as follows:
Six months ended June 30, --------------------------------------- (in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------ Interest............................................................. $22,641 $21,703 ======= ======= Income taxes......................................................... $22,277 $22,245 ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES The allowance for equity funds used during construction, which was capitalized as part of the cost of electric utility plant, amounted to $5.6 million and $5.4 million for the six months ended June 30, 1998 and 1997, respectively. (4) COMMITMENTS AND CONTINGENCIES - ---------------------------------- HELCO POWER SITUATION BACKGROUND. In 1991, HELCO identified the need, beginning in 1994, for - ---------- additional generation to provide for forecast load growth while maintaining a satisfactory generation reserve margin, to address uncertainties about future deliveries of power from existing firm power producers and to permit the retirement of older generating units. Accordingly, HELCO proceeded with plans to install at its Keahole power plant site two 20-megawatt (MW) combustion turbines (CT-4 and CT-5), followed by an 18-MW heat steam recovery generator (ST-7), at which time these units would be converted to a 56-MW (net) combined-cycle unit. In January 1994, the Public Utilities Commission of the State of Hawaii (PUC) approved expenditures for CT-4, which HELCO had planned to install in late 1994. The timing of the installation of HELCO's phased combined-cycle unit at the Keahole power plant site has been revised due to delays in (a) obtaining approval from the Hawaii Board of Land and Natural Resources (BLNR) of a Conservation District Use Permit (CDUP) amendment and (b) obtaining from the Department of Health of the State of Hawaii (DOH) and the U.S. Environmental Protection Agency (EPA) a Prevention of Significant Deterioration/Covered Source permit (PSD permit) for the Keahole power plant site. Subject to satisfactory resolution of the CDUP amendment and PSD permit matters, HELCO's current plan contemplates that CT-4 and CT-5 will be the next generating units added to its system. Current plans are for ST-7 to be deferred to approximately 2006 unless the Encogen Hawaii, L.P. facility (described below) is not placed in service as planned. CDUP AMENDMENT. On July 10, 1997, the Third Circuit Court of the State of Hawaii - --------------- issued its Amended Findings of Fact, Conclusions of Law, Decision and Order on HELCO's appeal of an order of the BLNR, along with other civil cases relating to HELCO's application for a CDUP amendment. This decision allows HELCO to use its Keahole property as requested in its application. An amended order to the same effect was issued on August 18, 1997. Final judgments have been entered as to all of the consolidated cases. Appeals with respect to the final judgments for certain of the cases have been filed with the Hawaii Supreme Court. Motions filed with the Third Circuit Court to stay the effectiveness of the judgments pending resolution of the appeals were denied in April and July 1998 (in response to a motion for reconsideration). Nonhearing motions for stay of final judgment pending resolution of the appeals were filed with the Hawaii Supreme Court, which has not yet ruled on the motions. Management believes that HELCO will ultimately prevail with regard to any appeals and that the final judgments of the Third Circuit Court will be upheld. PSD PERMIT. In November 1995, the EPA declined to sign HELCO's PSD permit for - ---------- the combined-cycle unit. In October 1997, the EPA approved a revised draft permit and the DOH issued a final PSD permit. Nine appeals from the issuance of the permit have been filed with the Environmental Appeals Board of the EPA. All briefing in the case has been completed. Based on the proceedings to date, management believes that HELCO will ultimately prevail in the appeals. 14 DECLARATORY JUDGMENT ACTIONS. In February 1997, the Keahole Defense Coalition - ---------------------------- and three individuals filed a lawsuit in the Third Circuit Court of the State of Hawaii against HELCO, the director of the DOH, and the BLNR, seeking declaratory rulings that, with regard to the Keahole project, one or more of the defendants had violated, or could not allow the plant to operate without violating, the State Clean Air Act, the State Noise Pollution Act, conditions of HELCO's conditional use permit, covenants of HELCO's land patent and Hawaii administrative rules regarding standard conditions applicable to land permits. Discovery is ongoing and the parties are seeking to set a trial date. In March 1998, an individual filed a complaint for declaratory judgment against HELCO, the BLNR and the Department of Land and Natural Resources of the State of Hawaii (DLNR). The complaint alleges a violation of her constitutional due process rights because the land use conditions (if any) which apply to HELCO's use of the Keahole site was determined administratively by the DLNR (through a letter issued to HELCO in January 1998) rather than being decided by the BLNR in a contested case. Also filed with the complaint was a motion to stay enforcement of the DLNR letter, which motion was denied in April 1998. In May 1998, Waimana Enterprises, whose subsidiary is a partner in Kawaihae Cogeneration Partners (KCP), filed a lawsuit in the Third Circuit Court of the State of Hawaii, asking for a declaration that the January 1998 DLNR letter is void and seeking an injunction to prevent HELCO from further construction until the Court or the BLNR, at a public hearing, determines what conditions and limitations apply and whether HELCO is in compliance with them. The two 1998 cases have been consolidated before the Third Circuit Court of the State of Hawaii. HELCO intends to vigorously defend against the claims raised and management believes the allegations are without merit. IPP complaints. Two independent power producers (IPPs), KCP and Enserch - -------------- Development Corporation (Enserch), filed separate complaints against HELCO with the PUC in 1993 and 1994, respectively, alleging that they are entitled to power purchase contracts to provide HELCO with additional capacity, which they claimed would be a substitute for HELCO's planned 56-MW combined-cycle unit at Keahole. Under HELCO's current estimate of generating capacity requirements, there is a near-term need for capacity in addition to the capacity which might be provided by either of the proposed IPP units. In September 1995, the PUC allowed HELCO to continue to pursue construction of and commit expenditures for the second combustion turbine (CT-5) and the steam recovery generator (ST-7) for its planned combined-cycle unit, stating in its order that "no part of the project may be included in HELCO's rate base unless and until the project is in fact installed, and is used and useful for utility purposes." The PUC also ordered HELCO to continue negotiating with the IPPs and directed that the facility to be built (i.e., either HELCO's or one of the IPP's) should be the one that can be most expeditiously put into service at "allowable cost." The status of the IPPs PUC complaints, and of a complaint filed by Hilo Coast Power Company (HCPC) in April 1997, is as follows: Enserch complaint. In January 1998, HELCO filed with the PUC an application ----------------- for approval of a power purchase agreement for a 60-MW facility and an interconnection agreement with Encogen, an Enserch affiliate, dated October 22, 1997. The agreements were entered into following a settlement agreement between Enserch and HELCO and are subject to PUC approval. The parties to the proceeding include HELCO, Encogen and the Consumer Advocate. The Consumer Advocate has submitted information requests to HELCO. Motions to intervene filed by KCP, HCPC and one other IPP were denied by the PUC. KCP filed an appeal with the First Circuit Court, challenging the denial of its intervention. KCP's appeal is scheduled for oral argument on September 25, 1998. No schedule has yet been established for the PUC proceeding. KCP complaint. In January 1996, the PUC ordered HELCO to continue in good ------------- faith to negotiate a power purchase agreement with KCP. In May 1997, KCP filed a motion for unspecified "sanctions" against HELCO for allegedly failing to negotiate in good faith. In June 1997, KCP filed a motion asking the PUC to designate KCP's facility as the next generating unit on the HELCO system and to determine the "allowable cost" which would be payable by HELCO to KCP. HELCO filed memoranda in opposition to KCP's motions. An evidentiary hearing was held in August 1997. KCP filed two motions, which HELCO also opposed, to supplement the record. The PUC issued an Order in June 1998 which denied all of KCP's pending motions; provided rulings and/or guidance on certain avoided cost and contract issues; directed HELCO to prepare an updated avoided cost calculation, which includes the Encogen agreement; and directed HELCO and KCP to resume contract negotiations. HELCO has commenced activity to comply with the Order. HELCO filed a motion for partial reconsideration with respect to one avoided cost issue. The PUC granted the motion and modified its order in July 1998. 15 HCPC complaint. In April 1997, HCPC filed a complaint against HELCO with -------------- the PUC, requesting an immediate hearing on HCPC's offer for a new 20-year power purchase contract for its existing facility, which is proposed to be expanded from 22 MW to 32 MW. HCPC's existing power purchase agreement is scheduled to terminate at the end of 1999. The PUC converted the HCPC complaint into a purchased power contract negotiation proceeding. HCPC submitted a new proposal in the proceeding in February 1998. An evidentiary hearing limited to certain avoided cost issues was held in April 1998 and post-hearing briefs on these issues have been submitted. Action by the PUC is pending. Management cannot determine at this time whether the PUC will approve the Encogen power purchase agreement or whether the negotiations with KCP and HCPC and related PUC proceedings will result in the execution and/or PUC approval of a power purchase agreement or impact management's plans with regard to installation of HELCO's combined-cycle unit at the Keahole power plant site. KCP'S FERC PETITION. On July 29, 1998, KCP tendered for filing with the Federal - -------------------- Energy Regulatory Commission (FERC) a Petition for Enforcement under section 210(h) of PURPA, or in the alternative, for Declaratory Order. KCP alleges that the PUC and HECO have taken actions that violate PURPA thereby allowing HELCO to begin construction of its own facility and preventing KCP from building its qualifying facility. KCP requests that FERC initiate enforcement proceedings or, in the alternative, issue an order declaring that the PUC's actions violate FERC's rules under PURPA and are therefore preempted under the Federal Power Act. FERC's notice of filing provides for the filing of motions to intervene or protest by August 31, 1998. In requesting denial of the petition, HECO currently intends to assert that the petition requests relief beyond FERC's jurisdiction and is without merit, and that the initiation of an enforcement action would not be consistent with FERC's enforcement policy. BLNR PETITION. On August 5, 1998, Keahole Defense Coalition filed with the BLNR - -------------- a Petition for Declaratory Ruling under Section 91-8, Hawaii Revised Statutes. The petition alleges that all conditions in Hawaii Administrative Rules 13-2-21 apply to HELCO's default entitlement to use its Keahole site, that the letter issued to HELCO by the DLNR in January 1998 was erroneous because it failed to incorporate all conditions applicable to the existing permits, and that the DOH issued three separate Notices of Violation (NOVs) to HELCO in 1992 and 1998 for violation of clean air rules, which NOVs constitute violations under the existing permits and render such permits null and void. The petition requests that the BLNR commence a contested case on the petition; that the BLNR determine that HELCO has violated the terms of its existing conditional use permits, causing such permits to be null and void; and that the BLNR determine that HELCO has violated the conditions applicable to its default entitlement, such that HELCO should be enjoined from using the Keahole property under such default entitlement. COMPLAINT AND MOTION FOR TEMPORARY RESTRAINING ORDER. On August 5, 1998, Keahole - ----------------------------------------------------- Defense Coalition filed in the Third Circuit Court of the State of Hawaii a Complaint and Motion for Temporary Restraining Order and Preliminary Mandatory Injunction against HELCO and the Chief Engineer, Department of Public Works, County of Hawaii, and on August 6, 1998, filed an amended complaint. The complaint and amended complaint do not identify a cause of action, but allege that the City Engineer issued eight building permits to HELCO for the expansion of the Keahole Generating Station without requiring HELCO to obtain a final Covered Source Permit as a precondition to construction on the belief that the DOH and the EPA had authorized certain construction activities. The complaints further allege that the existing units at Keahole are not being improved or upgraded, and that the DOH has issued a NOV for construction of pipe rack foundations, a retaining wall and an oil/water separator. The complaints call for the suspension and revocation of the eight building permits and an injunction to prevent further construction by HELCO. The motion calls for the Court to mandate that the Chief Engineer suspend or revoke certain building permits for structures, improvements and facilities which are directly or solely associated with or which are of a permanent nature aimed at completing CT-4, CT- 5 and ST-7 and enjoin HELCO from construction at Keahole while the permits are suspended or revoked. Notice of Violation. In July 1998, the DOH issued a Notice of Violation (NOV) to - -------------------- HELCO for three items allegedly constituting unauthorized construction activity at the Keahole Generating Station prior to receipt of an effective PSD air permit for CT-4 and CT-5. The NOV requires HELCO to immediately halt construction activities on pipe rack foundations, a retaining wall and an oil/water separator, and imposes a fine of $48,800. HELCO has complied with the stop work order on the three items and is currently considering its response to the NOV. HELCO has until mid-August 1998 to either request a hearing or pay the fine. COSTS INCURRED. As of June 30, 1998, HELCO's costs incurred in its efforts to - -------------- put into service its Keahole combined-cycle unit amounted to $61.1 million, including approximately $27.0 million for equipment and material purchases, approximately $14.8 million for planning, engineering, permitting, site development and other costs and approximately $19.3 million as an allowance for funds used during construction. Of the total costs incurred, approximately $0.8 million is for ST-7. 16 CONTINGENCY PLANNING. In June 1995, HELCO filed with the PUC its generation - -------------------- resource contingency plan detailing alternatives and mitigation measures to address the further delays that subsequently occurred in obtaining the permits necessary to construct its combined-cycle unit. Actions under the plan have helped HELCO maintain its reserve margin and reduce the risk of near-term capacity shortages. In January 1996, the PUC opened a proceeding to evaluate HELCO's contingency resource plan and HELCO's efforts to insure system reliability. HELCO has filed reports with the PUC from time to time updating the contingency plan and its implementation. ENVIRONMENTAL REGULATION See discussion of the DOH NOV issued to HELCO above and note (8), "Contingencies," in HEI's "Notes to consolidated financial statements." PUC SHOW CAUSE ORDER FOR HECO In March 1997, the PUC issued a show cause order to HECO requesting information to assist the PUC in determining if it should reduce HECO's rates and require HECO to refund any excess earnings to its ratepayers. The PUC noted that for 1996 HECO recorded a return on average common equity (ROACE) of 11.93% and a simple average rate of return on rate base (ROR) of 9.70%, which exceeded the 11.40% ROACE and 9.16% ROR determined to be reasonable by the PUC in the utility's last rate case. HECO filed a motion to close the proceeding in March 1998, based on the fact that the actual returns for 1997--a 10.26% ROACE and a 8.75% ROR--were below the returns the PUC found to be fair and reasonable in the last rate proceeding. The Consumer Advocate has filed with the PUC a statement that it does not oppose HECO's request to close the proceedings. Management cannot predict what future PUC action may be taken in this proceeding. HECO POWER OUTAGE On April 9, 1991, HECO experienced a power outage that affected all customers on the island of Oahu. The PUC initiated an investigation of the April 9, 1991 outage and consolidated it with a pending investigation of an outage that occurred in 1988. Power Technologies, Inc., an independent consultant hired by HECO with the approval of the PUC, investigated the 1991 outage. HECO is implementing certain of Power Technologies, Inc.'s recommendations and provides the PUC with summaries of its progress on those recommendations. Management cannot predict the timing and outcome of a PUC decision and order (D&O) that may be issued, if any, with respect to the outages. (5) ACCOUNTING CHANGES - ----------------------- COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Consolidated HECO adopted SFAS No. 130 in the first quarter of 1998, but had no material "other" comprehensive income items for the income statement periods presented or accumulated as of the balance sheet dates presented. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Consolidated HECO adopted SFAS No. 131 in the first quarter of 1998. No modification to consolidated HECO's reporting segment was required. COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE In March 1998, the AICPA Accounting Standards Executive Committee issued SOP 98- 1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which requires that certain costs, including certain payroll and payroll-related costs, be capitalized and amortized over the estimated useful life of the software. The provisions of SOP 98-1 are effective for fiscal years beginning after December 15, 1998 and earlier application is encouraged. HECO and its subsidiaries have not determined when they will adopt SOP 98-1. Management currently believes that the adoption of SOP 17 98-1 will not have a material effect on consolidated HECO's financial condition, results of operations or liquidity. COSTS OF START-UP ACTIVITIES In April 1998, the AICPA Accounting Standards Executive Committee issued SOP 98- 5, "Reporting on the Costs of Start-up Activities," which requires that costs of start-up activities, including organization costs, be expensed as incurred. The provisions of SOP 98-5 are effective for fiscal years beginning after December 15, 1998 and earlier application is encouraged. HECO and its subsidiaries have not determined when they will adopt SOP 98-5. Management currently believes that the adoption of SOP 98-5 will not have a material effect on consolidated HECO's financial condition, results of operations or liquidity. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which 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 statement of financial position and measure those instruments at fair value. The provisions of SFAS No. 133 are effective for all fiscal quarters of fiscal years beginning after June 15, 1999 and earlier application is encouraged. HECO and its subsidiaries have not determined when they will adopt SFAS No. 133 and have not yet determined the impact of adoption. (6) SUMMARIZED FINANCIAL INFORMATION - ------------------------------------- Summarized financial information for HECO's subsidiaries, HELCO and MECO, is as follows:
BALANCE SHEET DATA HELCO MECO --------------------------------------- ------------------------------ June 30, December 31, June 30, December 31, (in thousands) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Current assets............................ $ 25,331 $ 28,631 $ 26,180 $ 31,994 Noncurrent assets......................... 409,886 403,981 378,782 374,766 ----------- ----------- ----------- ----------- $435,217 $432,612 $404,962 $406,760 =========== =========== =========== =========== Common stock equity....................... $149,283 $144,761 $152,063 $150,129 Cumulative preferred stock Not subject to mandatory redemption... 10,000 10,000 8,000 8,000 Subject to mandatory redemption....... 7,000 7,000 5,575 5,575 Current liabilities....................... 57,973 63,500 18,938 24,454 Noncurrent liabilities.................... 210,961 207,351 220,386 218,602 ----------- ----------- ----------- ----------- $435,217 $432,612 $404,962 $406,760 =========== =========== =========== ===========
INCOME STATEMENT DATA
HELCO MECO ------------------------------------------------------------ --------------------------------------------------- Three months Six months Three months Six months ended June 30, ended June 30, ended June 30, ended June 30, -------------------------- --------------------------- ----------------------- ------------------------ (in thousands) 1998 1997 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Operating revenues....... $37,602 $39,025 $76,377 $79,363 $32,515 $38,281 $68,245 $76,260 Operating income......... 4,804 4,496 9,370 7,839 4,662 3,709 9,363 8,138 Net income for common stock... 4,082 3,782 7,833 6,518 3,598 2,553 7,182 5,848
HECO has not presented separate financial statements and other disclosures concerning MECO and HELCO because management has determined that such information is not material to holders of the junior deferrable debentures issued by MECO and HELCO, respectively, which have been fully and unconditionally guaranteed by HECO. 18 (7) RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO - -------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME ---------------------------------
Three months ended Six months ended June 30, June 30, -------------------------- ------------------------- (in thousands) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income)................................. $ 41,698 $ 40,396 $ 84,259 $ 78,990 Deduct: Income taxes on regulated activities.................. (12,558) (12,073) (25,560) (23,777) Revenues from nonregulated activities................. (2,344) (2,352) (4,563) (4,511) Add: Expenses from nonregulated activities................. 65 132 268 215 ----------- ----------- ----------- ----------- Operating income from regulated activities after income taxes (per HECO consolidated statements of income)............................................... $ 26,861 $ 26,103 $ 54,404 $ 50,917 =========== =========== =========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS - ------------- The following discussion should be read in conjunction with the consolidated financial statements of HEI and HECO and accompanying notes. RESULTS OF OPERATIONS HEI CONSOLIDATED - ----------------
Three months ended June 30, (in thousands, except ---------------------- % Primary reason(s) for per share amounts) 1998 1997 change significant change* - -------------------------------------------------------------------------------------------------------------- Revenues.................. $362,472 $360,253 1 Increases for the savings bank and "other" segments, partly offset by a decrease for the electric utility segment Operating income.......... 53,790 50,170 7 Improvement for all segments Net income................ 22,393 19,795 13 Higher operating income and lower income taxes**, partly offset by higher interest expense primarily due to higher average borrowings partly used to finance the infusion of capital into the savings bank for the acquisition of most of BoA's Hawaii operations Basic and diluted earnings per common share........... $ 0.70 $ 0.63 11 See explanation for "net income," partly offset by an increase in shares outstanding Weighted average number of common shares outstanding.............. 32,007 31,237 2 Issuances under the Stock Option and Incentive Plan and Nonemployee Director Stock Plan
19
Six months ended June 30, (in thousands, except -------------------- % Primary reason(s) for per share amounts) 1998 1997 change significant change* - ------------------------------------------------------------------------------------------------------------ Revenues.................. $738,093 $719,446 3 Increases for the savings bank and "other" segments, partly offset by a decrease for the electric utility segment Operating income.......... 109,808 99,522 10 Improvement for all segments Net income................ 44,616 39,458 13 Higher operating income and lower income taxes**, partly offset by higher preferred securities distributions (due to the issuance of HEI- and HECO-obligated preferred securities of trust subsidiaries in February and March 1997) and higher interest expense primarily due to higher average borrowings partly used to finance the infusion of capital into the savings bank for the acquisition of most of BoA's Hawaii operations Basic earnings per common share.................... $ 1.40 $ 1.27 10 See explanation for "net income," Diluted earnings per partly offset by an increase in common share............. $ 1.39 $ 1.27 9 shares outstanding Weighted average number of common shares outstanding.............. 31,982 31,099 3 Issuances under the Dividend Reinvestment and Stock Purchase Plan and other plans***
* Also see segment discussions which follow. ** Income taxes decreased primarily due to the favorable resolution of HEI's prior years' tax audit issues (with respect to which HEI had established a reserve) and the impact of the formation of ASB Realty Corporation (see savings bank segment discussion which follows). *** Beginning in March 1998, HEI purchased its common shares in the open market to satisfy the requirements of the HEI Dividend Reinvestment and Stock Purchase Plan and the Hawaiian Electric Industries Retirement Savings Plan. 20 Following is a general discussion of the results of operations by business segment. ELECTRIC UTILITY - ----------------
Three months ended June 30, (in thousands, except per ------------------------ % Primary reason(s) for barrel amounts) 1998 1997 change significant change - ------------------------------------------------------------------------------------------------------------- Revenues.................. $244,548 $275,324 (11) Lower fuel prices, the effects of which are passed on to ratepayers ($24 million), and a 3% decrease in KWH sales ($7 million) Expenses Fuel oil................. 44,449 65,112 (32) Lower fuel oil prices, fewer KWHs generated and better generating unit efficiency Purchased power.......... 69,091 72,473 (5) Lower fuel oil prices and fewer KWHs purchased Other.................... 89,310 97,343 (8) Lower other operation and maintenance expenses and lower revenue taxes Operating income.......... 41,698 40,396 3 Lower revenues more than offset by lower expenses Net income................ 18,689 18,115 3 Higher operating income, partly offset by higher interest expense Kilowatthour sales (millions).............. 2,152 2,209 (3) Fuel oil price per barrel. $18.59 $25.86 (28)
Six months ended June 30, (in thousands, except per --------------------- % Primary reason(s) for barrel amounts) 1998 1997 change significant change - ------------------------------------------------------------------------------------------------------------- Revenues.................. $502,810 $549,080 (8) Lower fuel prices, the effects of which are passed on to ratepayers ($41 million), and a 1% decrease in KWH sales ($6 million) Expenses Fuel oil................. 101,180 134,332 (25) Lower fuel oil prices, fewer KWHs generated and better generating unit efficiency Purchased power.......... 135,674 143,224 (5) Lower fuel oil prices and fewer KWHs purchased Other.................... 181,697 192,534 (6) Lower other operation and maintenance expenses and lower revenue taxes Operating income.......... 84,259 78,990 7 Lower revenues more than offset by lower expenses
21 (continued)
Six months ended June 30, (in thousands, except per --------------------- % Primary reason(s) for barrel amounts) 1998 1997 change significant change - -------------------------------------------------------------------------------------------------------------- Net income................ 37,951 35,279 8 Higher operating income, partly offset by higher interest expense and preferred securities distributions Kilowatthour sales (millions).............. 4,279 4,333 (1) Fuel oil price per barrel. $ 20.87 $ 26.98 (23)
Kilowatthour (KWH) sales in the second quarter and first six months of 1998 decreased 3% and 1%, respectively, from the same periods in 1997, partly due to the slow Hawaii economy and cooler weather. Despite the lower KWH sales, electric utility operating income increased 3% and 7% during the second quarter and first six months of 1998, respectively, compared to the same periods in 1997 as a result of lower expenses, partly resulting from cost containment efforts. Lower other operation and maintenance expenses (reflecting fewer unit overhauls and lower labor related expenses) contributed to the increases in operating income. Electric utility net income increased 3% and 8% during the second quarter and first six months of 1998, respectively, compared to the same periods in 1997 as a result of the higher operating income, partly offset by higher interest expense due to higher average borrowings and higher preferred securities distributions due to the issuance of the HECO-obligated preferred securities of HECO Capital Trust I in March 1997. PUC REGULATION OF ELECTRIC UTILITY RATES The PUC has broad discretion in its regulation of the rates charged by HEI's electric utility subsidiaries and in other matters. Any adverse decision and order (D&O) by the PUC concerning the level or method of determining electric utility rates, the authorized returns on equity or other matters, or any prolonged delay in rendering a D&O in a rate or other proceeding, could have a material adverse effect on the Company's financial condition and results of operations. Upon a showing of probable entitlement, the PUC is required to issue an interim D&O in a rate case within 10 months from the date of filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed). There is no time limit for rendering a final D&O. Interim rate increases are subject to refund with interest, pending the final outcome of the case. Management cannot predict with certainty when D&Os in pending or future rate cases will be rendered or the amount of any interim or final rate increase that may be granted. In June 1998, PUC Chairman Yukio Naito resigned effective July 31, 1998 after serving on the PUC since 1988. On July 29, 1998, Governor Benjamin Cayetano named Gregory Pai as Mr. Naito's replacement on the PUC effective August 1, 1998 and named Dennis Yamada as Chairman. Mr. Yamada has been serving on the PUC since July 1994 and had recently been confirmed for a new-six year term ending June 30, 2004. Mr. Pai's nomination is subject to Senate approval. RECENT RATE REQUESTS HEI's electric utility subsidiaries initiate PUC proceedings from time to time to request electric rate increases to cover rising operating costs, 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. Hawaii Electric Light Company, Inc. - ----------------------------------- In March 1998, HELCO filed a request to increase rates 11.5%, or $17.3 million in annual revenues, based on a 1999 test year and a 12.5% return on average common equity (ROACE), primarily to recover costs relating to two power generation projects--an agreement to buy power from Encogen's 60megawatt (MW) plant in Hamakua and the cost of adding generating units at HELCO's Keahole power plant. The Encogen agreement has been submitted to the PUC for approval. Under HELCO's 22 request, the portion of the rate increase related to Encogen's generators would not go into effect until the facilities are completed and providing electric service to customers. Maui Electric Company, Limited - ------------------------------ In May 1996, MECO filed a request to increase rates 13%, or $18.9 million in annual revenues, based on a 1997 test year and a 12.9% ROACE, primarily to recover the costs related to the anticipated 1997 addition of new generating unit M17. In November 1996, MECO filed a motion with the PUC to approve a stipulation between MECO and the Consumer Advocate which would provide MECO with an increase in annual revenues of $1.5 million, based on an 11.65% ROACE. In May 1997, the stipulated increase was revised to $1.3 million after considering the final decision in the 1996 test year case. The primary reason for the stipulation was a delay in the expected in-service date for MECO's generating unit M17 until late 1998 because of delays in obtaining the necessary Prevention of Significant Deterioration/Covered Source (PSD) permit from the Department of Health of the State of Hawaii (DOH)/U.S. Environmental Protection Agency (EPA). In December 1997, MECO received a final D&O authorizing no additional increase in annual revenues, based on an 11.12% ROACE. In January 1998, MECO received a PSD permit for generating unit M17 and filed a request to increase rates 15.3%, or $22.4 million in annual revenues, based on a 12.75% ROACE and a 1999 test year, primarily to recover the costs related to the anticipated addition of unit M17 in late 1998. In February 1998, KCP filed a petition with the EPA's Environmental Appeals Board (EAB) to review the air permit issued to MECO for units M17 and M19, staying construction. In April 1998, the DOH submitted its brief to the EAB responding to issues raised in KCP's petition and requesting that the petition be denied. On May 1, 1998, EPA Region IX filed its response to the KCP petition, indicating their continued concurrence with the permit issued to MECO and requesting that the KCP petition be denied. An EAB ruling is pending. CONTINGENCIES See note (4) in HECO's "Notes to consolidated financial statements." SAVINGS BANK - ------------
Three months ended June 30, ----------------------- % Primary reason(s) for (in thousands) 1998 1997 change significant change - ---------------------------------------------------------------------------------------------------------------- Revenues.................. $101,268 $69,674 45 Higher interest income as a result of the higher average interest-earning assets balance due to the acquisition of most of the Hawaii operations of BoA, partly offset by the lower weighted average yields on these assets Operating income.......... 12,630 12,236 3 Higher net interest income and other income due to the acquisition, partly offset by an increase in operating expenses as a result of the acquisition and a higher provision for loan losses Net income................ 7,352 7,172 3 Higher operating income and lower income taxes, partly offset by preferred stock dividends Interest rate spread...... 3.12% 2.96% 5 36 basis points decrease in the weighted average rate on interest-bearing liabilities, partly offset by 20 basis points decrease in the weighted average yield on interest-earning assets
23
Six months ended June 30, ------------------------ % Primary reason(s) for (in thousands) 1998 1997 change significant change - -------------------------------------------------------------------------------------------------------------- Revenues.................. $203,095 $138,586 47 See explanation above Operating income.......... 28,681 24,521 17 See explanation above Net income................ 15,712 14,271 10 Higher operating income, partly offset by preferred stock dividends Interest rate spread...... 3.18% 2.97% 7 33 basis points decrease in the weighted average rate on interest-bearing liabilities, partly offset by a 12 basis points decrease in the weighted average yield on interest-earning assets
ASB's revenues, operating income and net income for the second quarter and first six months of 1998 reflect the results of the acquired BoA Hawaii operations. Partly offsetting the higher results compared to the first six months of 1997 were increased consulting expenditures to consolidate and streamline operations and an after-tax increase of $2 million in ASB's loan loss provision (see discussion below). ASB's interest rate spread--the difference between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities--increased 5% and 7% for the second quarter and first six months of 1998 compared to same periods in 1997. Comparing the first half of 1998 to the same period in 1997, the weighted average rate on interest-bearing liabilities decreased more than the weighted average yield on interest-earning assets decreased. Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. In December 1997, ASB was able to grow significantly through the assumption of $1.7 billion of BoA's Hawaii deposits. There was an outflow of deposits of $156 million in the first six months of 1998, partly offset by $55 million of interest credited to accounts. ASB also derives funds from borrowings, payments of interest and principal on outstanding loans receivable and mortgage-backed securities, and other sources. In recent years, advances from the Federal Home Loan Bank (FHLB) of Seattle and securities sold under agreements to repurchase have become more significant sources of funds as the demand for deposits decreased due in part to increased competition from money market and mutual funds. Using sources of funds with a higher cost than deposits, such as advances from the FHLB, puts downward pressure on ASB's interest rate spread and net interest income. In the slow Hawaii economy, ASB has seen a rise in nonaccrual loans and loan loss reserves. During the first six months of 1998, ASB added $6.3 million to its allowance for loan losses -- 127% more than the additions made in the same period last year. As of June 30, 1998, ASB's allowance for loan losses was 1.15% of average loans outstanding. Charge-offs, however, remain low compared to mainland thrifts. Annualized charge-offs based on the six month period ended June 30, 1998 were 12 basis points of average loans outstanding, compared to 39 basis points for all U.S. thrifts for the year ended December 31, 1997. The following table presents the changes in the allowance for loan losses for the periods indicated. 24
Six months ended June 30, ----------------------------- (in thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------- Allowance for loan losses, beginning of period......................... $29,950 $19,205 Additions to provisions for losses..................................... 6,348 2,792 Allowance for losses on loans returned to BoA.......................... (107) -- Net charge-offs........................................................ (1,427) (956) ---------- ---------- Allowance for loan losses, end of period............................... $34,764 $21,041 ========== ==========
On March 27, 1998, ASB formed a wholly owned operating subsidiary, ASB Realty Corporation (ASBR). ASBR elects to be taxed as a real estate investment trust (REIT). ASBR's objective is to acquire, hold, finance and manage qualifying REIT assets. For the second quarter of 1998, in spite of a 3% increase in operating income, ASB and subsidiaries' income taxes were $1.1 million lower than the same period in 1997. OTHER - -----
Three months ended June 30, ------------------------ % Primary reason(s) for (in thousands) 1998 1997 change significant change - ---------------------------------------------------------------------------------------------------------------- Revenues.................. $16,656 $15,255 9 Freight transportation subsidiaries' higher general freight revenues and HEIPC's higher Guam revenues Operating loss............ (538) (2,462) 78 Higher freight transportation operating income (see below) and lower holding company administrative and general expenses
Six months ended June 30, ------------------------ % Primary reason(s) for (in thousands) 1998 1997 change significant change - ---------------------------------------------------------------------------------------------------------------- Revenues.................. $32,188 $31,780 1 Freight transportation subsidiaries' higher general freight revenues and HEIPC's higher Guam revenues, partly offset by MPC's lower unit sales Operating loss............ (3,132) (3,989) 21 Higher freight transportation operating income (see below)
The "other" business segment includes results of operations from Hawaiian Tug & Barge Corp. (HTB) and its subsidiary, Young Brothers, Limited (YB), maritime freight transportation companies; Malama Pacific Corp. (MPC) and its subsidiaries, real estate development and investment companies; HEI Investment Corp. (HEIIC), a company primarily holding investments in leveraged leases; HEI Power Corp. (HEIPC) and its subsidiaries, companies formed to pursue independent power and integrated energy services projects in Asia and the Pacific; Pacific Energy Conservation Services, Inc., a contract services company primarily providing limited services to an affiliate; Hawaiian Electric Industries Capital Trust I, HEI Preferred Funding, LP and Hycap Management, Inc., companies formed primarily for the purpose of effecting the issuance of 8.36% Trust Originated Preferred Securities; HEI and HEI Diversified, Inc. (HEIDI), holding companies; and eliminations of intercompany transactions. 25 FREIGHT TRANSPORTATION The freight transportation subsidiaries recorded operating income of $1.5 million and $2.1 million in the second quarter and first half of 1998, respectively, compared with $0.4 million and $0.8 million in the same periods of 1997. The higher operating incomes for 1998 are due to higher general freight revenues, lower maintenance and drydocking expenses and lower operating expenses resulting from a PUC approved sailing schedule change. The freight transportation subsidiaries, however, continue to be negatively impacted by the slow economic activity on Oahu's neighbor islands and the slow construction industry in Hawaii. In March 1997, YB filed a request with the PUC for a general rate increase of 8.2%. In September 1997, the PUC approved YB's request to change its sailing schedule that resulted in a reduction in YB's requested rate increase from 8.2% to 5.7%. In October 1997, YB received a final D&O authorizing a 4.7%, or $1.7 million increase in annual revenues, based on a 14.1% ROACE. REAL ESTATE MPC recorded operating losses of $0.3 million and $0.8 million in the second quarter and first half of 1998, respectively, compared with $0.3 million and $0.6 million in the same periods of 1997. The slow real estate market in Hawaii has negatively impacted MPC's real estate development activities. It is expected that Hawaii's real estate market will not rebound in the near term. MPC's present focus is to reduce its current investment in real estate development assets and increase cash flow by continuing the development and sales of its existing projects. There are currently no plans to invest in new projects. For further information on MPC, see note (4) in HEI's "Notes to consolidated financial statements." OTHER HEIPC was formed in 1995 and its subsidiaries have been and will be formed from time to time to pursue independent power and integrated energy services projects in Asia and the Pacific. HEIPC's consolidated operating losses were $1.0 million and $1.6 million in the second quarter and first half of 1998, respectively, compared with $0.8 million and $1.1 million in the same periods of 1997. The increases in 1998 operating losses were due to increased business development expenses, partly offset by operating income from the energy conversion agreement described below. In September 1996, an HEIPC subsidiary, HEI Power Corp. Guam (HPG), entered into a 20-year energy conversion agreement with the Guam Power Authority (GPA), pursuant to which HPG has repaired and is operating and maintaining two oil- fired 25-MW (net) units on GPA property at Tanguisson, Guam. In November 1996, HPG assumed operational control of the Tanguisson facility. HPG's total cost to repair the two units was $15 million. The GPA project site is contaminated with oil from spills occurring prior to HPG's assuming operational control. HPG has agreed to manage the operation and maintenance of GPA's waste oil recovery system at the project site consistent with GPA's oil recovery plan as approved by the EPA. GPA, however, has agreed to indemnify and hold HPG harmless from any pre-existing environmental liability. HEIPC is actively pursuing other projects in Asia and the Pacific. The success of any project undertaken by HEIPC will be dependent on many factors, including the economic, political, monetary, technological, regulatory and logistical circumstances surrounding each project and the location of the project. Due to political or regulatory actions or other circumstances, projects may be delayed or even prohibited. There is no assurance that any project undertaken by HEIPC will be successfully completed or acquired or that HEIPC's investment in any such project will not be lost, in whole or in part. Management's initial plans were to invest approximately $25 million to $30 million in HEIPC. HEIPC is pursuing projects which, if successful, could result in an aggregate investment of approximately $150 million over the next 3 to 4 years. Each project, however, would be subject to approval from the HEI Board of Directors. Further, the amount of equity invested may be reduced if debt financing is obtained. CONTINGENCIES - ------------- See note (8) in HEI's "Notes to consolidated financial statements" for a discussion of contingencies, including environmental regulation and The Hawaiian Insurance & Guaranty Company, Limited. 26 FUTURE ENVIRONMENTAL REGULATION On July 16, 1997, the EPA adopted national ambient air quality standards for certain particulate matter and ozone. The new standards will not require local pollution controls until 2004 for the ozone standards and 2005 for the particulate matter standards, with no compliance determinations until 2007 and 2008, respectively, and with possible extensions. The eventual impact of these new standards on the Company and consolidated HECO is not known at this time. YEAR 2000 COMPLIANCE HEI and its subsidiaries are aware of the Year 2000 date issues associated with the practice of encoding only the last two digits of four digit years in computer-based systems. Year 2000 date issues, if not properly addressed, could result in computer errors that might result in a disruption of business operations. Further, the Company could be adversely impacted by Year 2000 date issues if suppliers, customers and other businesses do not address the issues successfully. HEI and subsidiary management have developed Year 2000 programs and projects and have teams in place that are actively assessing, renovating, validating and implementing Year 2000 ready systems. Both of HEI's major business segments, HECO and its subsidiaries and ASB and its subsidiaries, are in the process of replacing the majority of their business-critical applications with integrated application suites that are warranted to be Year 2000 ready. Although Year 2000 readiness is a requirement, these application replacements are primarily driven by business needs. Management estimates that the incremental cost to renovate other applications and test replacement applications and systems to become Year 2000 ready will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. No assurance can be given that the Company will successfully avoid all problems that arise out of the Year 2000 issue. ACCOUNTING CHANGES - ------------------ See note (7) and note (5) in HEI's and HECO's "Notes to consolidated financial statements," respectively. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company and consolidated HECO each believes that its ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund their respective construction programs and investments and to satisfy debt and other cash requirements in the foreseeable future. The consolidated capital structure of HEI was as follows:
(in millions) June 30, 1998 December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------ Short-term borrowings......................... $ 333 14% $ 298 14% Long-term debt................................ 919 40 802 37 HEI- and HECO-obligated preferred securities of trust subsidiaries........... 150 6 150 7 Preferred stock of electric utility subsidiaries................................. 82 4 84 4 Common stock equity........................... 824 36 815 38 --------- --------- ---------- --------- $2,308 100% $2,149 100% ========= ========= ========== =========
ASB's deposit liabilities, securities sold under agreements to repurchase and advances from FHLB are not included in the table above. In February and June 1998, HEI issued $53 million and $60 million in medium-term notes bearing weighted average interest rates of 6.2% and 6.5%, respectively, and primarily used the proceeds to pay down short-term borrowings. This decrease in short-term borrowings at HEI was more than offset by an increase at ASB of $118 million in State of Hawaii retail repurchase agreements (classified as short-term borrowings), which matured on July 1, 1998. 27 On May 29, 1998, Standard & Poor's changed its outlook for HEI, HECO, HELCO and MECO securities from positive to stable citing continuing weakness in Hawaii's economy as the reason for this change. For the first six months of 1998, net cash provided by operating activities was $44 million. Net cash used in investing activities was $258 million, largely due to ASB's origination of loans and purchase of mortgage-backed and investment securities, net of repayments, and consolidated HECO's capital expenditures, partly offset by cash received from BoA for loans returned after the acquisition (in accordance with the provisions of the Purchase and Assumption Agreement). Net cash provided by financing activities was $214 million as a result of several factors, including net increases in securities sold under agreements to repurchase, long-term debt, advances from FHLB and short-term borrowings, partly offset by net decreases in deposit liabilities and the payment of common stock dividends. HEI estimates its consolidated requirements for funds for 1998 through 2002, including net capital expenditures (which exclude the allowance for funds used during construction and capital expenditures funded by third-party cash contributions in aid of construction), long-term debt retirements (excluding repayments of advances from the FHLB of Seattle and securities sold under agreements to repurchase) and sinking fund requirements, to total $819 million. Of this amount, approximately $665 million is for net capital expenditures (mostly relating to the electric utilities' net capital expenditures described below). HEI estimates that its consolidated internal sources, after the payment of HEI dividends, will provide approximately 80% of the consolidated requirements, with debt financing providing the remaining requirements. Additional debt and equity financing may be required to fund activities not included in the 1998-2002 forecast, such as the development of additional power projects in the Asia Pacific region, or to fund changes in requirements, such as increases in the amount of or acceleration of capital expenditures of the electric utilities. Following is a discussion of the liquidity and capital resources of HEI's largest segments. ELECTRIC UTILITY HECO's consolidated capital structure was as follows:
(in millions) June 30, 1998 December 31, 1997 - ------------------------------------------------------------------------------------------------------- Short-term borrowings from nonaffiliates and affiliate... $ 109 7% $ 96 6% Long-term debt................. 633 38 628 39 HECO-obligated preferred securities of trust subsidiary 50 3 50 3 Preferred stock................ 82 5 84 5 Common stock equity............ 792 47 769 47 -------- -------- -------- -------- $1,666 100% $1,627 100% ======== ======== ======== ========
Operating activities provided $55 million in net cash during the first six months of 1998. Investing activities used net cash of $54 million, primarily for capital expenditures. Financing activities used net cash of $1 million, including $17 million for the payment of common and preferred dividends and $2 million for preferred stock redemptions, almost entirely offset by the net increases in short-term borrowings and long-term debt. The electric utilities estimate their consolidated requirements for funds for 1998 through 2002, including net capital expenditures, long-term debt retirements and sinking fund requirements, total $644 million. HECO estimates that its consolidated internal sources, after the payment of common stock and preferred stock dividends, will provide approximately 87% of the consolidated requirements, with debt and equity financing providing the remaining requirements. As of June 30, 1998, $48 million of proceeds from previous sales by the Department of Budget and Finance of the State of Hawaii of special purpose revenue bonds on behalf of HECO, MECO and HELCO remain undrawn and an additional $88 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 on behalf of HECO and MECO prior to the end of 1999. In July 1998, an additional $100 million of revenue bonds were authorized by the Hawaii legislature for issuance prior to the end of 2003. The PUC must approve issuances of long-term securities by HECO, MECO and HELCO. 28 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. The electric utilities estimate that net capital expenditures for the five-year period 1998 through 2002 will total $592 million. Approximately 72% of forecast gross capital expenditures, which include the allowance for funds used during construction and capital expenditures funded by third-party cash contributions in aid of construction, is for transmission and distribution projects, with the remaining 28% primarily for generation projects. For 1998, electric utility net capital expenditures are estimated to be $151 million. Gross capital expenditures are estimated to be $184 million, comprised of approximately $121 million for transmission and distribution projects, approximately $39 million for new generation projects and approximately $24 million for general plant and existing generation projects. Drawdowns of proceeds from 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. 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, the availability of generating sites and transmission and distribution corridors, the ability to obtain adequate and timely rate increases, escalation in construction costs, demand-side management programs and requirements of environmental and other regulatory and permitting authorities. SAVINGS BANK
June 30, December 31, % (in millions) 1998 1997 change - -------------------------------------------------------------------------------------------------------------- Total assets..................................... $5,740 $5,548 3 Mortgage-backed securities....................... 1,906 1,865 2 Loans receivable, net............................ 3,059 3,036 1 Deposit liabilities.............................. 3,817 3,917 (3) Securities sold under agreements to repurchase... 526 375 40 Advances from Federal Home Loan Bank............. 791 736 7
As of June 30, 1998, ASB was the third largest financial institution in the state based on total assets of $5.7 billion and based on deposits of $3.8 billion. For the first six months of 1998, net cash used in ASB's operating activities was $14 million. Net cash used in ASB's investing activities was $197 million, due largely to the origination of loans and the purchase of mortgage-backed and investment securities, partly offset by principal repayments and the cash received from BoA for loans returned to BoA after the acquisition. Net cash provided by financing activities was $209 million largely due to a net increase of $150 million in securities sold under agreements to repurchase, $115 million in short-term borrowings and $54 million in advances from FHLB, partly offset by a net decrease of $101 million in deposit liabilities and $9 million in common and preferred stock dividends. Minimum liquidity levels are currently governed by the regulations adopted by the Office of Thrift Supervision, Department of Treasury (OTS). ASB was in compliance with OTS liquidity requirements as of June 30, 1998. ASB believes that a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth. As of June 30, 1998, ASB was in compliance with the OTS minimum capital requirements (noted in parentheses) with a tangible capital ratio of 5.1% (1.5%), a core capital ratio of 5.1% (3.0%) and a risk-based capital ratio of 12.4% (8.0%). FDIC regulations restrict the ability of financial institutions that are not "well-capitalized" to compete on the same terms as "well-capitalized" institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of June 30, 1998, ASB was "well-capitalized" (ratio requirements noted in parentheses) with a leverage ratio of 5.1% (5.0%), a Tier-1 risk-based ratio of 11.4% (6.0%) and a total risk-based ratio of 12.4% (10.0%). The federal and state governments have enacted significant interstate banking legislation. Under the federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, a bank holding company 29 may acquire control of a bank in any state, subject to certain restrictions. Under Hawaii law, effective June 1, 1997, a bank chartered under Hawaii law may merge with an out-of-state bank and convert all branches of both banks into branches of a single bank, subject to certain restrictions. Although the federal and Hawaii laws do not apply to thrifts, such legislation may nonetheless affect the competitive balance among banks, thrifts and other financial institutions and the level of competition among financial institutions doing business in Hawaii. For a discussion of the unfavorable disparity in the deposit insurance assessment rates and Financing Corporation assessment rates that ASB and other thrifts have paid in relation to the rates that most commercial banks have paid, and certain legislation affecting financial institutions, see note (3) in HEI's "Notes to consolidated financial statements." ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------ The Company's results are impacted by ASB's ability to manage interest rate risk. For quantitative and qualitative information about the Company's market risks, see pages 37 to 39 of HEI's 1997 Annual Report to Stockholders. U.S. Treasury yields at June 30, 1998 and December 31, 1997 were as follows:
(%) June 30, 1998 December 31, 1997 --- ------------- ----------------- 3 month 5.07 5.34 3 year 5.49 5.66 5 year 5.46 5.71 7 year 5.51 5.76 10 year 5.44 5.74 20 year 5.72 6.01 30 year 5.63 5.92
As interest rates (as measured by U.S. Treasury yields) have declined between 3.0% and 5.2% from December 31, 1997 to June 30, 1998, management does not believe there has been a material change in the Company's quantitative disclosures of its interest-sensitive assets, liabilities and off-balance sheet items. PART II - OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS - -------------------------- There are no significant developments in pending legal proceedings except as set forth in HEI's and HECO's "Notes to consolidated financial statements," and management's discussion and analysis of financial condition and results of operations. ITEM 5. OTHER INFORMATION - -------------------------- A. HECO, MECO and HELCO labor negotiations The current collective bargaining agreement between HECO, MECO and HELCO and the International Brotherhood of Electrical Workers (IBEW), Local 1260, covering approximately 63% of the total employees of these companies, was extended in November 1995 for a two-year period from November 1, 1996 through October 31, 1998. The current benefits agreement was also extended for a two-year period. HECO, MECO and HELCO and the IBEW are currently in negotiations. 30 B. HTB and YB labor negotiations HTB and YB had a collective bargaining agreement with the Inlandboatmen's Union of the Pacific (IBU) effective from July 26, 1995 through July 25, 1998. This agreement was extended during negotiations. On August 1, 1998, a new agreement was ratified. The new agreement is effective from July 26, 1998 to July 30, 2001 and provides for a 1.9% wage increase for the first year, a 1.8% wage increase for the second year and a 2.4% wage increase for the third year. The agreement covers all unionized employees of HTB and YB employed on ocean, interisland, harbor tug operations and dispatchers. It excludes journeyman craftsmen (covered in YB's contract with the International Longshoremen's and Warehousemen's Union), office clerical employees, professional and management employees, guards and watchmen. C. MECO air quality compliance On November 1, 1989, the Department of Health of the State of Hawaii (DOH) issued a Notice of Violation (NOV) indicating that Maalaea units X-1 and X-2 had exceeded operating limitations of 12 hours per day at various times in 1988. These incidents resulted from unscheduled unit outages and resulted in no net increase in emissions by MECO. Subsequently, MECO took steps to preclude future violations. An application for a permit modification was submitted to the EPA and approval was received from the EPA in July 1992. Units X-1 and X-2 continue to operate in compliance with the revised permit. Following a unit overhaul, emission compliance tests conducted for MECO's Maalaea Unit 14 in late 1995 indicated that particulate emissions were in excess of PSD permit limits. Corrective actions were taken and a retest in February 1996 confirmed that the unit returned to compliance with PSD limits. All test reports were submitted to the DOH. By letter dated July 15, 1996, the DOH indicated that a NOV would be issued for the past violations. By letter dated January 31, 1997, the DOH invited MECO to meet to discuss settlement of open matters. An agreement was reached with the DOH to resolve the NOV issued for X-1 and X-2 operating hours during 1988 and any other air permit violations which may have occurred from November 1, 1989 until November 1, 1996 (including past violations of Maalaea Unit 14 discussed in the previous paragraph). MECO signed the final consent order on July 24, 1998. In accordance with the agreement, MECO will contribute $100,000 over the next two years to a public education program on air quality after an executed copy of the consent order is received from the DOH. D. Ratio of earnings to fixed charges The following tables set forth the ratio of earnings to fixed charges for HEI and its subsidiaries for the periods indicated: RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING INTEREST ON ASB DEPOSITS
Six months Years Ended December 31, ended ------------------------------------------------------------------------------------------- June 30, 1998 1997 1996 1995 1994 1993 - ------------------- --------------- -------------- ------------- -------------- --------------- 1.82 1.82 1.87 1.94 2.22 2.25 =================== =============== ============== ============= ============== ===============
RATIO OF EARNINGS TO FIXED CHARGES INCLUDING INTEREST ON ASB DEPOSITS
Six months Years Ended December 31, ended ------------------------------------------------------------------------------------------- June 30, 1998 1997 1996 1995 1994 1993 - ------------------- --------------- -------------- ------------- -------------- --------------- 1.44 1.53 1.53 1.57 1.69 1.65 =================== =============== ============== ============= ============== ===============
31 For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent the sum of (i) pretax income from continuing operations (excluding undistributed net income or net loss from less than fifty-percent-owned persons) and (ii) fixed charges (as hereinafter defined, but excluding capitalized interest). "Fixed charges" are calculated both excluding and including interest on ASB's deposits during the applicable periods and represent the sum of (i) interest, whether capitalized or expensed, incurred by HEI and its subsidiaries plus their proportionate share of interest on debt to outsiders incurred by fifty-percent-owned persons, but excluding interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statements of income, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense, (iv) the preferred stock dividend requirements of HEI's subsidiaries, increased to an amount representing the pretax earnings required to cover such dividend requirements and (v) the preferred securities distribution requirements of trust subsidiaries. The following table sets forth the ratio of earnings to fixed charges for HECO and its subsidiaries for the periods indicated: RATIO OF EARNINGS TO FIXED CHARGES
Six months Years Ended December 31, ended ------------------------------------------------------------------------------------------- June 30, 1998 1997 1996 1995 1994 1993 - ------------------- --------------- -------------- ------------- -------------- --------------- 3.13 3.26 3.58 3.46 3.47 3.25 =================== =============== ============== ============= ============== ===============
For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent the sum of (i) pretax income before preferred stock dividends of HECO and (ii) fixed charges (as hereinafter defined, but excluding the allowance for borrowed funds used during construction). "Fixed charges" represent the sum of (i) interest, whether capitalized or expensed, incurred by HECO and its subsidiaries, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense, (iv) the preferred stock dividend requirements of HELCO and MECO, increased to an amount representing the pretax earnings required to cover such dividend requirements and (v) the preferred securities distribution requirements of the trust subsidiary. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - -----------------------------------------
(a) EXHIBITS HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 12.1 Computation of ratio of earnings to fixed charges, six months ended June 30, 1998 and 1997 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 12.2 Computation of ratio of earnings to fixed charges, six months ended June 30, 1998 and 1997 HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 27.1 Financial Data Schedule June 30, 1998 and six months ended June 30, 1998 HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 27.1(a) Financial Data Schedule June 30, 1997 and six months ended June 30, 1997 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 27.2 Financial Data Schedule June 30, 1998 and six months ended June 30, 1998
32 HEI Ninth Amendment to Trust Agreement, made and entered into on Exhibit 99.1 May 4, 1998, Between Fidelity Management Trust Company and HEI for the Hawaiian Electric Industries Retirement Savings Plan for incorporation by reference in the Registration Statement on Form S-8 (Regis. No. 333-02103)
(b) REPORTS ON FORM 8-K During the second quarter of 1998, HEI and HECO did not file a Current Report, Form 8-K, with the SEC. On August 4, 1998, HEI filed a Current Report on Form 8-K dated August 3, 1998, reporting HEI's settlement with insurance carriers under "Item 5 Other Events." SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signature of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof. HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC. (Registrant) (Registrant) By /s/ Robert F. Mougeot By /s/ Paul Oyer ---------------------- --------------------------- Robert F. Mougeot Paul A. Oyer Financial Vice President and Financial Vice President and Chief Financial Officer Treasurer (Principal Financial Officer of HEI) (Principal Financial Officer of HECO) Date: August 10, 1998 Date: August 10, 1998 33 EX-12.1 2 HEI - COMPUTATION OF RATIO HEI Exhibit 12.1 ---------------- Hawaiian Electric Industries, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Six months ended June 30, -------------------------------------------------------------------------- (dollars in thousands) 1998 (1) 1998 (2) 1997 (1) 1997 (2) - ----------------------------------------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges (3) The Company............................... $ 71,705 $143,970 $ 67,775 $108,663 Proportionate share of fifty-percent- owned persons............................ 247 247 309 309 Interest component of rentals................ 1,766 1,766 1,481 1,481 Pretax preferred stock dividend requirements of subsidiaries............................. 4,785 4,785 5,261 5,261 Preferred securities distribution requirements of trust subsidiaries.......... 6,192 6,192 4,439 4,439 -------- -------- -------- -------- TOTAL FIXED CHARGES.......................... $ 84,695 $156,960 $ 79,265 $120,153 ======== ======== ======== ======== EARNINGS Pretax income................................ $ 72,754 $ 72,754 $ 68,365 $ 68,365 Fixed charges, as shown above................ 84,695 156,960 79,265 120,153 Interest capitalized The Company............................... (3,423) (3,423) (3,172) (3,172) Proportionate share of fifty-percent- owned persons............................ (34) (34) (302) (302) -------- -------- -------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES......... $153,992 $226,257 $144,156 $185,044 ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES........... 1.82 1.44 1.82 1.54 ======== ======== ======== ========
(1) Excluding interest on ASB deposits. (2) Including interest on ASB deposits. (3) Total interest charges exclude interest on included in interest expense in HEI's nonrecourse debt from leveraged leases which is consolidated statements of income. EX-12.2 3 HECO - COMPUTATION OF RATIO HECO Exhibit 12.2 ----------------- Hawaiian Electric Company, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Six months ended June 30, ------------------------------- (dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------ FIXED CHARGES Total interest charges.............................................. $24,715 $24,253 Interest component of rentals....................................... 349 356 Pretax preferred stock dividend requirements of subsidiaries........ 2,035 2,085 Preferred securities distribution requirements of trust subsidiary.. 2,013 1,072 --------- --------- TOTAL FIXED CHARGES................................................. $29,112 $27,766 ========= ========= EARNINGS Income before preferred stock dividends of HECO..................... $39,682 $37,113 Income taxes (see note below)....................................... 25,534 23,813 Fixed charges, as shown above....................................... 29,112 27,766 AFUDC for borrowed funds............................................ (3,319) (3,136) --------- --------- EARNINGS AVAILABLE FOR FIXED CHARGES................................ $91,009 $85,556 ========= ========= RATIO OF EARNINGS TO FIXED CHARGES.................................. 3.13 3.08 ========= ========= Note: Income tax is comprised of the following-- Income tax expense relating to operating income from regulated activities............................................ $25,560 $23,777 Income tax expense (benefit) relating to income (loss) from nonregulated activities......................................... (26) 36 --------- --------- $25,534 $23,813 ========= =========
EX-27.1 4 HEI - FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC INDUSTRIES, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES, INC. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 253,886 2,132,890 150,098 0 39,206 0 3,070,668 1,022,929 8,163,297 0 918,861 83,370 148,293 659,399 164,807 8,163,297 0 738,093 0 628,285 239 0 36,815 72,754 28,138 44,616 0 0 0 44,616 1.40 1.39 REPRESENTS BASIC EPS
EX-27.1(A) 5 HEI - RESTATED FINANCIAL DATA SCHEDULE
5 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC INDUSTRIES, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED AS OF JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES, INC. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 129,398 1,341,021 148,179 0 47,126 0 2,900,993 934,434 6,022,890 0 802,650 86,260 148,293 636,890 151,455 6,022,890 0 719,446 0 619,924 (988) 0 32,145 68,365 28,907 39,458 0 0 0 39,458 1.27 1.27 REPRESENTS BASIC EPS
EX-27.2 6 HECO - FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND CONSOLIDATED STATEMENT OF INCOME AND CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000046207 HAWAIIAN ELECTRIC COMPANY, INC. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 PER-BOOK 1,916,010 0 154,919 12,743 146,418 2,230,090 85,387 296,332 410,207 791,926 81,775 48,293 603,307 0 0 108,945 30,000 1,595 0 0 564,249 2,230,090 498,247 25,560 418,283 443,843 54,404 9,964 64,368 24,686 39,682 1,731 37,951 15,326 44,545 55,101 0 0
EX-99.1 7 NINTH AMENDMENT TO TRUST AGREEMENT HEI EXHIBIT 99.1 NINTH AMENDMENT TO TRUST AGREEMENT BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND HAWAIIAN ELECTRIC INDUSTRIES, INC. THIS NINTH AMENDMENT TO TRUST AGREEMENT, is made and entered into May 4, 1998, by and between Fidelity Management Trust Company (the "Trustee") and Hawaiian Electric Industries, Inc. (the "Sponsor"); WITNESSETH: WHEREAS, the Trustee and the Sponsor heretofore entered into a Trust Agreement dated November 28, 1988, and amended December 22, 1989, January 1, 1994, March 15, 1994, February 1, 1996, April 1, 1996, April 1, 1997, June 13, 1997 and February 27, 1998 (the "Trust Agreement") for the Hawaiian Electric Industries Retirement Savings Plan (the "Plan"); and WHEREAS, the Trustee and the Sponsor wish to further amend said Trust Agreement as provided in Section 13 thereunder; and WHEREAS, on May 4, 1998, the Sponsor wishes to add Plan Sponsor WebStation as a service under the Trust and remove Plan Sponsor Workstation; and NOW THEREFORE, in consideration of the above premises the Trustee and the Sponsor hereby amend the Trust Agreement by: (1) Amending and restating Schedule "B" as attached. (2) Adding a new Schedule "K", Plan Sponsor Webstation Agreement, as attached. IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Ninth Amendment to be executed by their duly authorized officers effective as of the day and year first above written. HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, COMPANY INC. PENSION INVESTMENT COMMITTEE By /s/ Peter C. Lewis 5/1/98 By /s/ John DiBenedetto 5/30/98 ---------------------------- -------------------------------- Peter C. Lewis Date Vice President Date Member By /s/ Constance H. Lau 5/1/98 ---------------------------- Constance H. Lau Date Secretary and Member Schedule "B" FEE SCHEDULE ------------
Recordkeeping Fees - ------------------ * Annual Participation Fee Fees will be billed quarterly and are (See below) subject to a $7,500.00** per year or $22.00 per participant per year minimum fee, whichever is greater. * Plan Establishment Fee $2,500.00 * Loan Fee Establishment fee of $35.00 per loan account; annual fee of $15.00 per loan account. * Plan Sponsor WebStation (PSW): All User ID fees waived.
* Other Fees: extraordinary expenses resulting from large numbers of simultaneous manual transactions or from errors not caused by Fidelity. ** This fee will be imposed pro rata for each calendar quarter, or any part -------- thereof, that it remains necessary to keep a participant's account(s) as part of the Plan's records, e.g. vested, deferred, forfeiture, top-heavy and terminated participants who must remain on file through the calendar year-end for 1099R reporting. Trustee Fees - ------------ * To the extent that assets are invested in Fidelity Mutual Funds, 0.0125% per calendar quarter of the assets in the Trust as of the calendar quarter's last valuation date, but no less than $2,500.00 (Note: The Trustee reserves the right to review migration into Non-Fidelity Mutual Funds for potential impact on recordkeeping fees.) HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, COMPANY INC. PENSION INVESTMENT COMMITTEE By /s/ Peter C. Lewis 5/1/98 By /s/ John DiBenedetto 5/30/98 ---------------------------- ----------------------------- Peter C. Lewis Date Vice President Date Member By /s/ Constance H. Lau 5/1/98 ----------------------------- Constance H. Lau Date Secretary and Member SCHEDULE "K" PLAN SPONSOR WEBSTATION AGREEMENT This Agreement is entered into effective as of the fourth day of May, 1998, by and between Fidelity Institutional Retirement Services Company, a division of FMR Corp., a Massachusetts corporation ("Fidelity") and Hawaiian Electric Industries, Inc. ("Sponsor"). 1. Terms of Access and Use. ------------------------ Fidelity will provide the Sponsor and any individual authorized to act on behalf of the Sponsor, as identified in the Trust or Recordkeeping Agreement entered into between Fidelity or Fidelity Management Trust Company and the Sponsor, (collectively referred to as "User") with access to Plan Sponsor WebStation ("WebStation") upon Fidelity's acceptance of a properly completed Security Access Form. Fidelity hereby grants the User a non-transferable license to access WebStation in accordance with the terms and conditions described herein. No rights are conveyed to any property, intellectual or tangible, associated with WebStation. The User agrees to use the WebStation in accordance with the terms described herein and will not make it available to any third party without the prior written consent of Fidelity. 2. Authorization of Directions. User agrees that Fidelity shall not be under a ---------------------------- duty to inquire as to the authority or propriety of any directions given to Fidelity by the User and shall be entitled to act upon the direction any person whom it reasonably believes to be an authorized representative of the User. 3. Security of System. The User shall be responsible for the confidentiality ------------------- and use of any passwords and other security data, methods and devices issued to or obtained by it or its employees, representatives or agents in connection with the use of the WebStation. The User shall comply with the security procedures established by Fidelity for WebStation, including the use of passwords and/or encryption methods. The User agrees to promptly notify Fidelity of any unauthorized, negligent or inadvertent use of the system of which it is aware. The User further agrees to notify Fidelity of the termination of any employee who was granted access to Plan Sponsor WebStation. Fidelity retains the right to immediately suspend or withdraw access to WebStation, if, in Fidelity's opinion, such action is necessary to maintain the integrity of WebStation. 4. Liability of the Parties. To the extent that Plan Sponsor WebStation ------------------------- utilizes Internet services to transport data or communications, Fidelity will take reasonable security precautions, but Fidelity disclaims any liability for losses or other damages to the User resulting from interception, alteration or loss of any such data or communications. Fidelity shall not be responsible for, and makes no warranties regarding, the access, speed or availability of Internet or network services. 5. Miscellaneous. This Agreement shall be binding upon and inure to the -------------- benefit of the parties and their respective successors and assigns, and to the beneficiaries of the Trust. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, except to the extent pre-empted by the provisions of the Employee Retirement Income Security Act of 1974. This Agreement may be terminated by either party upon seven (7) days' written notice to the other party hereto at the address indicated below. Sections 2, 4, and 5 shall survive any termination of this Agreement. 6. WebStation will replace Remote Access and Plan Sponsor WorkStation. All references and fees to Remote Access and Plan Sponsor WorkStation are hereby amended as follows: Plan Sponsor WebStation (PSW): All User ID fees waived. Executed this fourth day of May, 1998. HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY INSTITUTIONAL BY: HAWAIIAN ELECTRIC INDUSTRIES, RETIREMENT SERVICES COMPANY INC. PENSION INVESTMENT COMMITTEE By /s/ Peter C. Lewis 5/1/98 By /s/ James M. McKinney 6/29/98 ---------------------------- -------------------------------- Peter C. Lewis Date Senior Vice President Date Member By /s/ Constance H. Lau 5/1/98 ---------------------------- Constance H. Lau Date Secretary and Member -----END PRIVACY-ENHANCED MESSAGE-----