-----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, OU/6H7a2dq96DrgZxdhZt4k1OIFY2wWPDN21ADGj1xtUwKHexkvHz2LZSnfn9Hdo 0YT5eQUwG0jehsNH7vt/Bw== 0000898430-01-501691.txt : 20010813 0000898430-01-501691.hdr.sgml : 20010813 ACCESSION NUMBER: 0000898430-01-501691 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010810 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: 1934 Act SEC FILE NUMBER: 001-08503 FILM NUMBER: 1703017 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: 1934 Act SEC FILE NUMBER: 001-04955 FILM NUMBER: 1703018 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 d10q.txt 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, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Exact Name of Registrant as Commission I.R.S. Employer Specified in Its Charter File Number Identification No. - ---------------------------------- ----------- ------------------ HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097 and Principal Subsidiary HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500 State of Hawaii - -------------------------------------------------------------------------------- (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 1, 2001 - ------------------------------------------------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. (Without Par Value)............... 33,681,216 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, 2001 INDEX
Page No. Glossary of terms.......................................................................................... ii Forward-looking statements................................................................................. v PART I. FINANCIAL INFORMATION Item 1. Financial statements Hawaiian Electric Industries, Inc. and subsidiaries --------------------------------------------------- Consolidated balance sheets (unaudited) - June 30, 2001 and December 31, 2000....................................................... 1 Consolidated statements of income (unaudited) - three and six months ended June 30, 2001 and 2000......................................... 2 Consolidated statements of changes in stockholders' equity (unaudited) - six months ended June 30, 2001 and 2000................................................... 3 Consolidated statements of cash flows (unaudited) - six months ended June 30, 2001 and 2000................................................... 4 Notes to consolidated financial statements (unaudited)...................................... 5 Hawaiian Electric Company, Inc. and subsidiaries ------------------------------------------------ Consolidated balance sheets (unaudited) - June 30, 2001 and December 31, 2000....................................................... 12 Consolidated statements of income (unaudited) - three and six months ended June 30, 2001 and 2000......................................... 13 Consolidated statements of retained earnings (unaudited) - three and six months ended June 30, 2001 and 2000......................................... 13 Consolidated statements of cash flows (unaudited) - six months ended June 30, 2001 and 2000................................................... 14 Notes to consolidated financial statements (unaudited)...................................... 15 Item 2. Management's discussion and analysis of financial condition and results of operations................................................................. 29 Item 3. Quantitative and qualitative disclosures about market risk.................................. 42 PART II. OTHER INFORMATION Item 1. Legal proceedings........................................................................... 43 Item 5. Other information........................................................................... 43 Item 6. Exhibits and reports on Form 8-K............................................................ 44 Signatures................................................................................................. 45
i Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended June 30, 2001 GLOSSARY OF TERMS Terms Definitions - ----- ----------- AFUDC Allowance for funds used during construction ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corp. (and its subsidiary since March 15, 2001, Bishop Insurance Agency of Hawaii, Inc.), ASB Service Corporation, AdCommunications, Inc., American Savings Mortgage Co., Inc. and ASB Realty Corporation Baotou Steel Baotou Iron & Steel (Group) Co., Ltd. BLNR Board of Land and Natural Resources of the State of Hawaii CDUP Conservation District Use Permit CEPALCO Cagayan Electric Power & Light Co., Inc. Company Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc., Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I, HECO Capital Trust II, HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, HEI Power Corp. and its subsidiaries, Pacific Energy Conservation Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc., HEI Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III, HEI Preferred Funding, LP, The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.) and Malama Pacific Corp. and its subsidiaries Consumer Advocate Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii DLNR Department of Land and Natural Resources of the State of Hawaii D&O Decision and order DOH Department of Health of the State of Hawaii DRIP HEI Dividend Reinvestment and Stock Purchase Plan EAB Environmental Appeals Board EAPRC East Asia Power Resources Corporation Enserch Enserch Development Corporation ii GLOSSARY OF TERMS, continued Terms Definitions - ----- ----------- EPA Environmental Protection Agency - federal EPHE EPHE Philippines Energy Company, Inc. Federal U.S. Government FHLB Federal Home Loan Bank GAAP Accounting principles generally accepted in the United States of America GPA Guam Power Authority Hamakua Hamakua Energy Partners, L.P., formerly known as Encogen Partners Hawaii, L.P. HAR Hawaii Administrative Rules HCPC Hilo Coast Power Company HECO Hawaiian Electric Company, Inc., an electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I and HECO Capital Trust II HEI Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., HEI Diversified, Inc., HEI Power Corp., Pacific Energy Conservation Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc., HEI Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III, The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.) and Malama Pacific Corp. HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B. HEIII HEI Investments, Inc. (formerly HEI Investment Corp.), a subsidiary of HEI Power Corp. HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc., and the parent company of several subsidiaries HEIPC HEI Power Corp. and its subsidiaries Group HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power Corp. iii GLOSSARY OF TERMS, continued Terms Definitions - ----- ----------- HTB Hawaiian Tug & Barge Corp. On November 10, 1999, HTB sold substantially all of its operating assets and the stock of Young Brothers, Limited, and changed its name to The Old Oahu Tug Service, Inc. IMPC Inner Mongolia Power Company IPP Independent power producer KCP Kawaihae Cogeneration Partners KWH Kilowatthour MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. MW Megawatt OTS Office of Thrift Supervision, Department of Treasury PBR Performance-based rate-making PPA Power purchase agreement PRPs Potentially responsible parties PUC Public Utilities Commission of the State of Hawaii ROACE Return on average common equity SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards TOOTS The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp. (HTB)), a wholly owned subsidiary of Hawaiian Electric Industries, Inc. On November 10, 1999, HTB sold Young Brothers, Limited and substantially all of HTB's operating assets and changed its name YB Young Brothers, Limited, which was sold on November 10, 1999, was formerly a wholly owned subsidiary of Hawaiian Tug & Barge Corp. iv Forward-looking statements This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and its subsidiaries contain "forward-looking statements," which include statements that are predictive in nature, depend upon or refer to future events or conditions, and/or include words such as "expects", "anticipates", "intends", "plans", "believes", "predicts", "estimates" or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings/losses or growth rates), ongoing business strategies or prospects and possible future actions, which may be provided by management, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about HEI and its subsidiaries, the performance of the industries in which they do business and economic and market factors, among other things. These statements are not guaranties of future performance. Such risks, uncertainties and other important factors could cause actual results to differ materially from those in the forward-looking statements and include, but are not limited to, the following: the effect of international, national and local economic conditions, including the condition of the Hawaii tourist and construction industries and the Hawaii housing market; the effects of weather and natural disasters; product demand and market acceptance risks; increasing competition in the electric utility, banking and international power industries; capacity and supply constraints or difficulties; fuel oil price changes and the continued availability of the electric utilities' energy cost adjustment clauses; new technological developments; federal, state and international governmental and regulatory actions, including changes in laws, rules and regulations applicable to HEI and its subsidiaries, decisions in rate cases and other Public Utilities Commission of the State of Hawaii (PUC) proceedings and on permitting issues, required corrective actions and changes in taxation; the results of financing efforts; the timing and extent of changes in interest rates; the risks inherent in changes in the value of and market for securities available for sale; the timing and extent of changes in foreign currency exchange rates, and the convertibility and availability of foreign currency, particularly in the Philippines and China; the risks inherent in implementing hedging strategies, including the availability and pricing of forward contracts; political and business risks inherent in doing business in developing countries; the ultimate outcome of tax positions taken; the risk that ASB Realty Corporation fails to qualify as a real estate investment trust for federal and state income tax purposes, in which case it would be subject to regular corporate income taxation; the risks inherent in holding for sale financial instruments whose market values may change; and other risks or uncertainties described elsewhere in this report and in other periodic reports previously and subsequently filed by HEI and/or Hawaiian Electric Company, Inc. (HECO) with the Securities and Exchange Commission (SEC). Forward-looking statements speak only as of the date of the report, presentation or filing in which they are made. v PART I - FINANCIAL INFORMATION
Item 1. Financial statements - ----------------------------- Hawaiian Electric Industries, Inc. and subsidiaries Consolidated balance sheets (unaudited) June 30, December 31, (in thousands) 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- Assets - ------ Cash and equivalents........................................................ $ 495,120 $ 215,034 Accounts receivable and unbilled revenues, net.............................. 165,725 191,501 Available-for-sale investment and mortgage/asset-backed securities.......... 2,372,298 164,668 Held-to-maturity investment and mortgage/asset-backed securities............ 81,316 2,105,837 Loans receivable, net....................................................... 2,782,950 3,211,325 Property, plant and equipment, net of accumulated depreciation of $1,282,137 and $1,230,691............................... 2,087,415 2,091,345 Regulatory assets........................................................... 113,813 116,623 Other....................................................................... 316,949 271,508 Goodwill and other intangibles.............................................. 105,305 101,481 - --------------------------------------------------------------------------------------------------------------------------- $8,520,891 $8,469,322 =========================================================================================================================== Liabilities and stockholders' equity - ------------------------------------ Liabilities Accounts payable............................................................ $ 122,851 $ 127,565 Deposit liabilities......................................................... 3,659,645 3,584,646 Short-term borrowings....................................................... 62,483 104,398 Securities sold under agreements to repurchase.............................. 562,046 596,504 Advances from Federal Home Loan Bank........................................ 1,194,252 1,249,252 Long-term debt.............................................................. 1,164,265 1,088,731 Deferred income taxes....................................................... 177,691 147,513 Contributions in aid of construction........................................ 209,774 211,518 Other....................................................................... 263,778 284,891 - --------------------------------------------------------------------------------------------------------------------------- 7,416,785 7,395,018 - --------------------------------------------------------------------------------------------------------------------------- HEI- and HECO-obligated preferred securities of trust subsidiaries directly or indirectly holding solely HEI and HEI-guaranteed and HECO and HECO-guaranteed subordinated debentures.................... 200,000 200,000 Preferred stock of subsidiaries - not subject to mandatory redemption....... 34,406 34,406 Minority interests.......................................................... 1,081 839 - --------------------------------------------------------------------------------------------------------------------------- 235,487 235,245 - --------------------------------------------------------------------------------------------------------------------------- Stockholders' equity Preferred stock, no par value, authorized 10,000 shares; issued: none...... - - Common stock, no par value, authorized 100,000 shares; issued and outstanding: 33,636 shares and 32,991 shares........................ 715,204 691,925 Retained earnings........................................................... 159,369 147,324 Accumulated other comprehensive loss........................................ (5,954) (190) - --------------------------------------------------------------------------------------------------------------------------- 868,619 839,059 - --------------------------------------------------------------------------------------------------------------------------- $8,520,891 $8,469,322 ===========================================================================================================================
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) 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- Revenues Electric utility......................................................... $313,651 $307,845 $632,074 $597,250 Savings bank............................................................. 112,250 108,699 228,004 218,966 International power...................................................... 1,455 (4,163) 2,985 (2,700) Other.................................................................... 1,438 755 598 1,495 - -------------------------------------------------------------------------------------------------------------------------- 428,794 413,136 863,661 815,011 - -------------------------------------------------------------------------------------------------------------------------- Expenses Electric utility......................................................... 263,623 256,230 534,036 494,005 Savings bank............................................................. 94,678 92,384 190,283 183,461 International power...................................................... 1,832 4,423 2,579 6,518 Other.................................................................... 4,338 2,973 6,723 5,699 - -------------------------------------------------------------------------------------------------------------------------- 364,471 356,010 733,621 689,683 - -------------------------------------------------------------------------------------------------------------------------- Operating income (loss) Electric utility......................................................... 50,028 51,615 98,038 103,245 Savings bank............................................................. 17,572 16,315 37,721 35,505 International power...................................................... (377) (8,586) 406 (9,218) Other.................................................................... (2,900) (2,218) (6,125) (4,204) - -------------------------------------------------------------------------------------------------------------------------- 64,323 57,126 130,040 125,328 - -------------------------------------------------------------------------------------------------------------------------- Interest expense--other than savings bank................................ (20,297) (20,156) (40,302) (39,228) Allowance for borrowed funds used during construction.................... 511 722 1,187 1,413 Preferred stock dividends of subsidiaries................................ (501) (506) (1,003) (1,004) Preferred securities distributions of trust subsidiaries................. (4,009) (4,009) (8,018) (8,018) Allowance for equity funds used during construction...................... 955 1,328 2,220 2,597 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes............................................... 40,982 34,505 84,124 81,088 Income taxes............................................................. 15,394 15,409 30,791 33,016 - -------------------------------------------------------------------------------------------------------------------------- Net income............................................................... $ 25,588 $ 19,096 $ 53,333 $ 48,072 ========================================================================================================================== Basic earnings per common share.......................................... $0.76 $0.59 $ 1.60 $ 1.49 ========================================================================================================================== Diluted earnings per common share........................................ $0.76 $0.59 $ 1.59 $ 1.48 ========================================================================================================================== Dividends per common share............................................... $0.62 $0.62 $ 1.24 $ 1.24 ========================================================================================================================== Weighted-average number of common shares outstanding............................................. 33,481 32,403 33,321 32,335 Dilutive effect of stock options and dividend equivalents............................................. 165 139 156 122 - -------------------------------------------------------------------------------------------------------------------------- Adjusted weighted-average shares......................................... 33,646 32,542 33,477 32,457 ========================================================================================================================== Ratio of earnings to fixed charges (SEC method) Excluding interest on ASB deposits.................................. 1.78 1.73 ========================================================================================================================== Including interest on ASB deposits.................................. 1.49 1.48 ==========================================================================================================================
See accompanying "Notes to consolidated financial statements." 2 Hawaiian Electric Industries, Inc. and subsidiaries Consolidated statements of changes in stockholders' equity (unaudited)
Accumulated other Common stock Retained comprehensive ------------------------ (in thousands) Shares Amount earnings income (loss) Total - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000....................... 32,991 $691,925 $147,324 $ (190) $839,059 Comprehensive income: Net income.................................... - - 53,333 - 53,333 Cash flow hedge: Cumulative effect of the adoption of SFAS No. 133, net of tax benefits of $1,031............................... - - - (1,619) (1,619) Derivative losses, net of tax benefits of $1,008............................... - - - (1,582) (1,582) Add: reclassification adjustments, net of tax benefits of $302................. - - - 474 474 Unrealized losses on securities: Cumulative effect of the adoption of SFAS No. 133, net of taxes of $571...... - - - 1,060 1,060 Unrealized losses arising during the period, net of tax benefits of $2,637............................... - - - (4,896) (4,896) Add: reclassification adjustment for losses included in net income, net of tax benefits of $456.................... - - - 845 845 Minimum pension liability adjustment, net of tax benefits of $29................. - - - (46) (46) - -------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss)...................... - - 53,333 (5,764) 47,569 - -------------------------------------------------------------------------------------------------------------------------- Issuance of common stock......................... 645 23,279 - - 23,279 Common stock dividends ($1.24 per share)......... - - (41,288) - (41,288) - -------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 2001........................... 33,636 $715,204 $159,369 $(5,954) $868,619 ========================================================================================================================== Balance, December 31, 1999....................... 32,213 $665,614 $182,251 $ (279) $847,586 Net income....................................... - - 48,072 - 48,072 Issuance of common stock......................... 351 11,482 - - 11,482 Common stock dividends ($1.24 per share)......... - - (40,099) - (40,099) - -------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 2000........................... 32,564 $677,096 $190,224 $ (279) $867,041 ==========================================================================================================================
Net income approximates comprehensive income for the six months ended June 30, 2000. See accompanying "Notes to consolidated financial statements." 3 Hawaiian Electric Industries, Inc. and subsidiaries Consolidated statements of cash flows (unaudited)
Six months ended June 30 2001 2000 - ------------------------------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities Net income........................................................................... $ 53,333 $ 48,072 Adjustments to reconcile net income to net cash provided by operating activities Depreciation of property, plant and equipment.................................. 55,342 54,212 Other amortization............................................................. 8,237 3,516 Provision for loan losses...................................................... 6,000 6,400 Deferred income taxes.......................................................... 34,455 3,055 Allowance for equity funds used during construction............................ (2,220) (2,597) Changes in assets and liabilities Decrease (increase) in accounts receivable and unbilled revenues, net.... 25,776 (12,932) Decrease in accounts payable............................................. (4,714) (1,628) Changes in other assets and liabilities.................................. (56,061) 25,468 - ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities............................................ 120,148 123,566 - ------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Principal repayments on available-for-sale investment securities..................... 890 - Proceeds from sale of investment securities.......................................... 72,003 - Available-for-sale mortgage/asset-backed securities purchased........................ (407,958) - Principal repayments on available-for-sale mortgage/asset-backed securities.......... 232,899 - Proceeds from sale of mortgage/asset-backed securities............................... 309,444 - Held-to-maturity investment securities purchased..................................... - (56,500) Held-to-maturity mortgage/asset-backed securities purchased.......................... - (200,224) Principal repayments on held-to-maturity mortgage/asset-backed securities............ - 126,600 Loans receivable originated and purchased............................................ (474,578) (259,896) Principal repayments on loans receivable............................................. 372,598 221,499 Proceeds from sale of loans.......................................................... 117,445 9,824 Capital expenditures................................................................. (53,701) (56,533) Acquisition of Philippines investment................................................ - (87,500) Other................................................................................ 8,333 12,379 - ------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities.................................. 177,375 (290,351) - ------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Net increase in deposit liabilities.................................................. 74,999 66,054 Net decrease in short-term borrowings with original maturities of three months or (38,920) (21,616) less................................................................................ Repayment of other short-term borrowings............................................. (3,000) - Net increase in retail repurchase agreements......................................... 2,315 4,240 Proceeds from securities sold under agreements to repurchase......................... 485,245 376,841 Repayments of securities sold under agreements to repurchase......................... (520,048) (410,878) Proceeds from advances from Federal Home Loan Bank................................... 194,100 345,031 Principal payments on advances from Federal Home Loan Bank........................... (249,100) (235,500) Proceeds from issuance of long-term debt............................................. 111,580 110,371 Repayment of long-term debt.......................................................... (35,500) (10,500) Preferred securities distributions of trust subsidiaries............................. (8,018) (8,018) Net proceeds from issuance of common stock........................................... 14,947 7,374 Common stock dividends............................................................... (33,225) (36,059) Other................................................................................ (12,812) (5,378) - ------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities.................................. (17,437) 181,962 - ------------------------------------------------------------------------------------------------------------------- Net increase in cash and equivalents................................................. 280,086 15,177 Cash and equivalents, beginning of period............................................ 215,034 199,906 - ------------------------------------------------------------------------------------------------------------------- Cash and equivalents, end of period.................................................. $ 495,120 $ 215,083 ====================================================================================================================
See accompanying "Notes to consolidated financial statements." 4 Hawaiian Electric Industries, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - -------------------------------------------------------------------------------- (1) Basis of presentation - ------------------------- The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HEI's Annual Report on SEC Form 10-K for the year ended December 31, 2000 and the consolidated financial statements and the notes thereto in HEI's Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 2001. In the opinion of HEI's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the Company's financial position as of June 30, 2001 and December 31, 2000, the results of its operations for the three and six months ended June 30, 2001 and 2000, and its cash flows for the six months ended June 30, 2001 and 2000. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. When required, certain reclassifications are made to prior periods' consolidated financial statements to conform to the 2001 presentation. 5 (2) Segment financial information - ---------------------------------- Segment financial information was as follows:
Electric Savings International (in thousands) utility bank power Other Total - ----------------------------------------------------------------------------------------------------------------------------------- Three months ended June 30, 2001 Revenues from external customers..... $ 313,650 $ 112,250 $ 1,455 $ 1,439 $ 428,794 Intersegment revenues................ 1 - - (1) - - ----------------------------------------------------------------------------------------------------------------------------------- Revenues......................... 313,651 112,250 1,455 1,438 428,794 =================================================================================================================================== Income (loss) before income taxes.... 37,157 16,165 (735) (11,605) 40,982 Income taxes (benefit)............... 14,441 5,958 172 (5,177) 15,394 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss)................ 22,716 10,207 (907) (6,428) 25,588 =================================================================================================================================== Six months ended June 30, 2001 Revenues from external customers..... $ 632,071 $ 228,004 $ 2,985 $ 601 $ 863,661 Intersegment revenues................ 3 - - (3) - - ----------------------------------------------------------------------------------------------------------------------------------- Revenues......................... 632,074 228,004 2,985 598 863,661 =================================================================================================================================== Income (loss) before income taxes.... 72,158 34,902 (372) (22,564) 84,124 Income taxes (benefit)............... 28,017 12,820 410 (10,456) 30,791 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss)................ 44,141 22,082 (782) (12,108) 53,333 =================================================================================================================================== Assets (June 30, 2001)............... 2,377,122 5,994,192 49,453 100,124 8,520,891 =================================================================================================================================== Three months ended June 30, 2000 Revenues from external customers..... $ 307,842 $ 108,699 $ (4,163) $ 758 $ 413,136 Intersegment revenues................ 3 - - (3) - - ----------------------------------------------------------------------------------------------------------------------------------- Revenues......................... 307,845 108,699 (4,163) 755 413,136 =================================================================================================================================== Income (loss) before income taxes.... 39,166 14,906 (8,860) (10,707) 34,505 Income taxes (benefit)............... 15,152 5,510 3 (5,256) 15,409 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss)................ 24,014 9,396 (8,863) (5,451) 19,096 =================================================================================================================================== Six months ended June 30, 2000 Revenues from external customers..... $ 597,233 $ 218,962 $ (2,703) $ 1,519 $ 815,011 Intersegment revenues................ 17 4 3 (24) - - ----------------------------------------------------------------------------------------------------------------------------------- Revenues......................... 597,250 218,966 (2,700) 1,495 815,011 =================================================================================================================================== Income (loss) before income taxes.... 78,068 32,689 (9,701) (19,968) 81,088 Income taxes (benefit)............... 30,329 12,072 189 (9,574) 33,016 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss)................ 47,739 20,617 (9,890) (10,394) 48,072 =================================================================================================================================== Assets (June 30, 2000)............... 2,326,249 6,002,445 133,656 80,960 8,543,310 ===================================================================================================================================
Revenues attributed to foreign countries for the periods identified above were not significant. (3) Electric utility subsidiary - -------------------------------- For HECO's consolidated financial information, including its commitments and contingencies, see pages 12 through 29. 6 (4) Savings bank subsidiary - ---------------------------- Selected financial information American Savings Bank, F.S.B. and subsidiaries Consolidated balance sheet data
June 30, December 31, (in thousands) 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- Assets Cash and equivalents............................................................ $ 489,413 $ 207,785 Available-for-sale investment securities........................................ 22,387 107,955 Available-for-sale mortgage/asset-backed securities............................. 2,002,986 56,713 Available-for-sale mortgage/asset-backed securities pledged for repurchase agreements.......................................... 325,216 - Held-to-maturity investment securities.......................................... 81,316 91,723 Held-to-maturity mortgage/asset-backed securities............................... - 1,697,343 Held-to-maturity mortgage/asset-backed securities pledged for repurchase agreements.......................................... - 316,771 Loans receivable, net........................................................... 2,782,950 3,211,325 Other........................................................................... 184,619 178,219 Goodwill and other intangibles.................................................. 105,305 101,481 - ---------------------------------------------------------------------------------------------------------------------------- $5,994,192 $5,969,315 ============================================================================================================================ Liabilities and equity Deposit liabilities............................................................. $3,659,645 $3,584,646 Securities sold under agreements to repurchase.................................. 562,046 596,504 Advances from Federal Home Loan Bank............................................ 1,194,252 1,249,252 Other........................................................................... 110,364 81,277 - ---------------------------------------------------------------------------------------------------------------------------- 5,526,307 5,511,679 Minority interests and preferred stock of subsidiary............................ 3,525 3,412 Preferred stock................................................................. 75,000 75,000 Common stock.................................................................... 242,469 240,386 Retained earnings............................................................... 149,754 138,709 Accumulated other comprehensive income (loss)................................... (2,863) 129 - ---------------------------------------------------------------------------------------------------------------------------- $5,994,192 $5,969,315 ============================================================================================================================
7 American Savings Bank, F.S.B. and subsidiaries Consolidated income statement data
Three months ended Six months ended June 30, June 30, ---------------------------------- ---------------------------------- (in thousands) 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Interest income............................................ $102,591 $103,276 $210,192 $205,784 Interest expense........................................... 56,812 58,334 117,312 114,052 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income........................................ 45,779 44,942 92,880 91,732 Provision for loan losses.................................. (3,000) (3,400) (6,000) (6,400) Other income............................................... 9,659 5,423 17,812 13,182 Operating, administrative and general expenses............. (34,866) (30,650) (66,971) (63,009) - ----------------------------------------------------------------------------------------------------------------------------------- Operating income........................................... 17,572 16,315 37,721 35,505 Minority interests......................................... 55 53 114 110 Income taxes............................................... 5,958 5,510 12,820 12,072 - ----------------------------------------------------------------------------------------------------------------------------------- Income before preferred stock dividends.................... 11,559 10,752 24,787 23,323 Preferred stock dividends.................................. 1,352 1,356 2,705 2,706 - ----------------------------------------------------------------------------------------------------------------------------------- Net income................................................. $ 10,207 $ 9,396 $ 22,082 $ 20,617 ===================================================================================================================================
Disposition of certain debt securities In June 2000, the Office of Thrift Supervision (OTS) advised American Savings Bank, F.S.B. (ASB) that four series of trust certificates, in the original aggregate principal amount of $114 million, were impermissible investments under regulations applicable to federal savings banks. The original trust certificates were purchased through two brokers and represented (i) the right to receive the principal amount of the trust certificates at maturity from an Aaa-rated swap counterparty (principal swap) and (ii) the right to receive the cash flow received on subordinated notes (income class notes). ASB recognized interest income on these securities on a cash basis. In 2000, ASB reclassified these trust certificates from held-to-maturity status to available-for-sale status in its financial statements and recognized a $3.8 million net loss on the writedown of these securities to their then-current estimated fair value. In the first six months of 2001, ASB recognized an additional $4.0 million net loss on the writedown of three series of these trust certificates to their then-current estimated fair value. The OTS directed ASB to dispose of the securities. ASB demanded that the brokers who sold the securities agree to rescind the transactions. One broker, through whom ASB purchased one issue of trust certificates for approximately $30 million, arranged a transaction which closed in April 2001 for the disposition of that issue for an amount approximating ASB's original purchase price. ASB filed a lawsuit against the broker through whom the other three issues of trust certificates were purchased, seeking rescission and other remedies, including recovery of any losses ASB may incur as a result of its purchase and ownership of these trust certificates. Subsequently, ASB terminated the principal swaps on the three issues and the related income class notes were sold by the swap counterparty to HEI as the only, and thus highest, bidder. In May 2001, HEI purchased two series of the income class notes for approximately $21 million and, in July 2001, HEI purchased the third series of income class note for approximately $7 million. HEI has recorded interest income on the two income class notes purchased in May 2001 under the effective yield method. HEI could incur additional losses from the ultimate disposition of these income class notes, or if there is an "other-than-temporary" decline in their fair value. ASB has agreed to indemnify HEI against such further losses, but the indemnity obligation is payable solely out of any recoveries achieved in the litigation against the broker who sold the related trust certificates to ASB. 8 Reclassification of certain debt securities On January 1, 2001, ASB reclassified approximately $2 billion of the securities it owns from held-to-maturity to available-for-sale. See note (7), "Recent accounting pronouncements-Derivative instruments and hedging activities." ASB Realty Corporation In March 1998, ASB formed a subsidiary, ASB Realty Corporation, which elects to be taxed as a real estate investment trust. This reorganization has reduced HEIDI's and ASB's state income taxes by $1.7 million for the six months ended June 30, 2001 and $8.5 million for prior years. Although the State of Hawaii Department of Taxation has challenged the tax treatment of this reorganization, ASB believes that its tax position is proper. (5) International power subsidiary - ----------------------------------- China project In 1998 and 1999, HEI Power Corp. and its subsidiaries (HEIPC Group) acquired what is now a 75% interest in a joint venture, Baotou Tianjiao Power Co., Ltd., formed to design, construct, own, operate and manage a 200 megawatt (MW) (net) coal-fired power plant to be located in Inner Mongolia, People's Republic of China. The power plant is intended to be built "inside the fence" for Baotou Iron & Steel (Group) Co., Ltd. (Baotou Steel). The project has received approval from both the national and Inner Mongolia governments. Construction had commenced and the first of the two units had been expected to be online by early 2001, and the second six months later. However, the Inner Mongolia Power Company (IMPC), which owns and operates the electricity grid in Inner Mongolia, has caused a delay of the project by failing to enter into a satisfactory interconnection arrangement with the joint venture. The IMPC is seeking to limit the joint venture's load, which is inconsistent with the terms of the project approvals and the power purchase contract. The HEIPC Group does not believe that it is prudent to continue construction without an interconnection arrangement whose terms are consistent with the project as approved by the national and Inner Mongolia governments. Under the power purchase contract between the joint venture and Baotou Steel, it is Baotou Steel's responsibility to secure an interconnection arrangement with IMPC. The HEIPC Group has continued to work with Baotou Steel and IMPC to secure a satisfactory interconnection arrangement. If such an arrangement is not obtained, the HEIPC Group intends to withdraw from the project (including the HEIPC Group's commitment to invest up to an additional $86 million toward the project, subject to certain conditions) and seek recovery of its investment of approximately $25 million to date. Management cannot predict the outcome of such efforts, nor estimate its impairment loss, if any, at this time. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Philippines investment On March 7, 2000, an indirect subsidiary of HEI Power Corp. (HEIPC) acquired a 50% interest in EPHE Philippines Energy Company, Inc. (EPHE), an indirect subsidiary of El Paso Energy Corporation, for $87.5 million plus up to an additional $6 million of payments contingent upon future earnings of East Asia Power Resources Corporation (EAPRC). EPHE then owned approximately 91.7% of the common shares of EAPRC, a Philippines holding company primarily engaged in the electric generation business in Manila and Cebu through its direct and indirect subsidiaries, using land and barge-based generating facilities fired by bunker fuel oil, with total installed capacity of approximately 390 MW. The HEIPC Group accounted for its investment in EPHE under the equity method of accounting. The Company evaluates equity investments when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Due to the equity losses of $24.1 million incurred in 2000 from the investment in EPHE and the changes in the political and economic conditions related to the investment (primarily devaluation of the Philippine peso and increase in fuel oil prices), management determined that the investment in EAPRC was impaired and, on December 31, 2000, wrote off the remaining $65.7 million investment in EAPRC based upon management's estimate of fair value using anticipated cash flows discounted at a rate commensurate with the risks involved. On December 31, 2000, the Company also accrued a potential payment obligation under an HEI guaranty of $10 million of EAPRC loans. In the first quarter of 2001, HEI was partially 9 released from the guaranty obligation and the Company reversed $1.5 million ($0.9 million, net of income taxes) of the $10 million accrued on December 31, 2000. El Paso Energy Corporation has demanded payment of the remaining guaranty. (6) Cash flows - --------------- Supplemental disclosures of cash flow information For the six months ended June 30, 2001 and 2000, the Company paid interest amounting to $146.9 million and $140.9 million, respectively. For the six months ended June 30, 2001 and 2000, the Company paid income taxes amounting to $20.4 million and $11.8 million, respectively. Supplemental disclosures of noncash activities From March 1998 to March 2000, HEI had acquired for cash its common shares in the open market to satisfy the requirements of the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP). In April 2000, HEI recommenced issuing new common shares under the HEI DRIP. Under the HEI DRIP, common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to $8.1 million and $4.0 million for the six months ended June 30, 2001 and 2000, respectively. ASB received $392.8 million in mortgage/asset-backed securities in exchange for loans in the six months ended June 30, 2001. (7) Recent accounting pronouncements - ------------------------------------- Derivative instruments and hedging activities The Company adopted the Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, on January 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The adoption of SFAS No. 133 did not have a material impact on the Company's financial condition, net income or liquidity. SFAS No. 133, as amended, allows the reclassification of certain debt securities from held-to-maturity to either available-for-sale or trading at the time of adoption. On January 1, 2001, ASB reclassified approximately $2 billion in mortgage/asset-backed securities and $13 million in investment securities having estimated fair values of approximately $2 billion and $13 million, respectively, from held-to-maturity to available-for-sale. This reclassification gives ASB the ability to better manage its risks (including interest rate, liquidity and credit risks). At January 1, 2001, the gross unrealized gain on such securities, net of income taxes, was approximately $1 million, and was included in accumulated other comprehensive income within stockholders' equity. HEI has entered into two swap agreements to manage its exposure to interest rate risk. In general, HEI issues primarily fixed-rate long-term debt to balance the short-term debt, which is variable by nature. In April 2000, during a period of rising interest rates, HEI was able to issue $100 million of variable-rate medium-term notes and simultaneously enter into a swap agreement, which effectively fixed the interest rate on the $100 million of debt at 7.995% until maturity in April 2003. On January 1, 2001, HEI designated this swap as a cash flow hedge, which hedges the variability of forecasted cash flows attributable to interest rate risk. All conditions were met to assume no ineffectiveness in the hedging relationship. Thus, this cash flow hedge is accounted for under the shortcut method by recording the value of the swap on the balance sheet as either an asset or liability with a corresponding offset recorded in accumulated other comprehensive income within stockholders' equity, net of tax. HEI recorded the after-tax transition amount associated with establishing the fair value of the swap on the balance sheet as a reduction of $1.6 million in accumulated other comprehensive income. 10
(in thousands) Summary of transition adjustment, January 1, 2001 Balance sheet - liabilities and stockholders' equity Deferred income taxes $(1,031) Other liabilities 2,650 Accumulated other comprehensive loss (1,619) ------------ $ - ============
In June 2001, during a period of falling interest rates, HEI had the opportunity to lower its interest payments on the $100 million of medium-term notes and entered into a swap agreement which changed the $100 million of effectively 7.995% fixed-rate debt to variable-rate debt (adjusted quarterly based on changes in the London InterBank Offered Rate indices). The initial interest rate after entering into this swap was 7.445%. HEI designated this swap as a fair value hedge, which hedges the variability of the fair value of the debt attributable to interest rate risk. All conditions were met to assume no ineffectiveness in the hedging relationship. Thus, this fair value hedge is accounted for under the shortcut method by recording the value of the swap on the balance sheet as either an asset or liability with a corresponding offset recorded to mark the debt to fair value. Business combinations, goodwill and other intangible assets In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for business combinations initiated or completed after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually (effective January 1, 2002 for the Company). SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121. On January 1, 2002, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first quarter of 2002. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first quarter of 2002. Any impairment loss will be measured as of January 1, 2002 and recognized as the cumulative effect of a change in accounting principle in the first quarter of 2002. As of June 30, 2001, the Company's unamortized goodwill was $85 million and unamortized identifiable intangible assets were $20 million, all of which will be subject to the transition provisions of SFAS Nos. 141 and 142. Amortization expense related to goodwill was $4.8 million for 2000 and $2.4 million for the six months ended June 30, 2001. The Company will need to undertake a detailed analysis in order to comply with adopting SFAS Nos. 141 and 142 and management will not be able to reasonably estimate the impact of adoption on the Company's financial statements, including whether there will be any transitional impairment losses, until the analysis has been performed. (8) Commitments and contingencies - ---------------------------------- See note (4), "Savings bank subsidiary," and note (5), "International power subsidiary," above and note (3), "Commitments and contingencies," in HECO's "Notes to consolidated financial statements." 11 Hawaiian Electric Company, Inc. and subsidiaries Consolidated balance sheets (unaudited)
June 30, December 31, (in thousands, except par value) 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- Assets Utility plant, at cost Land................................................................................. $ 29,489 $ 31,037 Plant and equipment.................................................................. 3,026,328 2,974,153 Less accumulated depreciation........................................................ (1,216,326) (1,170,184) Plant acquisition adjustment, net.................................................... 380 406 Construction in progress............................................................. 151,230 157,183 - --------------------------------------------------------------------------------------------------------------------------- Net utility plant.............................................................. 1,991,101 1,992,595 - --------------------------------------------------------------------------------------------------------------------------- Current assets Cash and equivalents................................................................. 933 1,534 Customer accounts receivable, net.................................................... 79,330 88,546 Accrued unbilled revenues, net....................................................... 54,590 64,020 Other accounts receivable, net....................................................... 2,433 5,426 Fuel oil stock, at average cost...................................................... 37,099 37,124 Materials and supplies, at average cost.............................................. 20,229 16,787 Prepayments and other................................................................ 38,486 4,697 - --------------------------------------------------------------------------------------------------------------------------- Total current assets........................................................... 233,100 218,134 - --------------------------------------------------------------------------------------------------------------------------- Other assets Regulatory assets.................................................................... 113,813 116,623 Other................................................................................ 39,108 41,170 - --------------------------------------------------------------------------------------------------------------------------- Total other assets............................................................. 152,921 157,793 - --------------------------------------------------------------------------------------------------------------------------- $ 2,377,122 $ 2,368,522 =========================================================================================================================== Capitalization and liabilities Capitalization Common stock, $6 2/3 par value, authorized 50,000 shares; outstanding 12,806 shares.......................................... $ 85,387 $ 85,387 Premium on capital stock............................................................. 295,740 295,655 Retained earnings.................................................................... 488,111 443,970 - --------------------------------------------------------------------------------------------------------------------------- Common stock equity............................................................ 869,238 825,012 Cumulative preferred stock - not subject to mandatory redemption..................... 34,293 34,293 HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures......................... 100,000 100,000 Long-term debt....................................................................... 679,412 667,731 - --------------------------------------------------------------------------------------------------------------------------- Total capitalization........................................................... 1,682,943 1,627,036 - --------------------------------------------------------------------------------------------------------------------------- Current liabilities Short-term borrowings-nonaffiliates.................................................. 39,282 104,398 Short-term borrowings-affiliate...................................................... 39,602 8,764 Accounts payable..................................................................... 50,669 71,698 Interest and preferred dividends payable............................................. 11,373 10,483 Taxes accrued........................................................................ 76,065 78,186 Other................................................................................ 20,257 10,559 - --------------------------------------------------------------------------------------------------------------------------- Total current liabilities...................................................... 237,248 284,088 - --------------------------------------------------------------------------------------------------------------------------- Deferred credits and other liabilities Deferred income taxes................................................................ 139,272 137,066 Unamortized tax credits.............................................................. 47,353 47,603 Other................................................................................ 60,532 61,211 - --------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities................................... 247,157 245,880 - --------------------------------------------------------------------------------------------------------------------------- Contributions in aid of construction.................................................... 209,774 211,518 - --------------------------------------------------------------------------------------------------------------------------- $ 2,377,122 $ 2,368,522 ===========================================================================================================================
See accompanying "Notes to consolidated financial statements." 12 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) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- Operating revenues......................................... $312,455 $306,483 $629,748 $ 594,904 - --------------------------------------------------------------------------------------------------------------------------- Operating expenses Fuel oil................................................... 82,085 91,092 170,330 166,247 Purchased power............................................ 83,481 70,444 165,397 140,670 Other operation............................................ 30,096 27,464 59,870 55,205 Maintenance................................................ 13,015 13,622 28,212 26,155 Depreciation............................................... 25,363 24,330 49,972 48,664 Taxes, other than income taxes............................. 29,426 29,005 59,917 56,366 Income taxes............................................... 14,362 15,201 27,966 30,394 - --------------------------------------------------------------------------------------------------------------------------- 277,828 271,158 561,664 523,701 - --------------------------------------------------------------------------------------------------------------------------- Operating income........................................... 34,627 35,325 68,084 71,203 - --------------------------------------------------------------------------------------------------------------------------- Other income Allowance for equity funds used during construction........ 955 1,328 2,220 2,597 Other, net................................................. 960 1,138 1,937 1,713 - --------------------------------------------------------------------------------------------------------------------------- 1,915 2,466 4,157 4,310 - --------------------------------------------------------------------------------------------------------------------------- Income before interest and other charges................... 36,542 37,791 72,241 75,513 - --------------------------------------------------------------------------------------------------------------------------- Interest and other charges Interest on long-term debt................................. 10,072 9,920 20,001 19,852 Amortization of net bond premium and expense............... 507 525 1,037 967 Other interest charges..................................... 1,340 1,635 3,413 3,532 Allowance for borrowed funds used during construction...... (511) (722) (1,187) (1,413) Preferred stock dividends of subsidiaries.................. 229 230 458 458 Preferred securities distributions of trust subsidiaries.............................................. 1,919 1,919 3,838 3,838 - --------------------------------------------------------------------------------------------------------------------------- 13,556 13,507 27,560 27,234 - --------------------------------------------------------------------------------------------------------------------------- Income before preferred stock dividends of HECO............ 22,986 24,284 44,681 48,279 Preferred stock dividends of HECO.......................... 270 270 540 540 - --------------------------------------------------------------------------------------------------------------------------- Net income for common stock................................ $ 22,716 $ 24,014 $ 44,141 $ 47,739 =========================================================================================================================== Ratio of earnings to fixed charges (SEC method)........... 3.44 3.64 ===========================================================================================================================
Hawaiian Electric Company, Inc. and subsidiaries Consolidated statements of retained earnings (unaudited)
Three months ended Six months ended June 30, June 30, ------------------------ ------------------------ (in thousands) 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- Retained earnings, beginning of period..................... $465,395 $434,979 $443,970 $425,206 Net income for common stock................................ 22,716 24,014 44,141 47,739 Common stock dividends..................................... - (17,794) - (31,746) - ----------------------------------------------------------------------------------------------------------------------- Retained earnings, end of period........................... $488,111 $441,199 $488,111 $441,199 =======================================================================================================================
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. 13 Hawaiian Electric Company, Inc. and subsidiaries Consolidated statements of cash flows (unaudited)
Six months ended June 30 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities Income before preferred stock dividends of HECO................................... $ 44,681 $ 48,279 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Depreciation of property, plant and equipment............................... 49,972 48,664 Other amortization.......................................................... 6,373 2,149 Deferred income taxes....................................................... 2,222 4,834 Tax credits, net............................................................ 534 678 Allowance for equity funds used during construction......................... (2,220) (2,597) Changes in assets and liabilities Decrease (increase) in accounts receivable............................. 12,209 (10,674) Decrease (increase) in accrued unbilled revenues....................... 9,430 (861) Decrease (increase) in fuel oil stock.................................. 25 (2,529) Increase in materials and supplies..................................... (3,442) (162) Increase in regulatory assets.......................................... (1,119) (1,181) Increase (decrease) in accounts payable................................ (21,029) 5,045 Changes in other assets and liabilities................................ (15,459) (5,171) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities......................................... 82,177 86,474 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Capital expenditures.............................................................. (51,072) (54,083) Contributions in aid of construction.............................................. 3,650 4,543 Payments on notes receivable...................................................... - 138 - ----------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities............................................. (47,422) (49,402) - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Common stock dividends............................................................ - (31,746) Preferred stock dividends......................................................... (540) (540) Preferred securities distributions of trust subsidiaries.......................... (3,838) (3,838) Proceeds from issuance of long-term debt.......................................... 11,580 10,371 Net decrease in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less............................... (31,283) (3,594) Repayment of other short-term borrowings.......................................... (3,000) - Other............................................................................. (8,275) (4,037) - ----------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities............................................. (35,356) (33,384) - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents................................... (601) 3,688 Cash and equivalents, beginning of period......................................... 1,534 1,966 - ----------------------------------------------------------------------------------------------------------------------------- Cash and equivalents, end of period............................................... $ 933 $ 5,654 =============================================================================================================================
See accompanying "Notes to consolidated financial statements." 14 Hawaiian Electric Company, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - -------------------------------------------------------------------------------- (1) Basis of presentation - -------------------------- The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HECO's Annual Report on SEC Form 10-K for the year ended December 31, 2000 and the consolidated financial statements and the notes thereto in HECO's Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 2001. In the opinion of HECO's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the financial position of HECO and its subsidiaries as of June 30, 2001 and December 31, 2000, the results of their operations for the three and six months ended June 30, 2001 and 2000, and their cash flows for the six months ended June 30, 2001 and 2000. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. When required, certain reclassifications are made to prior periods' consolidated financial statements to conform to the 2001 presentation. (2) Cash flows - --------------- Supplemental disclosures of cash flow information For the six months ended June 30, 2001 and 2000, HECO and its subsidiaries paid interest amounting to $22.8 million and $19.9 million, respectively. For the six months ended June 30, 2001 and 2000, HECO and its subsidiaries paid income taxes amounting to $15.2 million and $11.6 million, respectively. Supplemental disclosure of noncash activities The allowance for equity funds used during construction, which was charged to construction in progress as part of the cost of electric utility plant, amounted to $2.2 million and $2.6 million for each of the six months ended June 30, 2001 and 2000, respectively. (3) Commitments and contingencies - ---------------------------------- HELCO power situation In 1991, Hawaii Electric Light Company, Inc. (HELCO) began planning to meet increased electric generation demand forecasted for 1994. HELCO's plans were to install at its Keahole power plant two 20 MW combustion turbines (CT-4 and CT- 5), followed by an 18 MW heat steam recovery generator (ST-7), at which time these units would be converted to a 56 MW (net) dual-train combined-cycle unit. In January 1994, the PUC approved expenditures for CT-4, which HELCO had planned to install in late 1994. The timing of the installation of HELCO's phased units has been revised on several occasions due to delays in obtaining an amendment of a land use permit from the Hawaii Board of Land and Natural Resources (BLNR) and an air permit from the Department of Health of the State of Hawaii (DOH) and the U.S. Environmental Protection Agency (EPA) for the Keahole power plant site. The delays are also attributable to lawsuits, claims and petitions filed by independent power producers (IPPs) and other parties challenging these permits and objecting to the expansion, alleging among other things that (1) 15 operation of the expanded Keahole site would not comply with land use regulations (including noise standards) and HELCO's land patent; (2) HELCO cannot operate the plant within current air quality standards; (3) HELCO could alternatively purchase power from IPPs to meet increased electric generation demand; and (4) HELCO's land use entitlement expired in April 1999 and HELCO's request for an extension must be heard in a contested case hearing. Recent developments regarding HELCO's default entitlement may have a significant impact on whether HELCO will be able to complete the construction, which was started at Keahole. The contested case hearing on HELCO's request for an extension of the three-year construction deadline has been scheduled to begin on September 24, 2001. On July 3, 2001, the Third Circuit Court of the State of Hawaii (the Circuit Court) issued an order granting a motion for post-judgment relief and directed the individual requesting the motion to file with the Supreme Court a motion to remand the default entitlement judgment back to the Circuit Court. The individual filed that motion on July 10, 2001. See "Land use permit amendment," below, for further details. For a detailed description and a partial history of the Keahole Power Plant situation, see "HELCO power situation" on pages 9 to 17 of HEI's Annual Report on SEC Form 10-K for the year ended December 31, 2000. Recent developments in this situation are described below. Land use permit amendment. The Circuit Court ruled in 1997 that because the BLNR - ------------------------- had failed to render a valid decision on HELCO's application to amend its land use permit before the statutory deadline in April 1996, HELCO was entitled to use its Keahole site for the expansion project (HELCO's "default entitlement"). Final judgments of the Circuit Court related to this ruling are on appeal to the Hawaii Supreme Court, which in 1998 denied motions to stay the Circuit Court's final judgment pending resolution of the appeal. The Circuit Court's final judgment provided that HELCO must comply with the conditions in its application and with the standard land use conditions insofar as those conditions were not inconsistent with HELCO's default entitlement. Subsequent to entry of the Circuit Court's final judgment, there have been numerous proceedings before the Circuit Court and the BLNR in which certain parties (a) have sought determinations of what conditions apply to HELCO's default entitlement, (b) have claimed that HELCO has not complied with applicable land use conditions and that its default entitlement should thus be forfeited, (c) have claimed that HELCO will not be able to operate the proposed plant without violating applicable land use conditions and provisions of Hawaii's Clean Air Act and Noise Pollution Act and (d) have sought orders enjoining any further construction at the Keahole site. Although there has not been a final resolution of these claims, to date there have been four rulings on these claims which may adversely affect HELCO's ability to construct and operate CT-4 and CT-5. First, based on a change by the DOH in its interpretation of the noise rules it promulgated under the Hawaii Noise Pollution Act, the Circuit Court has ruled that a 55dBA daytime and 45dBA nighttime noise standard, rather than the previously applied 70dBA noise standard, applies to HELCO's plant, but has left enforcement of the ruling to the DOH. The DOH has not taken any formal enforcement action. If and when the DOH actually enforces the stricter standards, HELCO may, among other things, assert that the noise regulations are unconstitutional as applied. Meanwhile, while not waiving possible claims or defenses that it might have against the DOH, HELCO has installed noise mitigation measures on the existing diesel units at Keahole, has obtained from the Department of Land and Natural Resources of the State of Hawaii (DLNR) approval to install an additional silencer on CT-2 and is exploring possible noise mitigation measures, which can be implemented if necessary, for CT-4 and CT-5. Second, in September 2000, the Circuit Court orally ruled that, absent a legal or equitable extension properly authorized by the BLNR, the three-year construction period in the standard land use conditions of the DLNR expired in April 1999. In October 2000, HELCO filed with the BLNR a request for extension of the construction deadline and, in January 2001, the BLNR sent the request to a contested case hearing. A hearings officer has been selected and the hearing is scheduled in September 2001. Third, in December 2000, the Circuit Court granted a motion to stay further construction until extension of the construction deadline is obtained from the BLNR, at which time the Court would consider lifting the stay. Fourth, on March 28, 2001, an individual plaintiff filed a motion for post- judgment relief and a subpoena to require a former BLNR member to appear before the Circuit Court. When the hearing on this motion was postponed from 16 April 23, 2001 to May 7, 2001, the individual plaintiff did not issue another subpoena to the former BLNR member. Citing testimony in support of the project given by the former BLNR member at a March 6, 2001 public hearing on HELCO's air permit, the individual alleged that the testimony established grounds to conclude that the former BLNR member was unduly influenced by evidence of the need for the project that the BLNR had improperly admitted during the contested case hearing in 1995-1996 and that the BLNR member voted to approve HELCO's application on that basis. The individual, therefore, requested the Circuit Court to order that: (1) the agency record be supplemented by adding the transcript of the former BLNR member's testimony; (2) the plaintiff be allowed an opportunity to argue the prejudicial effect of HELCO's submission of evidence on the need for the project on her right to due process; (3) the plaintiff's motion be granted and the Circuit Court thereby: (a) vacate its February 11, 1998 judgment denying her cross-appeal; (b) grant her cross-appeal; (c) suspend operation of the default entitlement and the proceedings now before the BLNR; (d) certify the remaining issues in the current appeal to the Supreme Court as being issues for interlocutory appeal; and (e) certify its order in granting her motion to the Supreme Court. A hearing on this motion was held on May 7, 2001, with additional briefing on the issues submitted May 18, 2001. On July 3, 2001, the Circuit Court issued an order and directed the individual to file with the Supreme Court a motion to remand the February 11, 1998 default entitlement judgment back to the Circuit Court "in order that [the Circuit Court] may make a further determination." Attached to the order was a "Request for Recall of Judgment" in which the Circuit Court made certain findings of fact and further stated that it "has not determined the remedy that would be appropriate under the circumstances and reserves its disposition of said motion" until the case is remanded. The individual filed the motion for remand with the Supreme Court on July 10, 2001 and, as directed by the Circuit Court, attached a copy of the "Request for Recall of Judgment." On July 13, 2001, HELCO filed a motion for reconsideration of the Circuit Court's order. A hearing was held on August 6, 2001 and the judge took the matter under advisement. In light of the motion for reconsideration, HELCO also filed for an extension of time to file its memorandum in opposition to the motion for remand, and the Supreme Court granted the extension on July 16, 2001. The memorandum in opposition is now due on August 31, 2001. Air permit. In 1997, the DOH issued a final air permit for the Keahole expansion - ---------- project. Nine appeals of the issuance of the permit were filed with the EPA's Environmental Appeals Board (EAB). In November 1998, the EAB denied several of the appeals, but directed the DOH to reopen the permit. The EPA and DOH required additional data collection, which was satisfactorily completed in April 2000. A final air permit was reissued by the DOH in August 2001. HELCO hopes to reach a final resolution of any appeals, if any, to the EAB as expeditiously as possible. IPP Complaints. Three IPPs--Kawaihae Cogeneration Partners (KCP), Enserch - -------------- Development Corporation (Enserch) and Hilo Coast Power Company (HCPC)--filed separate complaints with the PUC in 1993, 1994 and 1999, respectively, alleging that they are each entitled to a power purchase agreement (PPA) to provide HELCO with additional capacity. KCP and Enserch each claimed they would be a substitute for HELCO's planned expansion of Keahole. In 1994 and 1995, the PUC allowed HELCO to pursue construction of and commit expenditures for CT-5 and ST-7, but noted that such costs are not to be included in rate base until the project is installed and "is used and useful for utility purposes." The PUC also ordered HELCO to continue negotiating with the IPPs and held that the facility to be built should be the one that can be most expeditiously put into service at "allowable cost." The Enserch and HCPC complaints have been resolved by HELCO's entry into two PPAs, which were necessary to ensure reliable service to customers on the island of Hawaii but, in the opinion of management, do not supplant the need for CT-4 and CT-5. In October 1999, the Circuit Court ruled that the lease for KCP's proposed plant site was invalid. Based on this ruling and for other reasons, management believes that KCP's pending proposal for a PPA is not viable and, therefore, will not impact the need for CT-4 and CT-5. Management's evaluation; costs incurred. Management believes that the issues - --------------------------------------- surrounding the amendment to the land use permit and applicable land use conditions, the air permit, the IPP complaints and related matters will 17 be satisfactorily resolved and will not prevent HELCO from ultimately constructing CT-4 and CT-5. Management currently expects that the BLNR, after holding a contested case hearing, will extend the construction period for the plant expansion and that installation of CT-4 and CT-5 will begin when the final air permit is effective (i.e., after resolution of any EAB appeals), with an expedited in-service date in the second half of 2002. There can be no assurances, however, that these results will be achieved or that this time frame will be met. In addition, with regard to the order granting motion for post- judgment relief and the motion for remand, because the Circuit Court has not yet determined the possible remedies, if any, it may impose if the judgment is remanded to it by the Supreme Court, it is too soon to evaluate the likelihood of an adverse impact of these actions on the Keahole project. The recovery of costs relating to CT-4 and CT-5 are subject to the rate-making process governed by the PUC. Management believes no adjustment to costs incurred to put CT-4 and CT-5 into service is required as of June 30, 2001. If it becomes probable that CT-4 and/or CT-5 will not be installed, however, HELCO may be required to write-off a material portion of the costs incurred in its efforts to put these units into service. As of June 30, 2001, HELCO's costs incurred in its efforts to put CT-4 and CT-5 into service and to support existing units (less costs the PUC has permitted to be transferred to plant-in-service for pre-air permit facilities) amounted to approximately $74 million, including $29 million for equipment and material purchases, $25 million for planning, engineering, permitting, site development and other costs and $20 million for an allowance for funds used during construction (AFUDC). Although management believes it has acted prudently with respect to the Keahole project, effective December 1, 1998, HELCO discontinued the accrual of AFUDC on CT-4 and CT-5 (which would have been approximately $0.5 million after tax per month) due in part to the delays through that date and the potential for further delays. HELCO has also deferred plans for ST-7 to 2005. No costs for ST-7 are included in construction in progress. Competition proceeding On December 30, 1996, the PUC instituted a proceeding to identify and examine the issues surrounding electric competition and to determine the impact of competition on the electric utility infrastructure in Hawaii. After a collaborative process involving the 19 parties to the proceeding, final statements of position were prepared by several of the parties and submitted to the PUC in October 1998. HECO's position is that retail competition is not feasible in Hawaii, but that some of the benefits of competition can be achieved through competitive bidding for new generation, performance-based rate-making (PBR) and innovative pricing provisions. The other parties to the proceeding advanced numerous other proposals in their statements of position. In January 2000, the PUC submitted a status report on its investigation to the legislature. In the report, the PUC stated that competitive bidding for new power supplies (i.e., wholesale generation competition) is a logical first step to encourage competition in the state's electric industry and that it plans to proceed with an examination of the feasibility of competitive bidding. The PUC also indicated in the report its plans to review specific policies to encourage renewable energy resources in the power generation mix. The report states that "further steps" by the PUC "will involve the development of specific policies to encourage wholesale competition and the continuing examination of other areas suitable for the development of competition." HECO cannot predict what the ultimate outcome of the proceeding will be or which (if any) of the proposals advanced in the proceeding will be implemented or whether the parties will seek and obtain state legislative action on their proposals. In May 1999, the PUC approved HECO's standard form contract for customer retention that allows HECO to provide a rate option for customers who would otherwise reduce their energy use from HECO's system by using energy from a nonutility generator. Based on HECO's current rates, the standard form contract provides a 2.77% and an 11.27% discount on base energy rates for "Large Power" and "General Service Demand" customers, respectively. In March 2000, the PUC approved a similar standard form contract for HELCO which, based on HELCO's current rates, provides a 10.00% discount on base energy rates for "Large Power" and "General Service Demand" customers. In December 1999, HECO, HELCO and Maui Electric Company, Limited (MECO) filed an application with the PUC seeking permission to implement PBR in future rate cases. The proposed PBR would have allowed adjustments in 18 the electric utilities' rates (for up to five years after a rate case) based on an index-based price cap, an earnings sharing mechanism and a service quality mechanism. In early 2001, the PUC dismissed the electric utilities' PBR proposal without prejudice, indicating it declines at this time to change its current cost of service/rate of return methodology for determining electric utility rates. Environmental regulation In early 1995, the DOH initially advised HECO, Hawaiian Tug & Barge Corp. (HTB), Young Brothers, Limited (YB) and others that it was conducting an investigation to determine the nature and extent of actual or potential releases of hazardous substances, oil, pollutants or contaminants at or near Honolulu Harbor. The DOH issued letters in December 1995, indicating that it had identified a number of parties, including HECO, HTB and YB, who appear to be potentially responsible for the contamination and/or operate their facilities upon contaminated land. The DOH met with these identified parties in January 1996 and certain of the identified parties (including HECO, Chevron Products Company, the State of Hawaii Department of Transportation Harbors Division and others) formed a Honolulu Harbor Work Group (Work Group). Effective January 30, 1998, the Work Group and the DOH entered into a voluntary agreement and scope of work to determine the nature and extent of any contamination, the responsible parties and appropriate remedial actions. In 1999, the Work Group submitted reports to the DOH presenting environmental conditions and recommendations for additional data gathering to allow for an assessment of the need for risk-based corrective action. The Work Group also engaged a consultant who identified 27 additional potentially responsible parties (PRPs) who were not members of the Work Group, including YB. Under the terms of the agreement for the sale of YB, HEI and The Old Oahu Tug Service, Inc. (TOOTS, formerly HTB) have certain indemnity obligations, including obligations with respect to the Honolulu Harbor investigation. In response to the DOH's request for technical assistance, the EPA became involved with the harbor investigation in June 2000. In August 2000, the Work Group, the DOH, the EPA and the U.S. Coast Guard met to discuss the Conceptual Site Model, how to proceed and other matters. In 2000, the DOH issued notices to over 20 other PRPs, including YB, regarding the ongoing investigation in the Honolulu Harbor area. A new voluntary agreement and a Joint Defense Agreement were signed by the parties in the Work Group and some of the new PRPs, including Phillips Petroleum, but not YB. The Work Group agreed to fund remediation work using an interim cost allocation method, which generally allocates costs based upon a three-tiered approach. HECO falls in the middle tier. In July 2001, the EPA issued a Notice of Federal Interest under the Oil Pollution Act of 1990 to HECO, YB and others. In the notice the EPA says, "Immediate subsurface investigation and assessment must be conducted to delineate the extent of contamination at the site." Further, the EPA, in coordination with the DOH, is preparing to perform the work itself, unless the Work Group or a subgroup of the Work Group is prepared to perform this work on a site-wide basis in a manner and on a schedule acceptable to both the EPA and DOH. On July 26, 2001, the Work Group notified the EPA that it intends to perform the immediate subsurface investigation and assessment. The scope of the investigation and assessment has not yet been determined. Because the scope of the immediate investigation and assessment remains to be determined and the extent of remedial or cleanup work is unknown, management cannot predict at this time the costs to be incurred by the Company or HECO. Certain of the costs incurred may be claimed and covered under insurance policies, but such coverage is not determinable at this time. (4) HECO-obligated mandatorily redeemable preferred securities of trust - ----------------------------------------------------------------------- subsidiaries holding solely HECO and HECO-guaranteed subordinated debentures ---------------------------------------------------------------------------- In March 1997, HECO Capital Trust I (Trust I), a grantor trust and a wholly owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO- Obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997 (1997 trust preferred securities) with an aggregate liquidation preference of $50 million and (ii) to HECO, common securities with a liquidation preference of approximately $1.55 million. Proceeds from the sale of the 1997 trust preferred securities and the common securities were used by Trust I to purchase 8.05% Junior Subordinated 19 Deferrable Interest Debentures, Series 1997 (1997 junior deferrable debentures) issued by HECO in the principal amount of $31.55 million and issued by each of MECO and HELCO in the respective principal amounts of $10 million. The 1997 junior deferrable debentures, which bear interest at 8.05% and mature on March 27, 2027, together with the subsidiary guarantees (pursuant to which the obligations of MECO and HELCO under their respective debentures are fully and unconditionally guaranteed by HECO), are the sole assets of Trust I. The 1997 trust preferred securities must be redeemed at the maturity of the underlying debt on March 27, 2027, which maturity may be shortened to a date no earlier than March 27, 2002 or extended to a date no later than March 27, 2046, and are not redeemable at the option of the holders, but may be redeemed by Trust I, in whole or in part, from time to time, on or after March 27, 2002 or upon the occurrence of certain events. All of the proceeds from the sale were invested by Trust I in the underlying debt securities of HECO, HELCO and MECO. In December 1998, HECO Capital Trust II (Trust II), a grantor trust and a wholly owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO- Obligated 7.30% Cumulative Quarterly Income Preferred Securities, Series 1998 (1998 trust preferred securities) with an aggregate liquidation preference of $50 million and (ii) to HECO, common securities with a liquidation preference of approximately $1.55 million. Proceeds from the sale of the 1998 trust preferred securities and the common securities were used by Trust II to purchase 7.30% Junior Subordinated Deferrable Interest Debentures, Series 1998 (1998 junior deferrable debentures) issued by HECO in the principal amount of $31.55 million and issued by each of MECO and HELCO in the respective principal amounts of $10 million. The 1998 junior deferrable debentures, which bear interest at 7.30% and mature on December 15, 2028, together with the subsidiary guarantees (pursuant to which the obligations of MECO and HELCO under their respective debentures are fully and unconditionally guaranteed by HECO), are the sole assets of Trust II. The 1998 trust preferred securities must be redeemed at the maturity of the underlying debt on December 15, 2028, which maturity may be shortened to a date no earlier than December 15, 2003 or extended to a date no later than December 15, 2047, and are not redeemable at the option of the holders, but may be redeemed by Trust II, in whole or in part, from time to time, on or after December 15, 2003 or upon the occurrence of certain events. All of the proceeds from the sale were invested by Trust II in the underlying debt securities of HECO, HELCO and MECO, who used such proceeds from the sale of the 1998 junior deferrable debentures primarily to effect the redemption of certain series of their preferred stock having a total par value of $47 million. The 1997 and 1998 junior deferrable debentures and the common securities of the Trusts have been eliminated in HECO's consolidated balance sheets as of June 30, 2001 and December 31, 2000. The 1997 and 1998 junior deferrable debentures are redeemable only (i) at the option of HECO, MECO and HELCO, respectively, in whole or in part, on or after March 27, 2002 (1997 junior deferrable debentures) and December 15, 2003 (1998 junior deferrable debentures) or (ii) at the option of HECO, in whole, upon the occurrence of a "Special Event" (relating to certain changes in laws or regulations). (5) Recent accounting pronouncements - ------------------------------------ Derivative instruments and hedging activities HECO and its subsidiaries adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, on January 1, 2001 with no resulting material impact to consolidated financial condition, net income or liquidity. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. 20 (6) Consolidating financial information - ---------------------------------------- Hawaiian Electric Company, Inc. and subsidiaries Consolidating balance sheet (unaudited)
June 30, 2001 ----------------------------------------------------------------------------------- Reclassi- fications HECO HECO and Capital Capital elimina- HECO (in thousands) HECO HELCO MECO Trust I Trust II tions consolidated - ---------------------------------------------------------------------------------------------------------------------------------- Assets Utility plant, at cost Land........................................ $ 25,280 $ 2,557 $ 1,652 $ - $ - $ - $ 29,489 Plant and equipment......................... 1,916,261 543,789 566,278 - - - 3,026,328 Less accumulated depreciation............... (779,816) (229,571) (206,939) - - - (1,216,326) Plant acquisition adjustment, net........... - - 380 - - - 380 Construction in progress.................... 60,651 82,009 8,570 - - - 151,230 - ---------------------------------------------------------------------------------------------------------------------------------- Net utility plant......................... 1,222,376 398,784 369,941 - - - 1,991,101 - ---------------------------------------------------------------------------------------------------------------------------------- Investment in subsidiaries, at equity........ 339,192 - - - - (339,192) - - ---------------------------------------------------------------------------------------------------------------------------------- Current assets Cash and equivalents........................ 9 860 64 - - - 933 Advances to affiliates...................... 18,900 - 4,000 51,546 51,546 (125,992) - Customer accounts receivable, net........... 52,464 14,751 12,115 - - - 79,330 Accrued unbilled revenues, net.............. 38,541 8,268 7,781 - - - 54,590 Other accounts receivable, net.............. 1,582 473 157 - - 221 2,433 Fuel oil stock, at average cost............. 28,501 2,185 6,413 - - - 37,099 Materials and supplies, at average cost..... 9,173 2,619 8,437 - - - 20,229 Prepayments and other....................... 30,775 5,485 2,226 - - - 38,486 - ---------------------------------------------------------------------------------------------------------------------------------- Total current assets...................... 179,945 34,641 41,193 51,546 51,546 (125,771) 233,100 - ---------------------------------------------------------------------------------------------------------------------------------- Other assets Regulatory assets........................... 76,793 19,147 17,873 - - - 113,813 Other....................................... 25,369 6,740 6,999 - - - 39,108 - ---------------------------------------------------------------------------------------------------------------------------------- Total other assets........................ 102,162 25,887 24,872 - - - 152,921 - ---------------------------------------------------------------------------------------------------------------------------------- $ 1,843,675 $ 459,312 $ 436,006 $51,546 $51,546 $(464,963) $2,377,122 ================================================================================================================================== Capitalization and liabilities Capitalization Common stock equity......................... $ 869,238 $ 165,838 $ 170,262 $ 1,546 $ 1,546 $(339,192) $ 869,238 Cumulative preferred stock-not subject to mandatory redemption........... 22,293 7,000 5,000 - - - 34,293 HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures............ - - - 50,000 50,000 - 100,000 Long-term debt.............................. 464,951 145,946 171,607 - - (103,092) 679,412 - ---------------------------------------------------------------------------------------------------------------------------------- Total capitalization...................... 1,356,482 318,784 346,869 51,546 51,546 (442,284) 1,682,943 - ---------------------------------------------------------------------------------------------------------------------------------- Current liabilities Short-term borrowings-nonaffiliates......... 39,282 - - - - - 39,282 Short-term borrowings-affiliate............. 43,602 18,900 - - - (22,900) 39,602 Accounts payable............................ 37,759 7,231 5,679 - - - 50,669 Interest and preferred dividends payable.... 7,358 1,706 2,385 - - (76) 11,373 Taxes accrued............................... 42,597 15,348 18,120 - - - 76,065 Other....................................... 14,486 2,049 3,425 - - 297 20,257 - ---------------------------------------------------------------------------------------------------------------------------------- Total current liabilities................. 185,084 45,234 29,609 - - (22,679) 237,248 - ---------------------------------------------------------------------------------------------------------------------------------- Deferred credits and other liabilities Deferred income taxes....................... 119,966 10,479 8,827 - - - 139,272 Unamortized tax credits..................... 27,901 8,953 10,499 - - - 47,353 Other....................................... 20,813 23,885 15,834 - - - 60,532 - ---------------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities.............................. 168,680 43,317 35,160 - - - 247,157 - ---------------------------------------------------------------------------------------------------------------------------------- Contributions in aid of construction......... 133,429 51,977 24,368 - - - 209,774 - ---------------------------------------------------------------------------------------------------------------------------------- $ 1,843,675 $ 459,312 $ 436,006 $51,546 $51,546 $(464,963) $2,377,122 ==================================================================================================================================
21 Hawaiian Electric Company, Inc. and subsidiaries Consolidating balance sheet (unaudited)
December 31, 2000 ----------------------------------------------------------------------------------- Reclassi- fications HECO HECO and Capital Capital elimina- HECO (in thousands) HECO HELCO MECO Trust I Trust II tions consolidated - --------------------------------------------------------------------------------------------------------------------------------- Assets Utility plant, at cost Land....................................... $ 24,999 $ 2,470 $ 3,568 $ - $ - $ - $ 31,037 Plant and equipment........................ 1,865,486 556,094 552,573 - - - 2,974,153 Less accumulated depreciation.............. (751,894) (222,476) (195,814) - - - (1,170,184) Plant acquisition adjustment, net.......... - - 406 - - - 406 Construction in progress................... 82,105 64,552 10,526 - - - 157,183 - --------------------------------------------------------------------------------------------------------------------------------- Net utility plant........................ 1,220,696 400,640 371,259 - - - 1,992,595 - --------------------------------------------------------------------------------------------------------------------------------- Investment in subsidiaries, at equity....... 333,809 - - - - (333,809) - - --------------------------------------------------------------------------------------------------------------------------------- Current assets Cash and equivalents....................... 1,398 4 132 - - - 1,534 Advances to affiliates..................... 21,800 - - 51,546 51,546 (124,892) - Customer accounts receivable, net.......... 60,484 15,022 13,040 - - - 88,546 Accrued unbilled revenues, net............. 44,448 10,144 9,428 - - - 64,020 Other accounts receivable, net............. 4,311 920 231 - - (36) 5,426 Fuel oil stock, at average cost............ 24,176 3,439 9,509 - - - 37,124 Materials and supplies, at average cost.... 6,958 2,365 7,464 - - - 16,787 Prepayments and other...................... 3,130 1,251 316 - - - 4,697 - --------------------------------------------------------------------------------------------------------------------------------- Total current assets..................... 166,705 33,145 40,120 51,546 51,546 (124,928) 218,134 - --------------------------------------------------------------------------------------------------------------------------------- Other assets Regulatory assets.......................... 77,717 19,838 19,068 - - - 116,623 Other...................................... 27,743 5,823 7,604 - - - 41,170 - --------------------------------------------------------------------------------------------------------------------------------- Total other assets....................... 105,460 25,661 26,672 - - - 157,793 - --------------------------------------------------------------------------------------------------------------------------------- $1,826,670 $459,446 $438,051 $51,546 $51,546 $(458,737) $2,368,522 ================================================================================================================================= Capitalization and liabilities Capitalization Common stock equity........................ $ 825,012 $162,901 $167,816 $ 1,546 $1,546 $(333,809) $ 825,012 Cumulative preferred stock-not subject to mandatory redemption.......... 22,293 7,000 5,000 - - - 34,293 HECO-obligated mandatorily redeemable trust preferred securities of subsidary trusts holding solely HECO and HECO-guaranteed debentures........... - - - 50,000 50,000 - 100,000 Long-term debt............................. 453,310 145,931 171,582 - - (103,092) 667,731 - --------------------------------------------------------------------------------------------------------------------------------- Total capitalization..................... 1,300,615 315,832 344,398 51,546 51,546 (436,901) 1,627,036 - --------------------------------------------------------------------------------------------------------------------------------- Current liabilities Short-term borrowings-nonaffiliates........ 104,398 - - - - - 104,398 Short-term borrowings-affiliate............ 8,764 20,300 1,500 - - (21,800) 8,764 Accounts payable........................... 51,249 10,146 10,303 - - - 71,698 Interest and preferred dividends payable... 6,779 1,790 2,045 - - (131) 10,483 Taxes accrued.............................. 46,094 15,572 16,520 - - - 78,186 Other...................................... 6,343 534 3,587 - - 95 10,559 - --------------------------------------------------------------------------------------------------------------------------------- Total current liabilities................ 223,627 48,342 33,955 - - (21,836) 284,088 - --------------------------------------------------------------------------------------------------------------------------------- Deferred credits and other liabilities Deferred income taxes...................... 116,642 10,535 9,889 - - - 137,066 Unamortized tax credits.................... 28,179 8,975 10,449 - - - 47,603 Other...................................... 22,284 23,821 15,106 - - - 61,211 - --------------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities............................ 167,105 43,331 35,444 - - - 245,880 - --------------------------------------------------------------------------------------------------------------------------------- Contributions in aid of construction........ 135,323 51,941 24,254 - - - 211,518 - --------------------------------------------------------------------------------------------------------------------------------- $1,826,670 $459,446 $438,051 $51,546 $51,546 $(458,737) $2,368,522 =================================================================================================================================
22 Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of income (unaudited)
Three months ended June 30, 2001 ----------------------------------------------------------------------------------- Reclassi- fications HECO HECO and Capital Capital elimina- HECO (in thousands) HECO HELCO MECO Trust I Trust II tions consolidated - --------------------------------------------------------------------------------------------------------------------------- Operating revenues........................ $215,810 $47,186 $49,459 $ - $ - $ - $312,455 - ---------------------------------------------------------------------------------------------------------------------------- Operating expenses Fuel oil.................................. 55,684 7,251 19,150 - - - 82,085 Purchased power........................... 65,738 16,200 1,543 - - - 83,481 Other operation........................... 19,601 4,050 6,445 - - - 30,096 Maintenance............................... 8,800 1,672 2,543 - - - 13,015 Depreciation.............................. 15,196 4,819 5,348 - - - 25,363 Taxes, other than income taxes............ 20,244 4,448 4,734 - - - 29,426 Income taxes.............................. 9,135 2,455 2,772 - - - 14,362 - ---------------------------------------------------------------------------------------------------------------------------- 194,398 40,895 42,535 - - - 277,828 - ---------------------------------------------------------------------------------------------------------------------------- Operating income.......................... 21,412 6,291 6,924 - - - 34,627 - ---------------------------------------------------------------------------------------------------------------------------- Other income Allowance for equity funds used during construction..................... 784 73 98 - - - 955 Equity in earnings of subsidiaries........ 8,246 - - - - (8,246) - Other, net................................ 1,017 163 41 1,038 940 (2,239) 960 - ---------------------------------------------------------------------------------------------------------------------------- 10,047 236 139 1,038 940 (10,485) 1,915 - ---------------------------------------------------------------------------------------------------------------------------- Income before interest and other charges........................... 31,459 6,527 7,063 1,038 940 (10,485) 36,542 - ---------------------------------------------------------------------------------------------------------------------------- Interest and other charges Interest on long-term debt................ 5,962 1,907 2,203 - - - 10,072 Amortization of net bond premium and expense............................. 327 79 101 - - - 507 Other interest charges.................... 2,608 638 333 - - (2,239) 1,340 Allowance for borrowed funds used during construction..................... (424) (43) (44) - - - (511) Preferred stock dividends of subsidiaries. - - - - - 229 229 Preferred securities distributions of trust subsidiaries................... - - - - - 1,919 1,919 - ---------------------------------------------------------------------------------------------------------------------------- 8,473 2,581 2,593 - - (91) 13,556 - ---------------------------------------------------------------------------------------------------------------------------- Income before preferred stock dividends of HECO....................... 22,986 3,946 4,470 1,038 940 (10,394) 22,986 Preferred stock dividends of HECO......... 270 133 96 1,007 912 (2,148) 270 - ---------------------------------------------------------------------------------------------------------------------------- Net income for common stock............... $ 22,716 $ 3,813 $ 4,374 $ 31 $ 28 $ (8,246) $ 22,716 ============================================================================================================================ Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of retained earnings (unaudited) Three months ended June 30, 2001 ----------------------------------------------------------------------------------- Reclassi- HECO HECO fications Capital Capital and HECO (in thousands) HECO HELCO MECO Trust I Trust II eliminations consolidated - ---------------------------------------------------------------------------------------------------------------------------- Retained earnings, beginning of period. $465,395 $65,117 $74,920 $ - $ - $(140,037) $465,395 Net income for common stock............ 22,716 3,813 4,374 31 28 (8,246) 22,716 Common stock dividends................. - (3,044) (3,275) (31) (28) 6,378 - - ---------------------------------------------------------------------------------------------------------------------------- Retained earnings, end of period....... $488,111 $65,886 $76,019 $ - $ - $(141,905) $488,111 ============================================================================================================================
23 Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of income (unaudited)
Three months ended June 30, 2000 ----------------------------------------------------------------------------------- Reclassi- fications HECO HECO and Capital Capital elimina- HECO (in thousands) HECO HELCO MECO Trust I Trust II tions consolidated - ---------------------------------------------------------------------------------------------------------------------------- Operating revenues........................ $212,725 $46,579 $47,179 $ - $ - $ - $306,483 - ---------------------------------------------------------------------------------------------------------------------------- Operating expenses Fuel oil.................................. 59,070 12,822 19,200 - - - 91,092 Purchased power........................... 60,146 8,764 1,534 - - - 70,444 Other operation........................... 18,004 4,560 4,900 - - - 27,464 Maintenance............................... 8,367 1,912 3,343 - - - 13,622 Depreciation.............................. 14,598 4,849 4,883 - - - 24,330 Taxes, other than income taxes............ 20,152 4,390 4,463 - - - 29,005 Income taxes.............................. 9,906 2,622 2,673 - - - 15,201 - ---------------------------------------------------------------------------------------------------------------------------- 190,243 39,919 40,996 - - - 271,158 - ---------------------------------------------------------------------------------------------------------------------------- Operating income.......................... 22,482 6,660 6,183 - - - 35,325 - ---------------------------------------------------------------------------------------------------------------------------- Other income Allowance for equity funds used during construction..................... 980 69 279 - - - 1,328 Equity in earnings of subsidiaries........ 8,359 - - - - (8,359) - Other, net................................ 1,147 193 365 1,038 940 (2,545) 1,138 - ---------------------------------------------------------------------------------------------------------------------------- 10,486 262 644 1,038 940 (10,904) 2,466 - ---------------------------------------------------------------------------------------------------------------------------- Income before interest and other charges........................... 32,968 6,922 6,827 1,038 940 (10,904) 37,791 - ---------------------------------------------------------------------------------------------------------------------------- Interest and other charges Interest on long-term debt................ 5,745 1,898 2,277 - - - 9,920 Amortization of net bond premium and expense............................. 349 85 91 - - - 525 Other interest charges.................... 3,136 765 280 - - (2,546) 1,635 Allowance for borrowed funds used during construction..................... (546) (40) (136) - - - (722) Preferred stock dividends of subsidiaries. - - - - - 230 230 Preferred securities distributions of trust subsidiaries................... - - - - - 1,919 1,919 - ---------------------------------------------------------------------------------------------------------------------------- 8,684 2,708 2,512 - - (397) 13,507 - ---------------------------------------------------------------------------------------------------------------------------- Income before preferred stock dividends of HECO....................... 24,284 4,214 4,315 1,038 940 (10,507) 24,284 Preferred stock dividends of HECO......... 270 134 95 1,007 912 (2,148) 270 - ---------------------------------------------------------------------------------------------------------------------------- Net income for common stock............... $ 24,014 $ 4,080 $ 4,220 $ 31 $ 28 $ (8,359) $ 24,014 ============================================================================================================================ Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of retained earnings (unaudited) Three months ended June 30, 2000 ----------------------------------------------------------------------------------- Reclassi- fications HECO HECO and Capital Capital elimina- HECO (in thousands) HECO HELCO MECO Trust I Trust II tions consolidated - ------------------------------------------------------------------------------------------------------------------------------- Retained earnings, beginning of period... $434,979 $61,276 $ 71,418 $ - $ - $(132,694) $434,979 Net income for common stock.............. 24,014 4,080 4,220 31 28 (8,359) 24,014 Common stock dividends................... (17,794) (2,926) (4,026) (31) (28) 7,011 (17,794) - ------------------------------------------------------------------------------------------------------------------------------- Retained earnings, end of period......... $441,199 $62,430 $ 71,612 $ - $ - $(134,042) $441,199 ===============================================================================================================================
24 Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of income (unaudited)
Six months ended June 30, 2001 -------------------------------------------------------------------------------- Reclassi- fications HECO HECO and Capital Capital elimina- HECO (in thousands) HECO HELCO MECO Trust I Trust II tions consolidated - --------------------------------------------------------------------------------------------------------------------------------- Operating revenues.......................... $ 431,029 $ 97,437 $101,282 $ - $ - $ - $ 629,748 - --------------------------------------------------------------------------------------------------------------------------------- Operating expenses Fuel oil.................................... 113,311 15,136 41,883 - - - 170,330 Purchased power............................. 129,199 34,274 1,924 - - - 165,397 Other operation............................. 39,191 8,388 12,291 - - - 59,870 Maintenance................................. 19,312 3,441 5,459 - - - 28,212 Depreciation................................ 30,392 8,884 10,696 - - - 49,972 Taxes, other than income taxes.............. 41,010 9,220 9,687 - - - 59,917 Income taxes................................ 17,364 5,058 5,544 - - - 27,966 - --------------------------------------------------------------------------------------------------------------------------------- 389,779 84,401 87,484 - - - 561,664 - --------------------------------------------------------------------------------------------------------------------------------- Operating income............................ 41,250 13,036 13,798 - - - 68,084 - --------------------------------------------------------------------------------------------------------------------------------- Other income Allowance for equity funds used during construction...................... 1,860 130 230 - - - 2,220 Equity in earnings of subsidiaries.......... 16,730 - - - - (16,730) - Other, net.................................. 2,193 279 97 2,075 1,881 (4,588) 1,937 - --------------------------------------------------------------------------------------------------------------------------------- 20,783 409 327 2,075 1,881 (21,318) 4,157 - --------------------------------------------------------------------------------------------------------------------------------- Income before interest and other charges............................ 62,033 13,445 14,125 2,075 1,881 (21,318) 72,241 - --------------------------------------------------------------------------------------------------------------------------------- Interest and other charges Interest on long-term debt.................. 11,781 3,816 4,404 - - - 20,001 Amortization of net bond premium and expense.............................. 654 181 202 - - - 1,037 Other interest charges...................... 5,923 1,387 691 - - (4,588) 3,413 Allowance for borrowed funds used during construction...................... (1,006) (78) (103) - - - (1,187) Preferred stock dividends of subsidiaries............................. - - - - - 458 458 Preferred securities distributions of trust subsidiaries.................... - - - - - 3,838 3,838 - --------------------------------------------------------------------------------------------------------------------------------- 17,352 5,306 5,194 - - (292) 27,560 - --------------------------------------------------------------------------------------------------------------------------------- Income before preferred stock dividends of HECO........................ 44,681 8,139 8,931 2,075 1,881 (21,026) 44,681 Preferred stock dividends of HECO........... 540 267 191 2,013 1,825 (4,296) 540 - --------------------------------------------------------------------------------------------------------------------------------- Net income for common stock................. $ 44,141 $ 7,872 $ 8,740 $ 62 $ 56 $ (16,730) $ 44,141 =================================================================================================================================
Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of retained earnings (unaudited)
Six months ended June 30, 2001 -------------------------------------------------------------------------------- Reclassi- HECO HECO fications Capital Capital and HECO (in thousands) HECO HELCO MECO Trust I Trust II eliminations consolidated - -------------------------------------------------------------------------------------------------------------------------------- Retained earnings, beginning of period...... $443,970 $62,962 $ 73,586 $ - $ - $(136,548) $ 443,970 Net income for common stock................. 44,141 7,872 8,740 62 56 (16,730) 44,141 Common stock dividends...................... - (4,948) (6,307) (62) (56) 11,373 - - -------------------------------------------------------------------------------------------------------------------------------- Retained earnings, end of period............ $488,111 $65,886 $ 76,019 $ - $ - $(141,905) $ 488,111 ================================================================================================================================
25 Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of income (unaudited)
Six months ended June 30, 2000 -------------------------------------------------------------------------------- Reclassi- fications HECO HECO and Capital Capital elimina- HECO (in thousands) HECO HELCO MECO Trust I Trust II tions consolidated - ---------------------------------------------------------------------------------------------------------------------------- Operating revenues..................... $ 413,074 $ 90,790 $ 91,040 $ - $ - $ - $ 594,904 - ---------------------------------------------------------------------------------------------------------------------------- Operating expenses Fuel oil............................... 106,656 25,030 34,561 - - - 166,247 Purchased power........................ 120,807 16,700 3,163 - - - 140,670 Other operation........................ 36,772 8,950 9,483 - - - 55,205 Maintenance............................ 17,085 3,474 5,596 - - - 26,155 Depreciation........................... 29,196 9,698 9,770 - - - 48,664 Taxes, other than income taxes......... 39,132 8,609 8,625 - - - 56,366 Income taxes........................... 19,146 5,129 6,119 - - - 30,394 - ---------------------------------------------------------------------------------------------------------------------------- 368,794 77,590 77,317 - - - 523,701 - ---------------------------------------------------------------------------------------------------------------------------- Operating income....................... 44,280 13,200 13,723 - - - 71,203 - ---------------------------------------------------------------------------------------------------------------------------- Other income Allowance for equity funds used during construction................. 1,912 118 567 - - - 2,597 Equity in earnings of subsidiaries..... 17,687 - - - - (17,687) - Other, net............................. 1,792 379 646 2,075 1,881 (5,060) 1,713 - ---------------------------------------------------------------------------------------------------------------------------- 21,391 497 1,213 2,075 1,881 (22,747) 4,310 - ---------------------------------------------------------------------------------------------------------------------------- Income before interest and other charges....................... 65,671 13,697 14,936 2,075 1,881 (22,747) 75,513 - ---------------------------------------------------------------------------------------------------------------------------- Interest and other charges Interest on long-term debt............. 11,485 3,810 4,557 - - - 19,852 Amortization of net bond premium and expense......................... 634 155 178 - - - 967 Other interest charges................. 6,340 1,554 698 - - (5,060) 3,532 Allowance for borrowed funds used during construction................. (1,067) (70) (276) - - - (1,413) Preferred stock dividends of subsidiaries........................ - - - - - 458 458 Preferred securities distributions of trust subsidiaries............... - - - - - 3,838 3,838 - ---------------------------------------------------------------------------------------------------------------------------- 17,392 5,449 5,157 - - (764) 27,234 - ---------------------------------------------------------------------------------------------------------------------------- Income before preferred stock dividends of HECO................... 48,279 8,248 9,779 2,075 1,881 (21,983) 48,279 Preferred stock dividends of HECO...... 540 267 191 2,013 1,825 (4,296) 540 - ---------------------------------------------------------------------------------------------------------------------------- Net income for common stock............ $ 47,739 $ 7,981 $ 9,588 $ 62 $ 56 $ (17,687) $ 47,739 ============================================================================================================================
Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of retained earnings (unaudited)
Six months ended June 30, 2000 --------------------------------------------------------------------------------- Reclassi- fications HECO HECO and Capital Capital elimina- HECO (in thousands) HECO HELCO MECO Trust I Trust II tions consolidated - ---------------------------------------------------------------------------------------------------------------------------- Retained earnings, beginning of period.... $425,206 $59,806 $69,633 $ - $ - $(129,439) $425,206 Net income for common stock............... 47,739 7,981 9,588 62 56 (17,687) 47,739 Common stock dividends.................... (31,746) (5,357) (7,609) (62) (56) 13,084 (31,746) - --------------------------------------------------------------------------------------------------------------------------- Retained earnings, end of period.......... $441,199 $62,430 $71,612 $ - $ - $(134,042) $441,199 ===========================================================================================================================
26 Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of cash flows (unaudited)
Six months ended June 30, 2001 -------------------------------------------------------------------------------- Reclassi- fications HECO HECO and Capital Capital elimina- HECO (in thousands) HECO HELCO MECO Trust I Trust II tions consolidated - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities Income before preferred stock dividends of HECO........................ $ 44,681 $ 8,139 $ 8,931 $ 2,075 $ 1,881 $(21,026) $ 44,681 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Equity in earnings...................... (16,730) - - - - 16,730 - Common stock dividends received from subsidiaries..................... 11,373 - - - - (11,373) - Depreciation of property, plant and equipment................... 30,392 8,884 10,696 - - - 49,972 Other amortization...................... 2,904 971 2,498 - - - 6,373 Deferred income taxes................... 3,340 (56) (1,062) - - - 2,222 Tax credits, net........................ 257 96 181 - - - 534 Allowance for equity funds used during construction................... (1,860) (130) (230) - - - (2,220) Changes in assets and liabilities Decrease in accounts receivable....... 10,749 718 999 - - (257) 12,209 Decrease in accrued unbilled revenues............................ 5,907 1,876 1,647 - - - 9,430 Decrease (increase) in fuel oil stock............................... (4,325) 1,254 3,096 - - - 25 Increase in materials and supplies.... (2,215) (254) (973) - - - (3,442) Increase in regulatory assets......... (119) (24) (976) - - - (1,119) Decrease in accounts payable.......... (13,490) (2,915) (4,624) - - - (21,029) Changes in other assets and liabilities......................... (16,645) (3,697) 788 - - 4,095 (15,459) - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities.. 54,219 14,862 20,971 2,075 1,881 (11,831) 82,177 - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities Capital expenditures....................... (33,220) (8,081) (9,771) - - - (51,072) Contributions in aid of construction....... 1,586 1,328 736 - - - 3,650 Advances to (repayments from) affiliates... 2,900 - (4,000) - - 1,100 - - ------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities...... (28,734) (6,753) (13,035) - - 1,100 (47,422) - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities Common stock dividends..................... - (4,948) (6,307) (62) (56) 11,373 - Preferred stock dividends.................. (540) (267) (191) - - 458 (540) Preferred securities distributions of trust subsidiaries................. - - - (2,013) (1,825) - (3,838) Proceeds from issuance of long-term debt... 11,580 - - - - - 11,580 Net decrease in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less................................ (27,283) (1,400) (1,500) - - (1,100) (31,283) Repayment of other short-term borrowings... (3,000) - - - - - (3,000) Other...................................... (7,631) (638) (6) - - - (8,275) - ------------------------------------------------------------------------------------------------------------------------------ Net cash used in financing activities...... (26,874) (7,253) (8,004) (2,075) (1,881) 10,731 (35,356) - ------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and equivalents.................. (1,389) 856 (68) - - - (601) Cash and equivalents, beginning of period.. 1,398 4 132 - - - 1,534 - ------------------------------------------------------------------------------------------------------------------------------ Cash and equivalents, end of period........ $ 9 $ 860 $ 64 $ - $ - $ - $ 933 ==============================================================================================================================
27 Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of cash flows (unaudited)
Six months ended June 30, 2000 ----------------------------------------------------------------------------------- Reclassi- fications HECO HECO and Capital Capital elimina- HECO (in thousands) HECO HELCO MECO Trust I Trust II tions consolidated - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Income before preferred stock dividends of HECO........................... $ 48,279 $ 8,248 $ 9,779 $ 2,075 $ 1,881 $(21,983) $ 48,279 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Equity in earnings.......................... (17,687) - - - - 17,687 - Common stock dividends received from subsidiaries......................... 13,084 - - - - (13,084) - Depreciation of property, plant and equipment................................. 29,196 9,698 9,770 - - - 48,664 Other amortization.......................... 1,400 326 423 - - - 2,149 Deferred income taxes....................... 4,858 269 (293) - - - 4,834 Tax credits, net............................ 622 93 (37) - - - 678 Allowance for equity funds used during construction.............................. (1,912) (118) (567) - - - (2,597) Changes in assets and liabilities Increase in accounts receivable........... (9,976) (1,143) (1,739) - - 2,184 (10,674) Decrease (increase) in accrued unbilled revenues............................... (947) 262 (176) - - - (861) Decrease (increase) in fuel oil stock..... (3,076) (1,057) 1,604 - - - (2,529) Decrease (increase) in materials and supplies............................... (179) 36 (19) - - - (162) Increase in regulatory assets............. (621) (53) (507) - - - (1,181) Increase (decrease) in accounts payable... 3,137 2,829 (921) - - - 5,045 Changes in other assets and liabilities... (11,280) 1,674 2,781 - - 1,654 (5,171) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities..... 54,898 21,064 20,098 2,075 1,881 (13,542) 86,474 - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Capital expenditures.......................... (32,541) (8,526) (13,016) - - - (54,083) Contributions in aid of construction.......... 2,180 1,075 1,288 - - - 4,543 Advances to (repayments from) affiliates...... 2,500 - (250) - - (2,250) - Payments on notes receivable.................. - 138 - - - - 138 - --------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities......... (27,861) (7,313) (11,978) - - (2,250) (49,402) - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Common stock dividends........................ (31,746) (5,357) (7,609) (62) (56) 13,084 (31,746) Preferred stock dividends..................... (540) (267) (191) - - 458 (540) Preferred securities distributions of trust subsidiaries...................... - - - (2,013) (1,825) - (3,838) Proceeds from issuance of long-term debt...... 10,371 - - - - - 10,371 Net decrease in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less.................................... (3,344) (2,500) - - - 2,250 (3,594) Other......................................... (2,808) (1,224) (5) - - - (4,037) - --------------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities......... (28,067) (9,348) (7,805) (2,075) (1,881) 15,792 (33,384) - --------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents....................... (1,030) 4,403 315 - - - 3,688 Cash and equivalents, beginning of period..... 1,039 198 729 - - - 1,966 - --------------------------------------------------------------------------------------------------------------------------------- Cash and equivalents, end of period........... $ 9 $ 4,601 $ 1,044 $ - $ - $ - $ 5,654 =================================================================================================================================
HECO has not provided separate financial statements and other disclosures concerning HELCO and MECO because management has concluded that such financial statements and other information are not material to holders of HELCO's and MECO's 1997 and 1998 junior deferrable debentures which have been fully and unconditionally guaranteed by HECO. 28 (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) 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income)......................................................... $50,028 $51,615 $98,038 $103,245 Deduct: Income taxes on regulated activities............................ (14,362) (15,201) (27,966) (30,394) Revenues from nonregulated activities........................... (1,196) (1,362) (2,326) (2,346) Add: Expenses from nonregulated activities........................... 157 273 338 698 ------------ ------------ ------------ ------------ Operating income from regulated activities after income taxes (per HECO consolidated statements of income)......................... $34,627 $35,325 $68,084 $ 71,203 ============ ============ ============ ============
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 per ---------------------------- % Primary reason(s) for share amounts) 2001 2000 change significant change* - ------------------------------------------------------------------------------------------------------------------------------------ Revenues............................. $ 428,794 $ 413,136 4 Increases for all segments Operating income .................... 64,323 57,126 13 Increase for the savings bank segment and decreased losses for the international power segment, partly offset by decreases for the electric utility and "other" segments Net income........................... 25,588 19,096 34 Higher operating income and slightly lower income taxes due to no tax benefits on losses from foreign operations in second quarter of 2000 Basic earnings per common share.................. $ 0.76 $ 0.59 29 See explanation for net income and weighted-average number of common shares outstanding Weighted-average number of common shares outstanding................ 33,481 32,403 3 Issuances under the DRIP and other plans
29
Three months ended June 30, (in thousands, except per ---------------------------- % Primary reason(s) for share amounts) 2001 2000 change significant change* - ------------------------------------------------------------------------------------------------------------------------------------ Revenues............................. $ 863,661 $ 815,011 6 Increases for the electric utility, savings bank and international power segments, partly offset by a decrease for the "other" segment Operating income .................... 130,040 125,328 4 Increases for the savings bank segment and better results for the international power segment, partly offset by decreases for the electric utility and "other" segments Net income........................... 53,333 48,072 11 Higher operating income and lower income taxes (no tax benefits on losses from foreign operations in first half of 2000), partly offset by higher interest expense due to higher average borrowings as a result of an HEIPC acquisition in March 2000 Basic earnings per common share.................. $ 1.60 $ 1.49 7 See explanation for net income and weighted-average number of common shares outstanding Weighted-average number of common shares outstanding................ 33,321 32,335 3 Issuances under the DRIP and other plans
* Also see segment discussions which follow. 30 Following is a general discussion of the results of operations by business segment. Electric utility - ----------------
Three months ended (in thousands, except per June 30, % ------------------------------- barrel amounts) 2001 2000 change Primary reason(s) for significant change - ------------------------------------------------------------------------------------------------------------------------------- Revenues...................... $ 313,651 $ 307,845 2 1.4% higher KWH sales ($5 million), HELCO rate increase and recovery of integrated resource planning and related costs, partly offset by lower fuel oil prices, the effects of which are passed on to customers Expenses Fuel oil................... 82,085 91,092 (10) Fewer KWHs generated and lower fuel oil prices Purchased power............ 83,481 70,444 19 Higher purchased power capacity payments due to increased capacity (including a new IPP, Hamakua Partners) and availability and more KWHs purchased Other...................... 98,057 94,694 4 Higher other operation expenses and depreciation Operating income.............. 50,028 51,615 (3) Higher KWH sales and HELCO rate increase, more than offset by higher purchased power capacity payments, other operation expenses and depreciation Net income.................... 22,716 24,014 (5) Lower operating income and lower AFUDC, partly offset by lower income taxes Kilowatthour sales (millions). 2,298 2,266 1 Fuel oil price per barrel..... $ 32.24 $ 32.51 (1)
31
Six months ended (in thousands, except per June 30, % ------------------------------- barrel amounts) 2001 2000 change Primary reason(s) for significant change - ------------------------------------------------------------------------------------------------------------------------------- Revenues...................... $ 632,074 $ 597,250 6 Higher fuel oil and purchased energy fuel prices, the effects of which are passed on to customers ($18 million), 1.6% higher KWH sales ($8 million), HELCO rate increase and recovery of integrated resource planning and related costs Expenses Fuel oil................... 170,330 166,247 2 Higher fuel oil prices, partly offset by fewer KWHs generated Purchased power............ 165,397 140,670 18 Higher fuel prices, higher purchased power capacity payments due to increased capacity (including a new IPP, Hamakua Partners) and availability, and more KWHs purchased Other...................... 198,309 187,088 6 Higher other operation and maintenance expenses, depreciation and taxes, other than income taxes Operating income.............. 98,038 103,245 (5) Higher KWH sales and HELCO rate increase, more than offset by higher purchased power capacity payments, other operation and maintenance expenses and depreciation Net income.................... 44,141 47,739 (8) Lower operating income and lower AFUDC, partly offset by lower income taxes Kilowatthour sales (millions). 4,539 4,469 2 Fuel oil price per barrel..... $ 33.56 $ 30.89 9
Kilowatthour (KWH) sales in the second quarter and first six months of 2001 increased 1.4% and 1.6%, respectively, from the same periods in 2000, partly due to warmer weather and an increase in the number of customers. However, electric utility operating income decreased 5% from the first six months of 2000, primarily due to higher purchased power and other operation and maintenance expenses. Maintenance expenses were higher due to more production, transmission and distribution maintenance work in the first half of 2001 than in the first half of 2000. Other operation expenses increased 8% primarily due to higher integrated resource planning costs (which were recovered in revenues), general liability settlements and legal expenses. Competition The electric utility industry is becoming increasingly competitive. IPPs are well established in Hawaii and continue to actively pursue new projects. Customer self-generation, with or without cogeneration, has made inroads in Hawaii 32 and is a continuing competitive factor. Competition in the generation sector in Hawaii is moderated, however, by the scarcity of generation sites, various permitting processes and lack of interconnections to other electric utilities. HECO and its subsidiaries have been able to compete successfully by offering customers economic alternatives that, among other things, employ energy efficient electrotechnologies such as the heat pump water heater. In December 1996, the PUC instituted a proceeding to identify and examine the issues surrounding electric competition and to determine the impact of competition on the electric utility infrastructure in Hawaii. See "Competition proceeding" in note (3) of HECO's "Notes to consolidated financial statements." Regulation of electric utility rates The PUC has broad discretion in its regulation of the rates charged by HEI's electric utility subsidiaries and in other matters. Any adverse decision and order (D&O) by the PUC concerning the level or method of determining electric utility rates, the authorized returns on equity or other matters, or any prolonged delay in rendering a D&O in a rate or other proceeding, could have a material adverse effect on the Company's financial condition and results of operations. Upon a showing of probable entitlement, the PUC is required to issue an interim D&O in a rate case within 10 months from the date of filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed). There is no time limit for rendering a final D&O. Interim rate increases are subject to refund with interest, pending the final outcome of the case. Management cannot predict with certainty when D&Os in pending or future rate cases will be rendered or the amount of any interim or final rate increase that may be granted. Recent rate requests HEI's electric utility subsidiaries initiate PUC proceedings from time to time to request electric rate increases to cover rising operating costs (e.g., the cost of purchased power) and the cost of plant and equipment, including the cost of new capital projects to maintain and improve service reliability. As of August 3, 2001, the return on average common equity (ROACE) found by the PUC to be reasonable in the most recent final rate decision for each utility was 11.40% for HECO (D&O issued on December 11, 1995 and based on a 1995 test year), 11.50% for HELCO (D&O issued on February 8, 2001 and based on a 2000 test year) and 10.94% for MECO (amended D&O issued on April 6, 1999 and based on a 1999 test year). Hawaii Electric Light Company, Inc. - ---------------------------------- In October 1999, HELCO filed a request to increase rates by 9.6%, or $15.5 million in annual revenues, based on a 2000 test year. In early 2001, HELCO received a final D&O from the PUC authorizing an $8.4 million, or 4.9% increase in annual revenues, effective February 15, 2001 and based on an 11.50% ROACE. The order granted HELCO an increase of approximately $2.3 million in annual revenues, in addition to affirming interim increases that took effect in September 2000 ($3.5 million) and January 2001 ($2.6 million). The D&O included in rate base $7.6 million for pre-air permit facilities that the PUC had found to be used or useful to support the existing generating units at Keahole. On June 1, 2001, the PUC issued an order approving a new standby service rate schedule rider for HELCO, adopting a stipulated agreement between HELCO and the Consumer Advocate. The standby service rider issue had been bifurcated from the rest of the rate case. The rider provides the rates, terms and conditions for obtaining backup and supplemental electric power from the utility when a customer obtains all or part of its electric power from sources other than HELCO. The timing of a future HELCO rate increase request, if any, to recover costs relating to adding two combustion turbines at Keahole, including the remaining $14.8 million cost of pre-air permit facilities, will depend on future circumstances. See "HELCO power situation" in note (3) of HECO's "Notes to consolidated financial statements." Accounting for the effects of certain types of regulation In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," the Company's financial statements reflect assets and costs of HECO and its subsidiaries based on current cost-based rate-making 33 regulations. Management believes HECO and its subsidiaries' operations currently satisfy the SFAS No. 71 criteria. However, if events or circumstances should change so that those criteria are no longer satisfied, management believes that a material adverse effect on the Company's results of operations, financial position or liquidity may result. As of June 30, 2001, HECO's consolidated regulatory assets amounted to $114 million. Legislation Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the utilities and their customers. For example, Congress is considering an energy plan designed to increase the supply of oil, as well as legislation that would promote renewable energy sources and conservation. The Hawaii legislature did not consider deregulation in its 2001 session, but passed a law that requires electric utilities to establish "renewables portfolio standard" goals of 7% by December 31, 2003, 8% by December 31, 2005 and 9% by December 31, 2010. Any electric utility whose percentage of electrical sales represented by renewable energy does not meet these goals will have to report to the PUC and provide an explanation for not meeting the renewables portfolio standard. The PUC could then grant a waiver from the standard or an extension for meeting the standard. The PUC may also provide incentives to encourage electric utilities to exceed the standards or meet the standards earlier, or both. HECO, MECO and HELCO may aggregate their renewable portfolios in order to achieve these goals. The new law also requires net energy metering of solar, wind turbine, biomass or hydroelectric energy generating systems (or hybrid systems) with a capacity up to 10 kilowatts (i.e., a customer-generator may be a net user or supplier of energy and will pay to or receive credit from the electric utility accordingly). Every electric utility must develop a standard contract or tariff providing for net energy metering (which will be available on a first-come-first-served basis) until the time that the total rated generating capacity produced by the eligible customer- generators equals 0.5% of the electric utility's system peak demand. HECO and its subsidiaries filed tariffs implementing the net energy metering requirement, effective July 26, 2001. Management cannot at this time predict the impact of this law or other proposed legislation on the utilities or their customers. Savings bank - ------------
Three months ended June 30, % ---------------------------------- (in thousands) 2001 2000 change Primary reason(s) for significant change - ---------------------------------------------------------------------------------------------------------------------------- Revenues................ $112,250 $108,699 3 Higher other income primarily due to net gains on sales of mortgage/asset-backed securities and loans and the revenues from Bishop Insurance Agency of Hawaii, Inc. (BIA) acquired in March 2001, partly offset by higher writedowns of investments and lower interest income as a result of lower weighted-average yields on mortgage/asset- backed securities and investments Operating income........ 17,572 16,315 8 Higher net interest income due to a higher average balance of interest-earning assets and higher other income, partly offset by higher expenses, including higher service bureau expense and compensation expense from BIA Net income.............. 10,207 9,396 9 Higher operating income Interest rate spread.... 3.07% 3.18% (3) 23 basis points decrease in the weighted- average yield on interest-earning assets, partly offset by a 12 basis points decrease in the weighted-average rate on interest- bearing liabilities
34
Six months ended June 30, % ---------------------------------- (in thousands) 2001 2000 change Primary reason(s) for significant change - ------------------------------------------------------------------------------------------------------------------------------- Revenues................ $228,004 $218,966 4 Higher interest income as a result of higher average balances of mortgage/asset-backed securities and investments and higher other income primarily due to net gains on sales of mortgage/asset-backed securities and loans and revenues from BIA acquired in March 2001, partly offset by higher writedowns of investments Operating income........ 37,721 35,505 6 Higher net interest and other income, partly offset by higher expenses, including higher service bureau expense and compensation expense from BIA Net income.............. 22,082 20,617 7 Higher operating income Interest rate spread.... 3.08% 3.19% (3) 11 basis points increase in the weighted-average rate on interest-bearing liabilities
ASB's interest rate spread--the difference between the weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities--decreased 3% for the second quarter and first six months of 2001 compared to the same periods in 2000. Comparing the first six months of 2001 to the same period in 2000, the weighted-average rate on interest-bearing liabilities increased when the weighted-average yield on interest-earning assets remained stable. Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. Deposits increased by $75 million in the first six months of 2001, including $61 million of interest credited to accounts. ASB also derives funds from borrowings, payments of interest and principal on outstanding loans receivable and investment and mortgage/asset-backed securities and other sources. Advances from the Federal Home Loan Bank (FHLB) of Seattle continue to be a significant source of funds as the demand for deposits decreases 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 net interest income. As of June 30, 2001, ASB's allowance for loan losses was 1.25% of average loans outstanding. Changes in the allowance for loan losses for the periods indicated are as follows: Six months ended June 30, 2001 2000 - -------------------------------------------------------------------------------- (in thousands) Allowance for loan losses, January 1................. $37,449 $35,348 Provision for loan losses............................ 6,000 6,400 Net charge-offs...................................... (4,085) (4,695) ----------- ----------- Allowance for loan losses, June 30................... $39,364 $37,053 =========== =========== In March 1998, ASB formed a wholly owned operating subsidiary, ASB Realty Corporation, which elects to be taxed as a real estate investment trust. This reorganization has reduced ASB's income taxes. For the first half of 2001, ASB and subsidiaries' effective income tax rate was 34%. Although the State of Hawaii has challenged the tax treatment of this reorganization, ASB believes that its tax position is proper. 35 Regulation Federal Deposit Insurance Corporation regulations restrict the ability of financial institutions that are not "well-capitalized" to compete on the same terms as "well-capitalized" institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of June 30, 2001, ASB was "well-capitalized" (ratio requirements noted in parentheses) with a leverage ratio of 6.2% (5.0%), a Tier-1 risk-based ratio of 11.4% (6.0%) and a total risk-based ratio of 12.5% (10.0%). For a discussion of securities deemed impermissible investments by the OTS, see "Disposition of certain debt securities" in note (4) of HEI's "Notes to consolidated financial statements." Examination of ASB by the OTS ASB is subject to examination by the OTS. In - ----------------------------- conducting its examinations, the OTS utilizes the Uniform Financial Institutions Rating System adopted by the Federal Financial Institutions Examination Council, which system utilizes the "CAMELS" criteria for rating financial institutions. The six components in the rating system are: Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. Thrift Bulletin (TB) 13a, adopted by the OTS on December 1, 1998, provides guidance on the management of interest rate risks, investment securities and derivatives activities. TB 13a updates the OTS's minimum standards for thrift institutions' interest rate risk management practices with regard to board-approved limits and interest rate risk measurement systems. Management has developed and is implementing an action plan to improve ASB's interest rate risk position. The current plan includes making changes to improve the matching of asset and liability durations, such as lengthening the term of costing liabilities and selling a portion of ASB's long-term fixed rate loan production. The OTS conducts Community Reinvestment Act, compliance, systems, holding company and safety and soundness examinations of ASB. The most recent OTS safety and soundness examination, covering the period from May 15, 2000 to March 31, 2001, was completed on August 2, 2001. International power - -------------------
Three months ended June 30, % ----------------------------- (in thousands) 2001 2000 change Primary reason(s) for significant change - ------------------------------------------------------------------------------------------------------------------------- Revenues..................... $ 1,455 $ (4,163) NM Prior years losses from HEIPC's indirect investment in EAPRC which was written off in December 2000 Operating loss............... (377) (8,586) 96 Prior years losses from EARPC investment and additional expenses related to the investment which was written off in December 2000
36
Six months ended June 30, % ----------------------------- (in thousands) 2001 2000 change Primary reason(s) for significant change - ------------------------------------------------------------------------------------------------------------------------- Revenues..................... $ 2,985 $ (2,700) NM Prior years losses from HEIPC's indirect investment in EARPC which was written off in December 2000 Operating income (loss)...... 406 (9,218) NM Prior years losses from EARPC investment and additional expenses related to the investment which was written off in December 2000 and $1.5 million partial release of a $10.0 million loan guaranty which was accrued in December 2000
NM Not meaningful. HEIPC was formed in 1995 and its subsidiaries have been formed from time to time to pursue independent power and integrated energy services projects in Asia and the Pacific. In September 1996, HEI Power Corp. Guam (HPG), entered into an energy conversion agreement for approximately 20 years with the Guam Power Authority (GPA), pursuant to which HPG has repaired and is operating and maintaining two oil-fired 25 MW (net) units in Tanguisson, Guam. 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 U.S. Environmental Protection Agency. GPA, however, has agreed to indemnify and hold HPG harmless from any pre-existing environmental liability. In 1998 and 1999, the HEIPC Group acquired what is now a 75% interest in a joint venture, Baotou Tianjiao Power Co., Ltd., formed to design, construct, own, operate and manage a 200 MW (net) coal-fired power plant to be located inside Baotou Steel's complex in Inner Mongolia, People's Republic of China. See "China project," in note (5) of HEI's "Notes to consolidated financial statements." In December 1998, the HEIPC Group invested $7.6 million to acquire convertible cumulative nonparticipating 8% preferred shares in Cagayan Electric Power & Light Co., Inc. (CEPALCO), an electric distribution company in the Philippines. In September 1999, the HEIPC Group also acquired 5% of the outstanding CEPALCO common stock for $2.1 million. The acquisitions were strategic moves which put the HEIPC Group in a position to participate in the anticipated privatization of the National Power Corporation and growth in the electric distribution business in the Philippines. In July 2001, the preferred shares were converted to common stock. The HEIPC Group currently owns approximately 20% of the outstanding common stock of CEPALCO. On March 7, 2000, an indirect subsidiary of HEIPC acquired a 50% interest in EPHE, an indirect subsidiary of El Paso Energy Corporation, for $87.5 million plus up to an additional $6 million of payments contingent upon future earnings of EAPRC. EPHE owns approximately 91.7% of the common shares of EAPRC, a Philippines holding company primarily engaged in the electric generation business in Manila and Cebu through its direct and indirect subsidiaries, using land and barge-based generating facilities fired by bunker fuel oil, with total installed capacity of approximately 390 MW. See "Philippines investment" in note (5) of HEI's "Notes to Consolidated Financial Statements." Net income for the first quarter of 2000 does not include equity in net losses of EPHE. The accounts of HEIPC and subsidiaries are consolidated on a one-month lag. 37 Due to the level of losses incurred in 2000 and the changes in the political and economic conditions related to the investment in EAPRC (e.g., devaluation of the Philippines peso and increase in fuel oil prices), management determined that the investment was impaired on December 31, 2000 and wrote off the remaining investment in EAPRC. Management is evaluating the overall international strategy and HEIPC's strategic alternatives. The Company will not be investing in new international power projects during this period of evaluation. Management expects to have completed its evaluation by the end of the third quarter 2001. As of June 30, 2001, the HEIPC Group's remaining investments in and advances to overseas power projects amounted to approximately $45 million. The success of any project undertaken by the HEIPC Group is 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 the HEIPC Group will be successfully completed or that the HEIPC Group's investment in any such project will not be lost, in whole or in part. Other - -----
Three months ended June 30, % ------------------------------ (in thousands) 2001 2000 change Primary reason(s) for significant change - --------------------------------------------------------------------------------------------------------------------- Revenues............. $ 1,438 $ 755 90 Interest income on income notes purchased in connection with the termination of ASB's investments in trust certificates in the second quarter of 2001 Operating loss....... (2,900) (2,218) (31) Higher general and administrative expenses at corporate primarily due to higher stock option expense Six months ended June 30, % ------------------------------ (in thousands) 2001 2000 change Primary reason(s) for significant change - --------------------------------------------------------------------------------------------------------------------- Revenues............. $ 598 $ 1,495 (60) Equity in net loss of Utech Venture Capital Corporation, partly offset by interest income on income notes purchased in connection with the termination of ASB's investments in trust certificates in the second quarter of 2001 Operating loss....... (6,125) (4,204) (46) See explanation for revenues and higher general and administrative expenses at corporate primarily due to higher stock option expense
The "other" business segment includes results of operations of TOOTS, formerly named HTB, a maritime freight transportation company which ceased operations in the fourth quarter of 1999; HEI Investments, Inc., a company primarily holding investments in leveraged leases (excludes foreign investment); Pacific Energy Conservation Services, Inc., a contract services company primarily providing windfarm operational and maintenance services to an affiliated electric utility; HEI District Cooling, Inc., a company formed to develop, build, own, lease, operate 38 and/or maintain central chilled water, cooling system facilities, and other energy related products and services; ProVision Technologies, Inc., a company formed to sell, install, operate and maintain on-site power generation equipment and auxiliary appliances in Hawaii and the Pacific Rim; HEI Properties, Inc., a company currently holding passive investments and expected to hold real estate and related assets; HEI Leasing, Inc., a company formed to own real estate subject to leases; Hawaiian Electric Industries Capital Trust I, HEI Preferred Funding, LP and Hycap Management, Inc., companies formed primarily for the purpose of effecting the issuance of 8.36% Trust Originated Preferred Securities; HEI and HEIDI, holding companies; and eliminations of intercompany transactions. Contingencies - ------------- See note (8) and note (3) in HEI's and HECO's respective "Notes to consolidated financial statements" for discussions of contingencies. Recent accounting pronouncements - -------------------------------- See note (7) and note (5) in HEI's and HECO's respective "Notes to consolidated financial statements." FINANCIAL CONDITION Liquidity and capital resources - ------------------------------- The Company and consolidated HECO each believes that its ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund its respective construction programs and investments and to cover debt and other cash requirements in the foreseeable future. The consolidated capital structure of HEI was as follows:
(in millions) June 30, 2001 December 31, 2000 - --------------------------------------------------------------------------------------------------------- Short-term borrowings.................................. $ 63 3% $ 104 5% Long-term debt......................................... 1,164 50 1,089 48 HEI- and HECO-obligated preferred securities of trust subsidiaries.......................................... 200 9 200 9 Preferred stock of subsidiaries........................ 34 1 34 1 Minority interests..................................... 1 - 1 - Common stock equity.................................... 869 37 839 37 - --------------------------------------------------------------------------------------------------------- $ 2,331 100% $2,267 100% =========================================================================================================
ASB's deposit liabilities, securities sold under agreements to repurchase and advances from the FHLB of Seattle are not included in the table above. 39 As of August 3, 2001, the Standard & Poor's (S&P) and Moody's Investors Service's (Moody's) ratings of HEI's and HECO's securities were as follows:
S&P Moody's - ------------------------------------------------------------------------------------------------ HEI - --- Commercial paper.................................................... A-2 P-2 Medium-term notes................................................... BBB Baa2 HEI-obligated preferred securities of trust subsidiary.............. BB+ Ba1 HECO - ---- Commercial paper.................................................... A-2 P-2 Revenue bonds (insured)............................................. AAA Aaa Revenue bonds (noninsured).......................................... BBB+ Baa1 HECO-obligated preferred securities of trust subsidiaries........... BBB- Baa2 Cumulative preferred stock (selected series)........................ nr Baa3
nr Not rated. The above ratings are not recommendations to buy, sell or hold any securities; such ratings may be subject to revision or withdrawal at any time by the rating agencies; and each rating should be evaluated independently of any other rating. In June 2001, Moody's revised its credit outlook on HEI and HECO securities to stable from negative, citing "significant improvements in the Hawaiian economy, the resulting strong financial performance of the company's main operating subsidiaries, and a reduced emphasis on overseas investments." There was no change to S&P's negative outlook on HEI and HECO securities. In July 2001, Moody's announced changes to all issuers' preferred stock and trust preferred stock ratings. These issues are now rated on the debt scale of Aaa to C. According to Moody's, the change was of a technical nature and not indicative of changes in fundamental credit quality. For the first six months of 2001, net cash provided by operating activities of consolidated HEI was $120 million. Net cash provided by investing activities was $177 million, largely due to repayments and sales of mortgage/asset-backed and investment securities, net of purchases, partly offset by HECO's consolidated capital expenditures. Net cash used in financing activities was $17 million as a result of several factors, including the payment of common stock dividends and trust preferred securities distributions and net decreases in advances from the FHLB, securities sold under agreements to repurchase and short-term borrowings, partly offset by net increases in deposit liabilities and long-term debt and the issuance of common stock. Total HEI consolidated financing requirements for 2001 through 2005, including net capital expenditures (which exclude AFUDC and capital expenditures funded by third-party contributions in aid of construction), long-term debt retirements (excluding repayments of advances from the FHLB of Seattle and securities sold under agreements to repurchase) and preferred stock retirements, are estimated to total $1.3 billion. Of this amount, approximately $0.7 billion is for net capital expenditures (mostly relating to the electric utilities' net capital expenditures described below). HEI's consolidated internal sources, after the payment of HEI dividends, are expected to provide approximately 59% of the consolidated financing requirements, with debt and equity financing providing the remaining requirements. Additional debt and equity financing may be required to fund activities not included in the 2001 through 2005 forecast, such as increases in the amount of or an acceleration of capital expenditures of the electric utilities. Following is a discussion of the liquidity and capital resources of HEI's largest segments. 40 Electric utility HECO's consolidated capital structure was as follows:
(in millions) June 30, 2001 December 31, 2000 - -------------------------------------------------------------------------------------------------------- Short-term borrowings............................. $ 79 4% $ 113 7% Long-term debt.................................... 679 39 668 38 HECO-obligated preferred securities of trust subsidiaries..................................... 100 6 100 6 Preferred stock................................... 34 2 34 2 Common stock equity............................... 869 49 825 47 - -------------------------------------------------------------------------------------------------------- $1,761 100% $1,740 100% ========================================================================================================
Operating activities provided $82 million in net cash during the first six months of 2001. Investing activities used net cash of $47 million, primarily for capital expenditures. Financing activities used net cash of $35 million, including $4 million for the payment of preferred dividends and preferred securities distributions and $34 million for the net repayment of short-term borrowings, partially offset by a $12 million net increase in long-term debt. The electric utilities' consolidated financing requirements for 2001 through 2005, including net capital expenditures and long-term debt repayments, are estimated to total $0.6 billion. HECO's consolidated internal sources, after the payment of common stock and preferred stock dividends, are expected to provide approximately 95% of the total requirements, with debt and equity financing providing the remaining requirements. As of June 30, 2001, $17 million of proceeds from previous sales by the Department of Budget and Finance of the State of Hawaii of special purpose revenue bonds issued for the benefit of HECO remain undrawn. Also as of June 30, 2001, an additional $65 million of special purpose revenue bonds were authorized by the Hawaii Legislature for issuance for the benefit of HECO and HELCO prior to the end of 2003. HECO estimates that it will require approximately $5 million in new common equity, in addition to retained earnings, over the five-year period 2001 through 2005. The PUC must approve issuances, if any, of long-term debt securities by HECO, HELCO and MECO. Capital expenditures include the costs of projects which are required to meet expected load growth, to improve reliability and to replace and upgrade existing equipment. Net capital expenditures for the five-year period 2001 through 2005 are currently estimated to total $0.6 billion. Approximately 65% of forecast gross capital expenditures, which includes the AFUDC and capital expenditures funded by third-party contributions in aid of construction, is for transmission and distribution projects, with the remaining 35% primarily for generation projects. For 2001, electric utility net capital expenditures are estimated to be $122 million. Gross capital expenditures are estimated to be $138 million, including approximately $98 million for transmission and distribution projects, approximately $24 million for generation projects and approximately $16 million for general plant and other projects. Drawdowns of proceeds from previous sales of tax-exempt special purpose revenue bonds and the generation of funds from internal sources are expected to provide the cash needed for net capital expenditures in 2001. Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of KWH sales and peak load, the availability of purchased power and changes in expectations concerning the construction and ownership of future generating units, the availability of generating sites and transmission and distribution corridors, the ability to obtain adequate and timely rate increases, escalation in construction costs, demand-side management programs, the effects of opposition to proposed construction projects and requirements of environmental and other regulatory and permitting authorities. 41 Savings bank
June 30, December 31, % (in millions) 2001 2000 change - -------------------------------------------------------------------------------------------------- Total assets.................................................... $5,994 $5,969 - Investment and mortgage/asset-backed securities................. 2,432 2,271 7 Loans receivable, net........................................... 2,783 3,211 (13) Deposit liabilities............................................. 3,660 3,585 2 Securities sold under agreements to repurchase.................. 562 597 (6) Advances from Federal Home Loan Bank............................ 1,194 1,249 (4)
As of June 30, 2001, ASB was the third largest financial institution in Hawaii based on total assets of $6 billion and deposits of $3.7 billion. In June 2001, ASB converted $397 million in residential mortgage loans into Federal National Mortgage Association (FNMA) pass-through securities. These securities were transferred into the investment securities portfolio where ASB can use them as collateral for FHLB advances and other borrowings. The conversion of the loans also improves ASB's risk-based capital ratio since less capital is needed to support federal agency securities than whole loans. In late June 2001, ASB sold $208 million of the FNMA securities to improve ASB's interest rate risk profile. The securities sold were lower yielding 30-year fixed-rate securities with long durations. ASB will reinvest the proceeds into shorter duration fixed-rate and adjustable-rate securities. For the first six months of 2001, net cash provided by ASB's operating activities was $60 million. Net cash provided by ASB's investing activities was $247 million, due largely to the repayments and sales of mortgage/asset-backed and investment securities, net of purchases. Net cash used in financing activities was $25 million largely due to net decreases of $55 million in advances from FHLB and $32 million in securities sold under agreements to repurchase and $14 million in common and preferred stock dividends, partly offset by a net increase of $75 million in deposit liabilities. Effective July 18, 2001, the OTS removed the regulation that required a savings association to maintain an average daily balance of liquid assets of at least 4% of its liquidity base, and retained a provision requiring a savings association to maintain sufficient liquidity to ensure its safe and sound operation. As of June 30, 2001, ASB had maintained liquid assets at a level which in the opinion of management is sufficient to ensure its safe and sound operation. ASB believes that a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth. As of June 30, 2001, ASB was in compliance with the OTS minimum capital requirements (ratio requirements noted in parentheses) with a tangible capital ratio of 6.2% (1.5%), a core capital ratio of 6.2% (4.0%) and a risk-based capital ratio of 12.5% (8.0%). Item 3. Quantitative and qualitative disclosures about market risk - ------------------------------------------------------------------ The Company considers interest rate risk to be a very significant market risk as it could potentially have a significant effect on the Company's financial condition and results of operations. For additional quantitative and qualitative information about the Company's market risks, see pages 16 to 19 of HEI's 2000 Annual Report to Stockholders. U.S. Treasury yields at June 30, 2001 and December 31, 2000 were as follows: (%) June 30, 2001 December 31, 2000 --- ------------- ----------------- 3 month 3.64 5.88 1 year 3.62 5.36 5 year 4.94 4.98 10 year 5.40 5.11 30 year 5.74 5.45 42 Interest rates (as measured by U.S. Treasury yields for various maturities) have decreased as much as 224 basis points and increased as much as 29 basis points between December 31, 2000 and June 30, 2001. Management believes that the shift from an inverted yield curve to a more normal yield curve resulted in a favorable, but immaterial, change in the Company's estimated fair values of its interest-sensitive assets, liabilities and off-balance sheet items. PART II - OTHER INFORMATION - -------------------------------------------------------------------------------- Item 1. Legal proceedings - -------------------------- There are no significant developments in pending legal proceedings except as set forth in HECO's "Notes to consolidated financial statements," and management's discussion and analysis of financial condition and results of operations. Item 5. Other information - -------------------------- A. Ratio of earnings to fixed charges HEI and subsidiaries Ratio of earnings to fixed charges excluding interest on ASB deposits
Six months ended Years ended December 31, --------------------------------------------------------------------------- June 30, 2001 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------------------------------------- 1.78 1.29 1.80 1.85 1.89 1.93 ==========================================================================================================
Ratio of earnings to fixed charges including interest on ASB deposits
Six months ended Years ended December 31, --------------------------------------------------------------------------- June 30, 2001 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------------------------------------- 1.49 1.19 1.48 1.47 1.58 1.56 ==========================================================================================================
For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent the sum of (i) pretax income from continuing operations (excluding undistributed net income or net loss from less than 50%-owned persons) and (ii) fixed charges (as hereinafter defined, but excluding capitalized interest). "Fixed charges" are calculated both excluding and including interest on ASB's deposits during the applicable periods and represent the sum of (i) interest, whether capitalized or expensed, but excluding interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statements of income, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense, (iv) the preferred stock dividend requirements of HEI's subsidiaries, increased to an amount representing the pretax earnings required to cover such dividend requirements and (v) the preferred securities distribution requirements of trust subsidiaries. HECO and subsidiaries Ratio of earnings to fixed charges
Six months ended Years ended December 31, --------------------------------------------------------------------------- June 30, 2001 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------------------------------------- 3.44 3.39 3.09 3.33 3.26 3.58 ==========================================================================================================
43 For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent the sum of (i) pretax income before preferred stock dividends of HECO and (ii) fixed charges (as hereinafter defined, but excluding the allowance for borrowed funds used during construction). "Fixed charges" represent the sum of (i) interest, whether capitalized or expensed, incurred by HECO and its subsidiaries, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense, (iv) the preferred stock dividend requirements of HELCO and MECO, increased to an amount representing the pretax earnings required to cover such dividend requirements and (v) the preferred securities distribution requirements of the trust subsidiaries. B. HECO transmission systems HECO serves Oahu's electricity requirements with power sources located primarily in West Oahu. The bulk of HECO's system load is in the Honolulu/East Oahu area. HECO transmits bulk power to the Honolulu/East Oahu service area over two major transmission corridors (Northern and Southern). Over the years, a series of studies addressing the reliability of the transmission system has recommended construction of the Southern corridor. The Southern corridor now extends from West Oahu through the Kewalo Substation in Honolulu. By late 2002, HECO plans to complete a Kewalo-Kamoku line, which will extend the Southern corridor to the Kamoku Substation. The Northern corridor traverses mountainous terrain and ends at the Pukele Substation, which services 18% of Oahu's electrical load, including one of the most important economic areas in the state (Waikiki). A failure of a 138 kv transmission line to the Pukele Substation, while the other line is out for maintenance, would result in a major system outage. HECO plans to construct a part underground/part overhead 138 kv transmission line from the Kamoku Substation to the Pukele Substation. This line would link the Southern and Northern corridors, and provide a third 138 kv transmission line to the Pukele substation. The Kamoku to Pukele transmission line project requires approval from the BLNR of a Conservation District Use Permit (CDUP). Several community and environmental groups have opposed the project, particularly the overhead portion of it. The BLNR held a public hearing on the CDUP in March 2001, at which several groups requested a contested case hearing. The BLNR appointed a hearings officer and it is anticipated that he will set the schedule for the contested case proceedings soon. In late 2000, the DLNR accepted a Revised Final Environmental Impact Statement (RFEIS) prepared in support of HECO's application for a CDUP. In early 2001, three organizations and an individual filed a complaint challenging the DLNR's acceptance of the RFEIS, seeking among other things, a court declaration that the RFEIS is inadequate and null and void. The BLNR has not halted administrative proceedings on the CDUP process (while the lawsuit is pending). HECO is vigorously contesting the lawsuit. The Kamoku to Pukele transmission line is scheduled to be in service by the first half of 2005 if construction is started by the first quarter of 2004. The actual start date of construction will depend on permitting and approval processes. PUC approval will be requested, as is the normal procedure for large transmission projects, when the project scope and projected costs are clearly defined. Management believes that the CDUP and other required permits and approvals will be obtained. 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, 2001 and 2000 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 12.2 Computation of ratio of earnings to fixed charges, six months ended June 30, 2001 and 2000 44 (b) Reports on Form 8-K Subsequent to March 31, 2001, HEI and/or HECO filed Current Reports, Forms 8-K, with the SEC as follows:
Dated Registrant/s Items reported - --------------------------------------------------------------------------------------------------------- April 23, 2001 HEI/HECO Item 5. HEI's April 23, 2001 news release reporting first quarter 2001 earnings April 24, 2001 HEI Item 5. HEI's April 24, 2001 news releases reporting HEI's quarterly dividend and the retirement of ASB's president May 23, 2001 HEI/HECO Item 5. Announcement of HEI's webcast and teleconference of the financial analyst presentation on Wednesday, May 30, 2001 June 1, 2001 HEI Item 5. Announcement of Constance H. Lau to the HEI Board of Directors June 19, 2001 HEI Items 5 and 7. HEI's Amended and Restated By-Laws, 1987 Stock Option and Incentive Plan of HEI as amended and restated effective June 19, 2001 and the Third Amendment to Trust Agreement, made and entered into April 1, 2001, between HEI and Fidelity Management Trust Company for the Hawaiian Electric Industries Retirement Savings Plan July 23, 2001 HEI/HECO Item 5. HEI's July 23, 2001 news release reporting second quarter 2001 earnings
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/ Curtis Y. Harada By /s/ Richard A. von Gnechten ---------------------------------- ----------------------------------- Curtis Y. Harada Richard A. von Gnechten Controller Financial Vice President (Principal Accounting (Principal Financial Officer of HEI) Officer of HECO) Date: August 8, 2001 Date: August 8, 2001 45 EX-12.1 3 dex121.txt HEI INC. COMPUTATION OF RATIO OF EARNINGS HEI Exhibit 12.1 ---------------- Hawaiian Electric Industries, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Six months ended June 30 2001 (1) 2001 (2) 2000 (1) 2000 (2) - ------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Fixed charges Total interest charges (3)............................ $ 94,388 $157,614 $ 97,032 $153,447 Interest component of rentals......................... 2,179 2,179 2,282 2,282 Pretax preferred stock dividend requirements of subsidiaries........................................ 1,571 1,571 1,679 1,679 Preferred securities distributions of trust subsidiaries.................................. 8,018 8,018 8,018 8,018 - ------------------------------------------------------------------------------------------------------------------------- Total fixed charges................................... $106,156 $169,382 $109,011 $165,426 ========================================================================================================================= Earnings Pretax income......................................... $ 84,124 $ 84,124 $ 81,088 $ 81,088 Fixed charges, as shown............................... 106,156 169,382 109,011 165,426 Interest capitalized.................................. (1,187) (1,187) (1,580) (1,580) - ------------------------------------------------------------------------------------------------------------------------- Earnings available for fixed charges.................. $189,093 $252,319 $188,519 $244,934 ========================================================================================================================= Ratio of earnings to fixed charges.................... 1.78 1.49 1.73 1.48 =========================================================================================================================
(1) Excluding interest on ASB deposits. (2) Including interest on ASB deposits. (3) Interest on nonrecourse debt from leveraged leases is not included in total interest charges nor in interest expense in HEI's consolidated statements of income. EX-12.2 4 dex122.txt HECO COMPUTATION OF RATIO OF EARNINGS. HECO Exhibit 12.2 ----------------- Hawaiian Electric Company, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Six months ended June 30 2001 2000 - ------------------------------------------------------------------------------------------------------------------ (dollars in thousands) Fixed charges Total interest charges.......................................................... $ 24,451 $ 24,351 Interest component of rentals................................................... 351 371 Pretax preferred stock dividend requirements of subsidiaries.................... 719 721 Preferred securities distributions of trust subsidiaries........................ 3,838 3,838 - ------------------------------------------------------------------------------------------------------------------ Total fixed charges............................................................. $ 29,359 $ 29,281 ================================================================================================================== Earnings Income before preferred stock dividends of HECO................................. $ 44,681 $ 48,279 Income taxes (see note below)................................................... 28,017 30,330 Fixed charges, as shown......................................................... 29,359 29,281 AFUDC for borrowed funds........................................................ (1,187) (1,413) - ------------------------------------------------------------------------------------------------------------------ Earnings available for fixed charges............................................ $100,870 $106,477 ================================================================================================================== Ratio of earnings to fixed charges.............................................. 3.44 3.64 ================================================================================================================== Note: Income taxes is comprised of the following Income tax expense relating to operating income for regulatory purposes...... $ 27,966 $ 30,394 Income tax expense (benefit) relating to nonoperating results................ 51 (64) - ------------------------------------------------------------------------------------------------------------------ $ 28,017 $ 30,330 ==================================================================================================================
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