-----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, NmTEdctD0niVEicS/Y17zcGLM+qk6kFpDitigMMIhXldjJBcH8Y5Ul2yjRl1y0yy HYtB3tbpYX4nVDpDhcvKTw== 0000898430-99-003220.txt : 19990813 0000898430-99-003220.hdr.sgml : 19990813 ACCESSION NUMBER: 0000898430-99-003220 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC INDUSTRIES INC CENTRAL INDEX KEY: 0000354707 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990208097 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08503 FILM NUMBER: 99686120 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085435662 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC CO INC CENTRAL INDEX KEY: 0000046207 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990040500 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04955 FILM NUMBER: 99686121 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085437771 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FORMER COMPANY: FORMER CONFORMED NAME: HAWAIIAN ELECTRIC CO LTD DATE OF NAME CHANGE: 19670212 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 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 6, 1999 - -------------------------------------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. (Without Par Value)...... 32,212,263 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, 1999 INDEX Page No. Glossary of terms........................................................ ii Forward-looking information.............................................. v PART I. FINANCIAL INFORMATION Item 1. Financial statements Hawaiian Electric Industries, Inc. and subsidiaries ----------------------------------------------------------- Consolidated balance sheets (unaudited) - June 30, 1999 and December 31, 1998........................ 1 Consolidated statements of income (unaudited) - three and six months ended June 30, 1999 and 1998.......... 2 Consolidated statements of retained earnings (unaudited) - three and six months ended June 30, 1999 and 1998.......... 3 Consolidated statements of cash flows (unaudited) - six months ended June 30, 1999 and 1998.................... 4 Notes to consolidated financial statements (unaudited)..... 5 Hawaiian Electric Company, Inc. and subsidiaries ----------------------------------------------------------- Consolidated balance sheets (unaudited) - June 30, 1999 and December 31, 1998........................ 10 Consolidated statements of income (unaudited) - three and six months ended June 30, 1999 and 1998.......... 11 Consolidated statements of retained earnings (unaudited) - three and six months ended June 30, 1999 and 1998.......... 11 Consolidated statements of cash flows (unaudited) - six months ended June 30, 1999 and 1998.................... 12 Notes to consolidated financial statements (unaudited)..... 13 Item 2. Management's discussion and analysis of financial condition and results of operations.................................. 23 Item 3. Quantitative and qualitative disclosures about market risk. 39 PART II. OTHER INFORMATION Item 1. Legal proceedings........................................... 40 Item 5. Other information........................................... 40 Item 6. Exhibits and reports on Form 8-K............................. 41 Signatures................................................................. 42 i Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended June 30, 1999 GLOSSARY OF TERMS Terms Definitions - ----- ----------- AFUDC Allowance for funds used during construction ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corp., ASB Service Corporation, AdCommunications, Inc., American Savings Mortgage Co., Inc. and ASB Realty Corporation BaoSteel Baotou Iron & Steel (Group) Co., Ltd. BIF Bank Insurance Fund 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 Investment Corp., Hawaiian Tug & Barge Corp., Young Brothers, Limited, HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, HEIDI Real Estate Corp., Pacific Energy Conservation Services, Inc., HEI Power Corp. and its subsidiaries, HEI District Cooling, Inc., ProVision Technologies, 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 and Malama Pacific Corp. and its subsidiaries D&O Decision and order DLNR Department of Land and Natural Resources of the State of Hawaii DOH Department of Health of the State of Hawaii EAB Environmental Appeals Board Encogen Encogen Hawaii, L.P. Enserch Enserch Development Corporation EPA Environmental Protection Agency - federal ii GLOSSARY OF TERMS, continued Terms Definitions - ----- ----------- FASB Financial Accounting Standards Board FDIC Federal Deposit Insurance Corporation federal U.S. Government FHLB Federal Home Loan Bank FICO Financing Corporation GAAP Generally accepted accounting principles GPA Guam Power Authority HCPC Hilo Coast Power Company, formerly Hilo Coast Processing Company HECO Hawaiian Electric Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I and HECO Capital Trust II HEI Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., HEI Investment Corp., Hawaiian Tug & Barge Corp., HEI Diversified, Inc., Pacific Energy Conservation Services, Inc., HEI Power Corp., HEI District Cooling, Inc., ProVision Technologies, Inc., Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III 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. and HEIDI Real Estate Corp. HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc., and the parent company of several subsidiaries HEIPC Group HEI Power Corp. and its subsidiaries HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power Corp. iii GLOSSARY OF TERMS, continued Terms Definitions - ----- ----------- HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of Young Brothers, Limited IPP Independent power producer KCP Kawaihae Cogeneration Partners KWH Kilowatthour MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several real estate subsidiaries. On September 14, 1998, the HEI Board of Directors adopted a plan to exit the residential real estate development business engaged in by Malama Pacific Corp. and its subsidiaries. MW Megawatt NOV Notice of Violation OTS Office of Thrift Supervision, Department of Treasury PSD permit Prevention of Significant Deterioration/Covered Source permit PUC Public Utilities Commission of the State of Hawaii ROACE Return on average common equity SAIF Savings Association Insurance Fund SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian Tug & Barge Corp. iv Forward-looking information This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and its subsidiaries contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Except for historical information contained herein, the matters set forth are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include, but are not limited to, such factors as the effect of international, national and local economic conditions, including the condition of the Hawaii tourist and construction industries and the Hawaii housing market; the effects of weather and natural disasters; product demand and market acceptance risks; increasing competition in the electric utility industry; capacity and supply constraints or difficulties; new technological developments; governmental and regulatory actions, including decisions in rate cases and on permitting issues; the results of financing efforts; the timing and extent of changes in interest rates and foreign currency exchange rates; the convertibility and availability of foreign currency; political and business risks inherent in doing business in developing countries; and the risks associated with the installation of new computer systems and the avoidance of Year 2000 problems. Investors are also referred to other risks and uncertainties discussed 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. 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) 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Assets - ------ Cash and equivalents............................................ $ 154,231 $ 412,254 Accounts receivable and unbilled revenues, net.................. 149,726 156,220 Investment and mortgage-backed securities....................... 2,019,704 1,902,927 Loans receivable, net........................................... 3,203,868 3,143,197 Property, plant and equipment, net of accumulated depreciation and amortization of $1,122,256 and $1,063,023... 2,089,055 2,093,398 Regulatory assets............................................... 113,656 110,459 Other........................................................... 275,716 265,799 Goodwill and other intangibles.................................. 110,872 115,006 ------------ ------------ $ 8,116,828 $ 8,199,260 ============ ============= Liabilities and stockholders' equity - ------------------------------------ Liabilities Accounts payable................................................ $ 117,608 $ 107,863 Deposit liabilities............................................. 3,728,784 3,865,736 Short-term borrowings........................................... 157,377 222,847 Securities sold under agreements to repurchase.................. 476,300 515,330 Advances from Federal Home Loan Bank............................ 926,081 805,581 Long-term debt.................................................. 995,254 899,598 Deferred income taxes........................................... 185,780 186,138 Contributions in aid of construction............................ 198,856 198,904 Other........................................................... 259,652 285,243 ------------ ------------ 7,045,692 7,087,240 ------------ ------------- 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 electric utility subsidiaries Subject to mandatory redemption............................. - 33,080 Not subject to mandatory redemption......................... 34,293 48,293 Minority interests.............................................. 3,570 3,675 ------------- ------------- 237,863 285,048 ------------- ------------- Stockholders' equity Preferred stock, no par value, authorized 10,000 shares; issued: none............................................... - - Common stock, no par value, authorized 100,000 shares; issued and outstanding: 32,186 shares and 32,116 shares............ 664,415 661,720 Retained earnings............................................... 168,858 165,252 ------------ ------------ 833,273 826,972 ------------- ------------- $ 8,116,828 $ 8,199,260 ============= ============= 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) 1999 1998 1999 1998 - --------------------------------------------------------- ----------------------------------------------------- Revenues Electric utility......................................... $252,272 $244,548 $490,063 $502,810 Savings bank............................................. 101,759 101,268 202,039 203,095 Other.................................................... 15,657 14,849 29,833 29,618 -------- -------- -------- -------- 369,688 360,665 721,935 735,523 -------- -------- -------- -------- Expenses Electric utility......................................... 207,936 202,850 404,826 418,551 Savings bank............................................. 85,970 88,638 171,119 174,414 Other.................................................... 17,072 15,063 33,248 31,983 -------- -------- -------- -------- 310,978 306,551 609,193 624,948 -------- -------- -------- -------- Operating income (loss) Electric utility......................................... 44,336 41,698 85,237 84,259 Savings bank............................................. 15,789 12,630 30,920 28,681 Other.................................................... (1,415) (214) (3,415) (2,365) -------- -------- -------- -------- 58,710 54,114 112,742 110,575 -------- -------- -------- -------- Interest expense--electric utility and other............. (19,000) (18,135) (36,888) (35,744) Allowance for borrowed funds used during construction................................... 599 1,703 1,239 3,319 Preferred stock dividends of electric utility subsidiaries.................................. (499) (1,500) (1,126) (3,008) Preferred securities distributions of trust subsidiaries. (4,008) (3,096) (8,007) (6,192) Allowance for equity funds used during construction................................... 987 2,866 2,026 5,642 -------- -------- -------- -------- Income from continuing operations before income taxes................................... 36,789 35,952 69,986 74,592 Income taxes............................................. 14,033 13,031 26,476 28,852 -------- -------- -------- -------- Income from continuing operations........................ 22,756 22,921 43,510 45,740 Loss from discontinued operations loss from operations (less applicable income tax benefits of $335 and $714 for the three months and six months ended June 30, 1998, respectively)..... - (528) - (1,124) -------- -------- -------- -------- Net income............................................... $ 22,756 $ 22,393 $ 43,510 $ 44,616 ======== ======== ======== ======== Basic earnings (loss) per common share Continuing operations................................. $ 0.71 $ 0.72 $ 1.35 $ 1.43 Discontinued operations............................... - (0.02) - (0.03) -------- -------- -------- -------- $ 0.71 $ 0.70 $ 1.35 $ 1.40 ======== ======== ======== ======== Diluted earnings (loss) per common share Continuing operations................................. $ 0.71 $ 0.72 $ 1.35 $ 1.42 Discontinued operations............................... - (0.02) - (0.03) -------- -------- -------- -------- $ 0.71 $ 0.70 $ 1.35 $ 1.39 ======== ======== ======== ======== Dividends per common share............................... $ 0.62 $ 0.62 $ 1.24 $ 1.24 ======== ======== ======== ======== Weighted-average number of common shares outstanding (basic earnings per common share) 32,183 32,007 32,168 31,982 Dilutive effect of stock options and dividend 92 136 98 138 equivalents.......................................... -------- -------- -------- -------- Adjusted weighted-average shares (diluted earnings per common share)................... 32,275 32,143 32,266 32,120 ======== ======== ======== ======== Ratio of earnings to fixed charges (SEC method) Excluding interest on ASB deposits.................. 1.79 1.86 ======== ======== Including interest on ASB deposits.................. 1.45 1.46 ======== ========
See accompanying notes to consolidated financial statements. 2
Hawaiian Electric Industries, Inc. and subsidiaries Consolidated statements of retained earnings (unaudited) Three months ended Six months ended June 30, June 30, --------------------------------- ------------------------------- (in thousands) 1999 1998 1999 1998 - ----------------------------------------------------------- ---------------------------------------------------------------------- Retained earnings, beginning of period................ $166,057 $162,259 $165,252 $159,862 Net income............................................ 22,756 22,393 43,510 44,616 Common stock dividends................................ (19,955) (19,845) (39,904) (39,671) -------------- -------------- -------------- --------- Retained earnings, end of period...................... $168,858 $164,807 $168,858 $164,807 ============== ============== ============== ========= 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, ---------------------------------- (in thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Income from continuing operations.................................................... $ 43,510 $ 45,740 Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities Depreciation and amortization of property, plant and equipment................. 54,410 49,539 Other amortization............................................................. 8,180 7,850 Provision for loan losses...................................................... 6,098 6,348 Deferred income taxes.......................................................... 796 (1,478) Allowance for equity funds used during construction............................ (2,026) (5,642) Changes in assets and liabilities Decrease in accounts receivable and unbilled revenues, net............... 6,494 8,211 Increase (decrease) in accounts payable.................................. 9,745 (42,356) Changes in other assets and liabilities.................................. (26,805) 5,529 --------- --------- Net cash provided by continuing operating activities................................. 100,402 73,741 --------- --------- Cash flows from investing activities Held-to-maturity mortgage-backed securities purchased................................ (479,844) (278,784) Principal repayments on held-to-maturity mortgage-backed securities.................. 364,060 237,356 Held-to-maturity investment securities purchased..................................... - (117,982) Loans receivable originated and purchased............................................ (400,473) (301,420) Principal repayments on loans receivable............................................. 327,281 238,987 Capital expenditures................................................................. (57,759) (72,675) Cash paid to Bank of America, FSB for the purchase of loans receivable and other assets, net of the assumption of deposit and other liabilities.............. - (24,018) Proceeds from loans returned to Bank of America, FSB................................. - 27,514 Other................................................................................ 9,983 10,652 --------- --------- Net cash used in investing activities................................................ (236,752) (280,370) --------- --------- Cash flows from financing activities Net decrease in deposit liabilities.................................................. (136,952) (101,028) Net decrease in short-term borrowings with original maturities of three months or less.............................................................. (65,470) (78,854) Net decrease in retail repurchase agreements......................................... 125 115,028 Proceeds from securities sold under agreements to repurchase......................... 198,000 412,812 Repurchase of securities sold under agreements to repurchase......................... (237,000) (263,000) Proceeds from advances from Federal Home Loan Bank................................... 423,100 335,700 Principal payments on advances from Federal Home Loan Bank........................... (302,600) (281,593) Proceeds from issuance of long-term debt............................................. 99,075 175,482 Repayment of long-term debt.......................................................... (3,500) (59,400) Redemption of electric utility subsidiaries' preferred stock......................... (42,080) (2,400) Net proceeds from issuance of common stock........................................... 2,510 4,514 Common stock dividends............................................................... (39,904) (39,671) Preferred securities distributions of trust subsidiaries............................. (8,007) (6,192) Other................................................................................ (8,970) (2,593) --------- --------- Net cash provided by (used in) financing activities.................................. (121,673) 208,805 --------- --------- Net cash used in discontinued operations............................................. - (2,500) --------- --------- Net decrease in cash and equivalents................................................. (258,023) (324) Cash and equivalents, beginning of period............................................ 412,254 253,910 --------- --------- Cash and equivalents, end of period.................................................. $ 154,231 $ 253,586 ========= ========= See accompanying notes to consolidated financial statements.
4 Hawaiian Electric Industries, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 and 1998 (Unaudited) - -------------------------------------------------------------------------------- (1) Basis of presentation - -------------------------- The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Securities and Exchange Commission (SEC) Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HEI's Annual Report on SEC Form 10-K for the year ended December 31, 1998 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, 1999. 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, 1999 and December 31, 1998, the results of its operations for the three and six months ended June 30, 1999 and 1998, and its cash flows for the six months ended June 30, 1999 and 1998. 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. Certain reclassifications have been made to prior periods' consolidated financial statements to conform to the 1999 presentation. 5 (2) Segment financial information - ---------------------------------- Segment financial information was as follows:
Electric Savings Holding Elimi- ($ in thousands) utility bank Other companies nations Total - ---------------------------------------------------------------------------------------------- Quarter ended June 30, 1999 Revenues from external 252,272 101,752 14,658 1,006 - 369,688 customers................... Intersegment revenues........ - 7 2,728 1,554 (4,289) - ----------------------------------------------------------------- Revenues................. 252,272 101,759 17,386 2,560 (4,289) 369,688 ================================================================= Profit (loss)*............... 31,335 14,439 140 (9,125) - 36,789 Income taxes (benefit)....... 12,111 5,382 496 (3,956) - 14,033 ----------------------------------------------------------------- Income (loss) from continuing operations. 19,224 9,057 (356) (5,169) - 22,756 ================================================================= Six months ended June 30, 1999 Revenues from external 490,063 202,024 28,692 1,156 - 721,935 customers................... Intersegment revenues........ - 15 5,372 3,556 (8,943) - ----------------------------------------------------------------- Revenues................. 490,063 202,039 34,064 4,712 (8,943) 721,935 ================================================================= Profit (loss)*............... 59,036 28,220 556 (17,826) - 69,986 Income taxes (benefit)....... 22,731 10,638 911 (7,804) - 26,476 ----------------------------------------------------------------- Income (loss) from continuing operations. 36,305 17,582 (355) (10,022) - 43,510 ================================================================= Quarter ended June 30, 1998 Revenues from external customers................... 244,548 101,260 14,790 67 - 360,665 Intersegment revenues........ - 8 2,715 2,078 (4,801) - ----------------------------------------------------------------- Revenues................. 244,548 101,268 17,505 2,145 (4,801) 360,665 ================================================================= Profit (loss)*............... 31,207 11,280 997 (7,532) - 35,952 Income taxes (benefit)....... 12,518 3,928 900 (4,315) - 13,031 ----------------------------------------------------------------- Income (loss) from continuing operations. 18,689 7,352 97 (3,217) - 22,921 ================================================================= Six months ended June 30, 1998 Revenues from external customers................... 502,810 203,080 29,501 132 - 735,523 Intersegment revenues........ - 15 5,331 4,114 (9,460) - ----------------------------------------------------------------- Revenues................. 502,810 203,095 34,832 4,246 (9,460) 735,523 ================================================================= Profit (loss)*............... 63,485 25,981 1,340 (16,214) - 74,592 Income taxes (benefit)....... 25,534 10,269 1,498 (8,449) - 28,852 ----------------------------------------------------------------- Income (loss) from continuing operations. 37,951 15,712 (158) (7,765) - 45,740 =================================================================
* Income before income taxes and discontinued operations. Revenues attributed to foreign countries for the periods identified above were not significant. 6 (3) Electric utility subsidiary - -------------------------------- For Hawaiian Electric Company, Inc.'s consolidated financial information, including its commitments and contingencies, see pages 10 through 22. (4) Savings bank subsidiary - ---------------------------- Deposit-insurance premiums The Savings Association Insurance Fund (SAIF) insures the deposit accounts of ASB and other thrifts. The Bank Insurance Fund (BIF) insures the deposit accounts of commercial banks. The Federal Deposit Insurance Corporation (FDIC) administers the SAIF and BIF. In December 1996, the FDIC adopted a risk-based assessment schedule for SAIF institutions, effective January 1, 1997, that was identical to the existing base rate schedule for BIF institutions: zero to 27 cents per $100 of deposits. Added to this base rate schedule through 1999 will be the assessment to fund the Financing Corporation's (FICO's) interest obligations, which assessment was initially set at 6.48 cents per $100 of deposits for SAIF institutions and 1.3 cents per $100 of deposits for BIF institutions (subject to quarterly adjustment). In December 1997, ASB acquired BIF-assessable deposits as well as SAIF-assessable deposits from Bank of America, FSB. As a "well-capitalized" thrift, ASB's base deposit insurance premium effective for the June 30, 1999 quarterly payment is zero and its assessment for funding FICO interest payments is 5.8 cents per $100 of SAIF-assessable deposits and 1.2 cents per $100 of BIF- assessable deposits, on an annual basis, based on deposits as of March 31, 1999. SAIF-assessable deposits represented 98% of total deposits as of March 31, 1999. (5) Cash flows - ---------------- Supplemental disclosures of cash flow information Cash paid for interest (net of capitalized amounts) and income taxes was as follows:
Six months ended June 30, ------------------------------------------ (in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Interest (including interest paid by savings bank, but excluding interest paid on nonrecourse debt on leveraged leases).............................................. $139,858 $138,267 ======== ======== Income taxes........................................................................ $ 38,030 $ 33,926 ======== ========
Supplemental disclosures 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 $2.0 million and $5.6 million for the six months ended June 30, 1999 and 1998, respectively, and decreased due to the nonaccrual of AFUDC at Keahole and a lower construction in progress base on which AFUDC is calculated because of additions to plant in 1998. (6) Accounting changes - ----------------------- Costs of computer software developed or obtained for internal use and start-up activities In March 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which requires that certain costs, including certain payroll and payroll-related costs, be capitalized and amortized over the estimated useful life of the software. In April 1998, the AICPA Accounting Standards Executive Committee issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which requires that costs of start-up activities, including organization costs, be expensed as incurred. The provisions of SOP 98-1 and SOP 98-5 are effective for fiscal years beginning after December 15, 1998. The Company adopted SOP 98-1 and SOP 98-5 effective January 1, 1999. The adoption of SOP 98-1 and SOP 98-5 did not have a material effect on the Company's financial condition, results of operations or liquidity. 7 Derivative instruments and hedging activities In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the provisions of SFAS No. 133 were amended by SFAS No. 137 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133, as amended, on January 1, 2001, but has not yet determined the impact, if any, of adoption. (7) Commitments and contingencies - ---------------------------------- Environmental regulation In early 1995, the Department of Health of the State of Hawaii (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 to 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, Equilon Enterprises LLC (formerly Shell Oil Products Company), the State of Hawaii Department of Transportation Harbors Division and others, but not including HTB and YB] formed a Technical Work Group and a Legal Work Group which now function together as the Honolulu Harbor Working Group. Effective January 30, 1998, the Honolulu Harbor Working 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. On April 19, 1999, the Honolulu Harbor Working Group submitted to the DOH a "Data Assimilation and Review" report, which presents the results of a study conducted by a consultant to document environmental conditions in the Iwilei Unit of the Honolulu Harbor study area related to potential petroleum impacts. The location and sources (confirmed and potential) of petroleum releases were identified. The Honolulu Harbor Working Group will later submit a report that will include the identification and evaluation of potential hazardous areas, a preliminary risk screening and recommendations for additional data gathering to allow an assessment of the need for risk-based corrective action. Tentatively, it is expected that this report will be submitted to the DOH in the third quarter of 1999. On July 14, 1999, the Honolulu Harbor Working Group engaged PHR Environmental Consultants, Inc. (PHR) to assist in identifying additional potentially responsible parties. Preliminary results from PHR are expected later in the third quarter 1999. Because the process for determining appropriate remedial and cleanup action, if any, is at an early stage, management cannot predict at this time the costs of further site analysis or future remediation and cleanup requirements, nor can it estimate when such costs would be incurred. Certain of the costs incurred may be claimed and covered under insurance policies, but such coverage is not determinable at this time. China project In September 1998, HEI Power Corp. (HEIPC), through a wholly owned subsidiary's 80% ownership of a Mauritius Company, acquired an effective 60% interest in a joint venture, Baotou Tianjiao Power Co., Ltd. (Tianjiao), formed to design, construct, own, operate and manage a 200 megawatt (MW) coal-fired power plant to be located inside Baotou Iron & Steel (Group) Co., Ltd.'s (BaoSteel's) complex in Inner Mongolia, People's Republic of China. BaoSteel, a state-owned enterprise and the fifth largest steel company in China, is a 25% partner in the joint venture and will purchase all the electricity generated. 8 Ownership of the plant will be transferred, without charge, to BaoSteel in approximately 20 years. As of June 30, 1999, HEIPC and its subsidiaries (the HEIPC Group) had invested approximately $17 million and are committed to invest up to an additional $83 million toward the China project. Completion of construction is dependent on BaoSteel having made satisfactory arrangements with the Inner Mongolia Power (Group) Co. Ltd. for the interconnection of the project. Although BaoSteel is in the process of securing the interconnection agreement, as of August 6, 1999, such agreement had not yet been finalized. (8) Discontinued operations--Malama Pacific Corp. (MPC) - -------------------------------------------------------- On September 14, 1998, the HEI Board of Directors adopted a plan to exit the residential real estate development business (engaged by MPC and its subsidiaries) by September 1999. Accordingly, MPC management commenced a program to sell all of MPC's real estate assets and investments and HEI reported MPC as a discontinued operation in the Company's consolidated statements of income in the third quarter of 1998. Summary financial information for the discontinued operations of MPC is as follows:
Three months Six months ended ended (in thousands) June 30, 1998 June 30, 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Operations Revenues............................................................................. $1,807 $ 2,570 Operating loss....................................................................... $ (324) $ (767) Interest expense..................................................................... (539) (1,071) Income tax benefits.................................................................. 335 714 ------------ ----------- Loss from discontinued operations - loss from operations............................. $ (528) $(1,124) ============ =========== Basic and diluted loss per common share.............................................. $(0.02) $ (0.03) ============ ===========
As of June 30, 1999, the remaining net assets of the discontinued residential real estate development operations amounted to $21 million (included in "Other" assets) and consisted primarily of real estate assets, receivables and deferred tax assets, reduced by loans, accounts payable and a reserve for the net loss from operations during the disposal period (estimated to be $3 million as of September 14, 1998). The amounts that MPC will ultimately realize from the sale of the real estate assets could differ materially from the recorded amounts as of June 30, 1999. For the period from September 14, 1998 to June 30, 1999, the net loss from operations was approximately $2 million and was charged to the loss reserve. In the second quarter of 1999, MPC closed the sale of one property and received proceeds, net of selling expenses, of $3.8 million. The remaining MPC and/or its joint ventures' properties to be sold consist of approximately 400 acres on three islands. MPC is currently in active negotiations for the sale of approximately 150 acres. (9) Subsequent event - --------------------- On August 4, 1999, HEI signed an agreement for the sale of Young Brothers, Limited and certain assets of Hawaiian Tug & Barge Corp. to Saltchuk Resources, Inc. of Seattle, Washington. The sale is subject to several conditions, including completion by buyer of a due diligence review and the approval of the Public Utilities Commission of the State of Hawaii. The sale is expected to result in an after-tax loss of approximately $2 million for the Company. 9
Hawaiian Electric Company, Inc. and subsidiaries Consolidated balance sheets (unaudited) June 30, December 31, (in thousands, except par value) 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Assets Utility plant, at cost Land.................................................................. $ 28,291 $ 30,312 Plant and equipment................................................... 2,783,752 2,750,487 Less accumulated depreciation......................................... (1,034,656) (982,172) Plant acquisition adjustment, net..................................... 484 510 Construction in progress.............................................. 161,399 144,035 ------------------- ------------------ Net utility plant............................................... 1,939,270 1,943,172 ------------------- ------------------ Current assets Cash and equivalents.................................................. 18,653 54,783 Customer accounts receivable, net..................................... 70,073 69,170 Accrued unbilled revenues, net........................................ 40,566 43,445 Other accounts receivable, net........................................ 1,553 4,082 Fuel oil stock, at average cost....................................... 23,141 16,778 Materials and supplies, at average cost............................... 19,342 17,266 Prepayments and other................................................. 4,167 3,858 ------------------- ------------------ Total current assets............................................ 177,495 209,382 ------------------- ------------------ Other assets Regulatory assets..................................................... 111,618 108,344 Other................................................................. 46,627 50,355 ------------------- ------------------ Total other assets.............................................. 158,245 158,699 ------------------- ------------------ $ 2,275,010 $2,311,253 =================== ================== 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.............................................. 295,529 295,344 Retained earnings..................................................... 415,944 405,836 ------------------- ------------------ Common stock equity............................................. 796,860 786,567 Cumulative preferred stock - not subject to mandatory redemption...... 34,293 34,293 HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures......................................................... 100,000 100,000 Long-term debt, net................................................... 626,754 621,998 ------------------- ------------------ Total capitalization............................................ 1,557,907 1,542,858 ------------------- ------------------ Current liabilities Preferred stock sinking fund and optional redemption payments......... -- 47,080 Short-term borrowings - nonaffiliates................................. 123,127 133,863 Short-term borrowings - affiliate..................................... -- 5,550 Accounts payable...................................................... 51,322 40,008 Interest and preferred dividends payable.............................. 10,983 11,214 Taxes accrued......................................................... 61,239 58,335 Other................................................................. 24,333 30,166 ------------------- ------------------ Total current liabilities....................................... 271,004 326,216 ------------------- ------------------ Deferred credits and other liabilities Deferred income taxes................................................. 129,372 128,327 Unamortized tax credits............................................... 48,243 48,130 Other................................................................. 69,628 66,818 ------------------- ------------------ Total deferred credits and other liabilities.................... 247,243 243,275 ------------------- ------------------ Contributions in aid of construction..................................... 198,856 198,904 ------------------- ------------------ $ 2,275,010 $2,311,253 =================== ================== See accompanying notes to HECO's consolidated financial statements.
10
Hawaiian Electric Company, Inc. and subsidiaries Consolidated statements of income (unaudited) Three months ended Six months ended (in thousands, except for ratio of earnings June 30, June 30, --------------------------------- --------------------------------- to fixed charges) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Operating revenues.................................... $250,858 $242,204 $487,483 $498,247 -------------- -------------- -------------- -------------- Operating expenses Fuel oil.............................................. 47,226 44,449 92,104 101,180 Purchased power....................................... 67,649 69,091 127,629 135,674 Other operation....................................... 32,477 33,879 64,800 69,965 Maintenance........................................... 13,583 10,866 26,888 21,230 Depreciation and amortization......................... 23,354 21,446 46,719 42,888 Taxes, other than income taxes........................ 23,524 23,054 46,420 47,346 Income taxes.......................................... 12,121 12,558 22,789 25,560 -------------- -------------- -------------- -------------- 219,934 215,343 427,349 443,843 -------------- -------------- -------------- -------------- Operating income...................................... 30,924 26,861 60,134 54,404 -------------- -------------- -------------- -------------- Other income Allowance for equity funds used during construction................................ 987 2,866 2,026 5,642 Other, net............................................ 1,301 2,320 2,372 4,322 -------------- -------------- -------------- -------------- 2,288 5,186 4,398 9,964 -------------- -------------- -------------- -------------- Income before interest and other charges.............. 33,212 32,047 64,532 64,368 -------------- -------------- -------------- -------------- Interest and other charges Interest on long-term debt............................ 9,915 10,514 19,826 20,692 Amortization of net bond premium and expense.......... 404 373 767 722 Other interest charges................................ 1,851 1,667 3,920 3,301 Allowance for borrowed funds used during construction................................ (599) (1,703) (1,239) (3,319) Preferred stock dividends of subsidiaries............. 229 639 487 1,277 Preferred securities distributions of trust subsidiaries................................. 1,918 1,007 3,827 2,013 -------------- -------------- -------------- -------------- 13,718 12,497 27,588 24,686 -------------- -------------- -------------- -------------- Income before preferred stock dividends of HECO............................................ 19,494 19,550 36,944 39,682 Preferred stock dividends of HECO..................... 270 861 639 1,731 -------------- -------------- -------------- -------------- Net income for common stock........................... $ 19,224 $ 18,689 $ 36,305 $ 37,951 ============== ============== ============== ============== Ratio of earnings to fixed charges (SEC method)...... 2.98 3.13 ============== ==============
Hawaiian Electric Company, Inc. and subsidiaries Consolidated statements of retained earnings (unaudited) Three months ended Six months ended June 30, June 30, --------------------------------- --------------------------------- (in thousands) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- Retained earnings, beginning of period................ $409,530 $391,518 $405,836 $387,582 Net income for common stock........................... 19,224 18,689 36,305 37,951 Common stock dividends................................ (12,810) -- (26,197) (15,326) -------------- -------------- -------------- -------------- Retained earnings, end of period...................... $415,944 $410,207 $415,944 $410,207 ============== ============== ============== ============== HEI owns all the common stock of HECO. Therefore, per share data with respect to shares of common stock of HECO are not meaningful. See accompanying notes to HECO's consolidated financial statements.
11
Hawaiian Electric Company, Inc. and subsidiaries Consolidated statements of cash flows (unaudited) Six months ended June 30, ------------------------------------------- (in thousands) 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Income before preferred stock dividends of HECO............................ $ 36,944 $ 39,682 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Depreciation and amortization of property, plant and equipment............................................... 46,719 42,888 Other amortization................................................... 3,177 3,625 Deferred income taxes................................................ 1,045 1,163 Tax credits, net..................................................... 910 2,553 Allowance for equity funds used during construction.................. (2,026) (5,642) Changes in assets and liabilities Decrease in accounts receivable................................. 1,626 6,252 Decrease in accrued unbilled revenues........................... 2,879 1,162 Decrease (increase) in fuel oil stock........................... (6,363) 5,656 Decrease (increase) in materials and supplies................... (2,076) 812 Increase in regulatory assets................................... (1,602) (3,265) Increase (decrease) in accounts payable......................... 11,314 (9,003) Changes in other assets and liabilities......................... 683 (28,769) ------------------- ------------------ Net cash provided by operating activities.................................. 93,230 57,114 ------------------- ------------------ Cash flows from investing activities Capital expenditures....................................................... (44,042) (60,542) Contributions in aid of construction....................................... 4,423 5,560 Payments on notes receivable............................................... 794 756 ------------------- ------------------ Net cash used in investing activities...................................... (38,825) (54,226) ------------------- ------------------ Cash flows from financing activities Common stock dividends..................................................... (26,197) (15,326) Preferred stock dividends.................................................. (639) (1,731) Preferred securities distributions of trust subsidiaries................... (3,827) (2,013) Proceeds from issuance of long-term debt................................... 4,675 62,982 Repayment of long-term debt................................................ -- (57,500) Redemption of preferred stock.............................................. (42,080) (2,400) Net increase (decrease) in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less.......... (16,286) 13,364 Other...................................................................... (6,181) (462) ------------------- ------------------ Net cash used in financing activities...................................... (90,535) (3,086) ------------------- ------------------ Net decrease in cash and equivalents....................................... (36,130) (198) Cash and equivalents, beginning of period.................................. 54,783 1,676 ------------------- ------------------ Cash and equivalents, end of period........................................ $ 18,653 $ 1,478 =================== ================== See accompanying notes to HECO's consolidated financial statements.
12 Hawaiian Electric Company, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 and 1998 (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, 1998 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, 1999. 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, 1999 and December 31, 1998, the results of their operations for the three and six months ended June 30, 1999 and 1998, and their cash flows for the six months ended June 30, 1999 and 1998. 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. Certain reclassifications have been made to prior periods' consolidated financial statements to conform to the 1999 presentation. (2) Cash flows - --------------- Supplemental disclosures of cash flow information Cash paid for interest (net of capitalized amounts) and income taxes was as follows:
Six months ended June 30, ----------------------------------------- (in thousands) 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Interest................................................................... $22,880 $22,641 ================== ================== Income taxes............................................................... $ 5,153 $22,277 ================== ==================
The decrease in income taxes paid for the six months ended June 30, 1999 compared to the same period in 1998 was primarily due to the increase in year- to-date Public Service Company tax deductions. 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 $2.0 million and $5.6 million for the six months ended June 30, 1999 and 1998, respectively, and decreased due to the nonaccrual of AFUDC at Keahole and a lower construction in progress base on which AFUDC is calculated because of additions to plant in 1998. 13 (3) Commitments and contingencies - ---------------------------------- HELCO power situation Background. In 1991, HELCO identified the need, beginning in 1994, for - ---------- additional generation to provide for forecast load growth while maintaining a satisfactory generation reserve margin, to address uncertainties about future deliveries of power from existing firm power producers and to permit the retirement of older generating units. Accordingly, HELCO proceeded with plans to install at its Keahole power plant site two 20 megawatt (MW) combustion turbines (CT-4 and CT-5), followed by an 18 MW heat recovery steam generator (ST-7), at which time these units would be converted to a 58 MW dual-train combined-cycle (DTCC) unit. In January 1994, the Public Utilities Commission of the State of Hawaii (PUC) approved expenditures for CT-4, which HELCO had planned to install in late 1994. The timing of the installation of HELCO's phased DTCC unit at the Keahole power plant site has been revised on several occasions due to delays, described below, in (a) obtaining approval from the Hawaii Board of Land and Natural Resources (BLNR) of a Conservation District Use Permit (CDUP) amendment and (b) obtaining from the Department of Health of the State of Hawaii (DOH) and the U.S. Environmental Protection Agency (EPA) a Prevention of Significant Deterioration/Covered Source permit (PSD permit) for the Keahole power plant site. The delays are primarily attributable to lawsuits, claims and petitions filed by independent power producers and other parties. CDUP amendment. On July 10, 1997, the Third Circuit Court of the State of Hawaii - --------------- issued its Amended Findings of Fact, Conclusions of Law, Decision and Order addressing HELCO's appeal of an order of the BLNR, along with other consolidated civil cases relating to HELCO's application for a CDUP amendment. This decision allows HELCO to use its Keahole property as requested in its application. An amended order to the same effect was issued on August 18, 1997. Final judgments have been entered in all of the consolidated cases. Appeals with respect to the final judgments for certain of the cases have been filed with the Hawaii Supreme Court. Motions filed with the Third Circuit Court to stay the effectiveness of the judgments pending resolution of the appeals were denied in April and July 1998 (in response to a motion for reconsideration). In August 1998, the Hawaii Supreme Court denied nonhearing motions for stay of final judgment pending resolution of the appeals. Management believes that HELCO will ultimately prevail on appeal and that the final judgments of the Third Circuit Court will be upheld. PSD permit. In November 1995, the EPA declined to sign HELCO's PSD permit for - ---------- the combined-cycle unit. HELCO revised its permit application and, in 1997, the EPA approved a revised draft permit and the DOH issued a final PSD permit for HELCO's DTCC unit. Nine appeals of the issuance of the permit were filed with the EPA's Environmental Appeals Board (EAB) in December 1997. On November 25, 1998, the EAB issued an Order Denying Review in Part and Remanding in Part. The EAB denied appeals of the permit that were based on challenges to (1) the DOH's use of a netting analysis (with respect to nitrogen oxide (NOx) emissions), (2) the DOH's determination of Best Available Control Technology (BACT) for control of sulfur dioxide emissions, and (3) certain aspects of the DOH's ambient air and source impact analysis. However, the EAB concluded that the DOH had not adequately responded to comments that had been made during the public comment period that data relating to certain ambient air concentrations were outdated or were measured at unrepresentative locations. The EAB remanded the proceedings and directed the DOH to reopen the permit for the limited purpose of (1) providing an updated air quality impact report incorporating current data on sulfur dioxide and particulate matter ambient concentrations and (2) providing a sufficient explanation of why the carbon monoxide and ozone data used to support the permit are reasonably representative, or performing a new air quality analysis based on data shown to be representative of the air quality in the area to be affected by the project. The EAB directed the DOH to accept and respond to public comments on the DOH's decisions with respect to these issues and ruled that any further appeals of its decision would be limited to the issues addressed on remand. On March 3, 1999, the EAB issued an Order denying motions for reconsideration which had been filed by HELCO, the Keahole Defense Coalition (KDC) and Kawaihae Cogeneration Partners (KCP). 14 As a result of the EAB's decision on November 25, 1998 and its denial of all motions for reconsideration on March 3, 1999, there have been further delays in HELCO's construction of CT-4 and CT-5. The actual length of the delays will depend on the actions needed to address the EAB's rulings. HELCO continues to work with the DOH to address the issues specified in the EAB remand order, with the objective of having the final permit reissued by the end of 1999 and of reaching a final resolution of any appeals to the EAB as expeditiously as possible thereafter. As part of this process, DOH has scheduled a public hearing on the draft permit, limited to the issues remanded by the EAB, for September 9, 1999. HELCO believes that the PSD permit will eventually be obtained. KDC declaratory judgment action. In February 1997, KDC and three individuals - ------------------------------- (Plaintiffs) filed a lawsuit in the Third Circuit Court of the State of Hawaii against HELCO, the director of the DOH, and the BLNR, seeking declaratory rulings with regard to five counts alleging that, with regard to the Keahole project, one or more of the defendants had violated, or could not allow the plant to operate without violating, the State Clean Air Act, the State Noise Pollution Act, conditions of HELCO's conditional use permit, covenants of HELCO's land patent and Hawaii administrative rules regarding standard conditions applicable to land permits. The Complaint was amended in March of 1998 to add a sixth count, claiming that an amendment to a provision of the land patent (relating to the conditions under which the State could repurchase the land) is void and that the original provision should be reinstated. On April 12, 1999, the Court ruled that, because there were no remaining issues of fact in the case, a May 1999 trial date was vacated, no further discovery was authorized, and proceedings before the Court were suspended pending any further administrative action by the DOH and BLNR. The Court's rulings to date on the six counts in the KDC complaint are as follows: 1. Count I (State Clean Air Act): At a hearing on April 5, 1999, the Court ruled that the DOH was within its discretionary authority in granting HELCO's requests for additional extensions of time to file its Title V air permit applications. 2. Count II (State Noise Pollution Act): At a hearing relating to Count II on February 16, 1999, the DOH notified the Court and the parties of a change in its interpretation of the noise rules promulgated under the State Noise Pollution Act. The change in interpretation would apply to the Keahole plant the noise standard applicable to the emitter property (which the DOH claims to be a 55 dBA (daytime) and 45 dBA (nighttime) standard) rather than the previously-applied noise standard of the receptor properties in the surrounding agricultural park (a 70 dBA standard). In response to the new position announced by the DOH, on February 23, 1999 HELCO filed a declaratory judgment action against the DOH, alleging that the noise rules were invalid on constitutional grounds. At a hearing on March 31, 1999, the Court granted KDC's motion to dismiss the new complaint and Plaintiffs' motion for reconsideration on Count II and ruled that the applicable noise standard was 55 dBA daytime and 45 dBA nighttime. The Court specifically reserved ruling on HELCO's claims or potential claims based on estoppel and on the constitutionality of the noise rules "as applied" to HELCO's Keahole plant. On May 12, 1999, the Order dismissing HELCO's declaratory judgment complaint was issued and Final Judgment was entered. The DOH objected to the entry of Final Judgment before all issues in the lawsuit were resolved, but an Order denying that motion was issued on July 26, 1999. HELCO has 30 days thereafter to appeal. Also on March 31, 1999, the Court granted in part and denied in part HELCO's motion for leave to file a cross-claim and a third-party complaint, stating that HELCO may file such motions on the "as applied" and "estoppel" claims once the DOH actually applies the 55/45 dBA noise standard to the Keahole plant. An Order confirming this ruling was entered on June 1, 1999. The DOH has not issued any formal enforcement action applying the 55/45 dBA standard to the Keahole plant. 15 3. Count III (violation of CDUP): At a hearing on April 12, 1999, the Court granted HELCO's motion for summary judgment and suspended proceedings on this Count pending referral of this matter to BLNR. (Should DOH find HELCO in violation of the noise rules (see Count II), BLNR would be called to act on the impact of such violation, if any, on the CDUP.) 4. Count IV (violations of HELCO's land patent): At a hearing on April 12, 1999, the Court granted HELCO's motion for summary judgment and suspended proceedings on this Count pending referral of this matter to BLNR. (Should DOH find HELCO in violation of the noise rules (see Count II), BLNR would be called to act on the impact of such violation, if any, on the land patent.) 5. Count V (HELCO's ability to comply with land use regulations): At a hearing on April 12, 1999, the Court granted HELCO's motion for summary judgment and suspended proceedings on this Count pending referral of this matter to BLNR for resolution of the administrative proceeding now pending before it. (See "BLNR petition," below.) 6. Count VI (amendment of HELCO's land patent): At the March 31, 1999 hearing, the Court granted Plaintiffs' motion for summary judgment, finding that a 1984 amendment to HELCO's land patent was invalid because BLNR had failed to comply with the statutory procedure relating to amendments. The amendment was intended to correct an error in the original land patent with regard to the repurchase clause in the patent and to conform the language to the applicable statute, under which the State would have the right to repurchase the site (as opposed to an automatic reversion) if it were no longer used for utility purposes. HELCO and BLNR have discussed correcting this matter through an administrative or judicial reformation of the land patent. If and when the DOH and BLNR/Department of Land and Natural Resources of the State of Hawaii (DLNR) act on the issues relating to Counts II through VI, and depending upon their rulings, the KDC lawsuit may be moot. Meanwhile, HELCO is exploring possible noise mitigation measures, which can be implemented if necessary, for both the existing units and CT-4 and CT-5. Orders were entered on April 16, 1999 with regard to Count I, May 18, 1999 with regard to Count VI, and June 3, 1999 with regard to Counts II through V. On April 30, 1999, KDC filed a motion to determine prevailing party and to tax attorney fees and costs and a motion for discovery sanctions. After hearing, the court ruled that plaintiffs were the prevailing party as to Counts II and V and were entitled to fees and costs with regard to those counts, denied plaintiffs' motion for fees as the prevailing party with regard to Count VI, denied HELCO's motion for fees as the prevailing party with regard to Count I and granted plaintiffs' request for discovery sanctions against HELCO for late supplementation of responses to discovery requests. HELCO intends to continue to vigorously defend against the claims raised in this case and in related administrative actions. Other complaints. Two additional cases were filed in 1998. First, in March 1998, - ---------------- Plaintiff Ratliff filed a complaint for declaratory judgment against HELCO, the BLNR and the DLNR. The complaint alleges a violation of plaintiff's constitutional due process rights because the land use conditions (if any) which apply to HELCO's use of the Keahole site were determined administratively by the DLNR (through a letter issued to HELCO on January 30, 1998) rather than being decided by the BLNR in a contested case. Also filed with the complaint was a motion to stay enforcement of the DLNR letter, which motion was denied in April 1998. Second, in May 1998, Waimana Enterprises, whose subsidiary is a partner in KCP, filed a lawsuit in the Third Circuit Court of the State of Hawaii, asking for a declaration that the January 1998 DLNR letter is void and seeking an injunction to prevent HELCO from further construction until the Court or the BLNR, at a public hearing, determines what conditions and limitations apply and whether HELCO is in compliance with them. At a hearing on February 8, 1999, the parties agreed, and the Court orally ordered, the consolidation of the Ratliff lawsuit with the KDC lawsuit and the dismissal with prejudice of the Waimana lawsuit. Ratliff filed a motion for summary judgment with regard to the claims in her lawsuit and BLNR and DLNR, joined by HELCO, also filed a 16 motion for summary judgment in that lawsuit. At the March 31, 1999 hearing, the Court granted the BLNR/DLNR motion and HELCO's joinder, finding that the January 30, 1998 letter was a ministerial function properly performed by DLNR. A proposed Order was approved by all counsel, but has not yet been entered by the Court. IPP complaints. Two independent power producers (IPPs), KCP and Enserch - -------------- Development Corporation (Enserch), filed separate complaints against HELCO with the PUC in 1993 and 1994, respectively, alleging that they are entitled to power purchase contracts to provide HELCO with additional capacity, which they claimed would be a substitute for HELCO's planned 58 MW DTCC unit at Keahole. In September 1995, the PUC allowed HELCO to continue to pursue construction of and commit expenditures for the second combustion turbine (CT-5) and the steam recovery generator (ST-7) for its planned DTCC unit, but stated in its order that "no part of the project may be included in HELCO's rate base unless and until the project is in fact installed, and is used and useful for utility purposes." The PUC also ordered HELCO to continue negotiating with the IPPs and held that the facility to be built (i.e., either HELCO's or one of the IPP's) should be the one that can be most expeditiously put into service at "allowable cost." The current status of the IPPs' PUC complaints, and of a complaint filed by Hilo Coast Power Company (HCPC) in April 1997, is as follows: Enserch complaint. On January 16, 1998, HELCO filed with the PUC an ----------------- application for approval of a power purchase agreement for a 60 MW (net) facility and an interconnection agreement with Encogen Hawaii, L.P. (Encogen), an Enserch affiliate, both dated October 22, 1997. The PUC issued a decision and order approving the agreements on July 14, 1999, which was amended at HELCO's request on July 21, 1999. If the decision is not appealed (within the 30-day period allowed for filing a Notice of Appeal), and Encogen meets the in-service date deadlines in the power purchase agreement, Encogen's first phase of 22 MW is scheduled to be in- service in April 2000 and the remainder of its 60 MW facility is scheduled to be in-service in August 2000. If the decision is appealed, Encogen must decide by February 15, 2000 whether it will proceed with the project notwithstanding the appeal. If Encogen does proceed notwithstanding an appeal, the in-service date deadlines for Phases 1 and 2 would be extended to September 2000 and January 2001, respectively. KCP complaint. In January 1996, the PUC ordered HELCO to continue in good ------------- faith to negotiate a power purchase agreement with KCP. In May 1997, KCP filed a motion for unspecified "sanctions" against HELCO for allegedly failing to negotiate in good faith. In June 1997, KCP filed a motion asking the PUC to designate KCP's facility as the next generating unit on the HELCO system and to determine the "allowable cost" which would be payable by HELCO to KCP. HELCO filed memoranda in opposition to KCP's motions. The PUC held an evidentiary hearing in August 1997. KCP filed two other motions, which HELCO opposed, to supplement the record. The PUC issued an Order in June 1998 which denied all of KCP's pending motions; provided rulings and/or guidance on certain avoided cost and contract issues; directed HELCO to prepare an updated avoided cost calculation that includes the Encogen agreement; and directed HELCO and KCP to resume contract negotiations. HELCO filed a motion for partial reconsideration with respect to one avoided cost issue. The PUC granted HELCO's motion and modified its order in July 1998. HELCO resumed negotiations with KCP in 1998 in compliance with the Order, but no agreement has been reached. On November 20, 1998, KCP filed a motion asking the PUC to appoint a hearings officer to make a recommendation to the PUC regarding the terms and conditions of a power purchase agreement and the calculation of avoided cost. HELCO filed a memorandum in opposition to KCP's motion on December 2, 1998. On July 9, 1999, KCP filed an additional motion, asking the PUC to reopen its complaint docket and to enforce the Public Utility Regulatory Policies Act of 1978 by calculating the utility's avoided cost. HELCO filed a memorandum in opposition to KCP's motion on July 16, 1999, KCP filed a reply on July 22, 1999 and the Consumer Advocate filed a statement of position on August 2, 1999. 17 HCPC complaint. In April 1997, HCPC filed a complaint against HELCO with -------------- the PUC, requesting an immediate hearing on HCPC's offer for a new 20-year power purchase agreement for its existing facility, which is proposed to be expanded from 22 MW to 32 MW. HCPC's existing power purchase agreement is scheduled to terminate at the end of 1999. The PUC converted the HCPC complaint into a purchased power contract negotiation proceeding. HCPC submitted a new proposal in the proceeding in March 1998 for a 32-year power purchase agreement. An evidentiary hearing, which was limited to three issues affecting the calculation of avoided costs, including which of HELCO's planned unit additions could be deferred or displaced by a new power purchase agreement with HCPC, was held in April 1998. On November 25, 1998, the PUC issued a Decision and Order in the HCPC complaint docket. The Decision and Order states that (1) "whether the next immediate unit is ultimately provided by Encogen at Hamakua or HELCO at Keahole, HCPC can negotiate to provide the increment of power following the next immediate unit", and "HELCO's sunk and parallel planning costs for CT-4 and CT-5 will not be part of the avoided cost calculation", and (2) the reconductoring of a transmission line to accept HCPC's proposed 32 MWs would be of system- wide benefit, and the cost would not be included in the avoided cost calculation. The decision also addressed a system-modeling issue, and required that the avoided cost calculation be based on the same assumptions used in the last (April 1998) avoided cost calculation. The PUC directed that HCPC and HELCO continue to negotiate a power purchase agreement and by February of 1999 submit to the PUC either a finalized agreement or reports informing the PUC of the matters preventing the finalization of an agreement. The parties entered into negotiations but have not finalized an agreement. Status reports were filed by HCPC and HELCO in February 1999. In its status report, HELCO requested a hearing with respect to the pricing and avoided cost issues. The PUC issued an Order reopening the docket to further assist HELCO and HCPC in negotiating an agreement and giving each party an opportunity to file supplemental memoranda. HELCO filed a Motion for Partial Reconsideration of the Order, stating that it would waive its right to a hearing if it were allowed to present oral arguments to the PUC. The PUC granted HELCO's motion, and oral arguments were held on March 25, 1999. On June 24, 1999, the PUC issued an Order in which it agreed with HELCO's avoided cost calculation. The PUC ordered HELCO and HCPC to continue negotiations consistent with the Order and to submit either a finalized agreement or, if no agreement is reached, to submit written reports informing the PUC of the matters that are preventing finalization of an agreement. As a result of a request by HCPC and HELCO, the PUC submittal date has been extended to August 18, 1999. Negotiations between HELCO and HCPC are continuing. Management cannot determine at this time whether any party will appeal the decision and order approving the Encogen power purchase agreement, whether Encogen would proceed with its project if an appeal is taken, or whether the negotiations with KCP or HCPC or related PUC proceedings will result in the execution and/or PUC approval of an additional power purchase agreement. BLNR petition. On August 5, 1998, KDC filed with the BLNR a Petition for - -------------- Declaratory Ruling under Section 91-8, Hawaii Revised Statutes. The petition alleged that all conditions in Hawaii Administrative Rules Section 13-2-21 apply to HELCO's default entitlement to use its Keahole site, that the letter issued to HELCO by the DLNR in January 1998 was erroneous because it failed to incorporate all conditions applicable to the existing permits, and that the DOH issued three separate Notices of Violation (NOVs) to HELCO in 1992 and 1998 for violation of clean air rules, which NOVs constitute violations under the existing permits and render such permits null and void. The petition requested that the BLNR commence a contested case on the petition; that the BLNR determine that HELCO has violated the terms of its existing conditional use permits, causing such permits to be null and void; and that the BLNR determine that HELCO has violated the conditions applicable to its default entitlement, such that HELCO should be enjoined from using the Keahole property under such default entitlement. The BLNR requested that each of the parties submit statements of position on the issues and HELCO filed its statement in October 1998. The last of the responsive submissions of the parties was filed in December 1998. The matter has not yet been set before BLNR for a determination of whether a hearing 18 will be held. However, on June 3, 1999, counsel for BLNR submitted a status report to the Third Circuit Court informing the Court that KDC's petition would be presented to BLNR for resolution within 90 days of the status report. DOH Notice of Violation. In July 1998, the DOH issued an NOV to HELCO for items - ----------------------- allegedly constituting unauthorized construction activity at the Keahole Generating Station prior to receipt of an effective PSD permit for CT-4 and CT- 5. The NOV required HELCO to immediately halt construction activities on pipe rack foundations, a retaining wall and an oil/water separator, and imposed a fine of $48,800. HELCO complied with the stop work order on the designated items and paid the fine. EPA Notice of Violation. In September 1998, the EPA issued an NOV to HELCO - ----------------------- stating that HELCO violated the Hawaii State Implementation Plan by commencing construction activities at the Keahole generating station without first obtaining a final air permit. By law, 30 days after the NOV, the EPA may issue an order requiring compliance with applicable laws, assessing penalties and/or commencing a civil action seeking an injunction; however, no order has yet been issued. HELCO has put the EPA on notice that certain construction activities not affected by the NOV are continuing, and has received approval to proceed with certain construction activities. However, HELCO has halted work on other construction activities at Keahole until further notice is provided or approval is obtained from the EPA, or until the final air permit is received. Contingency planning. In June 1995, HELCO filed with the PUC its generation - -------------------- resource contingency plan detailing alternatives and mitigation measures to address the delays that have occurred in obtaining the permits necessary to construct its combined-cycle unit at Keahole. Actions under the plan have helped HELCO maintain its reserve margin and reduce the risk of near-term capacity shortages. In January 1996, the PUC opened a proceeding to evaluate HELCO's contingency resource plan and HELCO's efforts to insure system reliability. HELCO has filed reports with the PUC from time to time updating the contingency plan and the status of implementing the plan. The most recent update was filed on March 1, 1999. Due to the delays in adding new generation, upon the expiration of the HCPC power purchase agreement for 22 MW at the end of 1999, HELCO's reserve margin (based on firm capacity without considering as-available resources such as wind and run-of-the-river hydroelectric generators) in 2000 will be less than the margin called for by its generation planning criteria until new generation is added. The addition of new generation is not expected to occur until April 2000, at the earliest. When the HCPC power purchase agreement expires at the end of 1999, HELCO will have sufficient generation to cover projected monthly system peak loads with units on scheduled maintenance, but may not always have enough reserve margin to make up for the unexpected outage of one of its largest generation units beginning in January 2000 until new generation is added. HELCO is negotiating with HCPC for a new power purchase agreement and reviewing other options to mitigate the short-term reserve margin shortfall. Project status and costs incurred. Although management believes it has acted - --------------------------------- prudently with respect to the Keahole project, effective December 1, 1998, HELCO decided to discontinue, for financial reporting purposes, the accrual of an Allowance For Funds Used During Construction (AFUDC) on CT-4 and CT5 (which would have been approximately $0.4 million after tax per month). The length of the delays to date and potential further delays were factors considered by management in its decision to discontinue the accrual of AFUDC. HELCO has also deferred plans for ST-7 to approximately 2006 or 2007, unless the Encogen facility is not placed in service as planned. In December 1998, HELCO removed $0.8 million in costs accumulated against ST-7 from construction work-in- progress, writing off $0.6 million and reclassifying $0.2 million in costs to inventory, since ST-7 would not be needed in the immediate future. Under HELCO's current estimate of generating capacity requirements, there is a need for capacity in addition to the capacity which might be provided by any one of the IPPs. HELCO believes that issues surrounding the CDUP amendment, the PSD permit, the declaratory judgment actions, the BLNR petition and related matters will be satisfactorily resolved and will not prevent it from constructing CT-4 and CT-5. HELCO's current plan contemplates that CT-4 and CT-5 will be added to its system by early 2001. Management cannot determine at this time, however, the impact on its plans with regard to the 19 installation of units CT-4 and CT-5 if power purchase agreements with two or more of the IPPs (including Encogen) were to be negotiated, approved by the PUC and implemented. If it becomes probable that CT-4 and/or CT-5 will not be installed, 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, 1999, HELCO's costs incurred in its efforts to put CT-4 and CT-5 into service amounted to $76.8 million, including approximately $31.8 million for equipment and material purchases, approximately $23.5 million for planning, engineering, permitting, site development and other costs and approximately $21.5 million for AFUDC accrued through November 30, 1998, after which HELCO stopped accruing AFUDC. It is the opinion of management that no adjustment is required to these costs as of June 30, 1999. 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 and innovative pricing provisions. The other parties to the proceeding advanced numerous other proposals in their statements of position. The PUC will determine what subsequent steps will be followed in the proceeding, but no timetable has been set for such a determination. Some of the parties may seek state legislative action on their proposals. 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. Environmental regulation See discussion of the DOH NOV and the EPA NOV issued to HELCO above and note (7), "Commitments and contingencies," in HEI's "Notes to consolidated financial statements." (4) HECO-obligated mandatorily redeemable trust preferred securities of - ------------------------------------------------------------------------- subsidiary trusts holding solely HECO and HECO-guaranteed debentures --------------------------------------------------------------------- In March 1997, HECO Capital Trust I (Trust I), a grantor trust and a wholly owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO- Obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997 (1997 trust preferred securities) with an aggregate liquidation preference of $50 million and (ii) to HECO, common securities with a liquidation preference of approximately $1.55 million. Proceeds from the sale of the 1997 trust preferred securities and the common securities were used by Trust I to purchase 8.05% Junior Subordinated Deferrable Interest Debentures, Series 1997 (1997 junior deferrable debentures) issued by HECO in the principal amount of $31.55 million and issued by each of MECO and HELCO in the respective principal amounts of $10 million. The 1997 junior deferrable debentures, which bear interest at 8.05% and mature on March 27, 2027, together with the subsidiary guarantees (pursuant to which the obligations of MECO and HELCO under their respective debentures are fully and unconditionally guaranteed by HECO), are the sole assets of Trust I. The 1997 trust preferred securities must be redeemed at the maturity of the underlying debt on March 27, 2027, which maturity may be shortened to a date no earlier than March 27, 2002 or extended to a date no later than March 27, 2046, and are not redeemable at the option of the holders, but may be redeemed by Trust I, in whole or in part, from time to time, on or after March 27, 2002 or upon the occurrence of certain events. 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 20 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, 1999 and December 31, 1998. 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) Accounting changes - ----------------------- Costs of computer software developed or obtained for internal use and start-up activities In March 1998, the AICPA Accounting Standards Executive Committee issued SOP 98- 1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which requires that certain costs, including certain payroll and payroll-related costs, be capitalized and amortized over the estimated useful life of the software. In April 1998, the AICPA Accounting Standards Executive Committee issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which requires that costs of start-up activities, including organization costs, be expensed as incurred. The provisions of SOP 98-1 and SOP 98-5 are effective for fiscal years beginning after December 15, 1998. HECO and its subsidiaries adopted SOP 98-1 and SOP 98-5 effective January 1, 1999. The adoption of SOP 98- 1 and SOP 98-5 did not have a material effect on HECO's consolidated financial condition, results of operations or liquidity. Derivative instruments and hedging activities In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the provisions of SFAS No. 133 were amended by SFAS No. 137 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. HECO and its subsidiaries will adopt SFAS No. 133, as amended, on January 1, 2001, but management has not yet determined the impact, if any, of adoption. 21 (6) Summarized financial information - ------------------------------------- Summarized financial information for HECO's subsidiaries, HELCO and MECO, is as follows: Balance sheet data
HELCO MECO ------------------------------- ------------------------------ June 30, December 31, June 30, December 31, (in thousands) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------ Current assets...................... $ 34,148 $ 35,473 $ 35,106 $ 41,103 Noncurrent assets................... 422,489 424,278 392,328 382,517 ------------ --------------- ------------ --------------- $456,637 $459,751 $427,434 $423,620 ============ =============== ============ =============== Common stock equity................. $156,838 $157,269 $161,669 $157,402 Cumulative preferred stock-not subject to mandatory redemption.... 7,000 7,000 5,000 5,000 Current liabilities................. 57,078 62,313 30,381 32,052 Noncurrent liabilities.............. 235,721 233,169 230,384 229,166 ------------ --------------- ------------ --------------- $456,637 $459,751 $427,434 $423,620 ============ =============== ============ ===============
Income statement data
HELCO MECO ------------------------------------------------------ ------------------------------------------------ Three months Six months Three months Six months ended June 30, ended June 30, ended June 30, ended June 30, ------------------------- ------------------------- ------------------------- -------------------- (in thousands) 1999 1998 1999 1998 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Operating revenues.... $37,927 $37,602 $74,827 $76,377 $37,299 $32,515 $72,980 $68,245 Operating income...... 4,442 4,804 9,887 9,370 7,133 4,662 12,153 9,363 Net income for common stock 1,786 4,082 4,709 7,833 4,604 3,598 7,011 7,182
HECO has not provided separate financial statements and other disclosures concerning MECO and HELCO because in the opinion of management, such financial statements and other information are not material to holders of the 1997 and 1998 junior deferrable debentures issued by MECO and HELCO which have been fully and unconditionally guaranteed by HECO. (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) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------- Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income)... $ 44,336 $ 41,698 $ 85,237 $ 84,259 Deduct: Income taxes on regulated activities.......... (12,121) (12,558) (22,789) (25,560) Revenues from nonregulated activities......... (1,414) (2,344) (2,580) (4,563) Add: Expenses from nonregulated activities......... 123 65 266 268 ------------ ------------ ------------ ----------- Operating income from regulated activities after income taxes (per HECO consolidated statements of income)......................... $ 30,924 $ 26,861 $ 60,134 $ 54,404 ============ ============ ============ ===========
22 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) 1999 1998 change significant change* - ------------------------------------------------------------------------------------------------------------------- Revenues...................... $369,688 $360,665 3 Increase for all segments Operating income.............. 58,710 54,114 8 Increases for the electric utility and savings bank segments Income (loss) from: Continuing operations...... $ 22,756 $ 22,921 (1) Higher operating income and lower preferred stock dividends, more than offset by lower AFUDC and higher preferred securities distributions, interest expense and income taxes Discontinued operations.... - (528) NM Discontinued operations of real estate subsidiary in September 1998 ------------------------ Net income.............. $ 22,756 $ 22,393 2 ======================== Basic earnings per common share Continuing operations...... $ 0.71 $ 0.72 (1) See explanation for "Income (loss) from continuing operations" Discontinued operations.... - (0.02) NM See explanation for "Income (loss) from discontinued operations" ------------------------ $ 0.71 $ 0.70 1 ======================== Weighted-average number of common shares outstanding.... 32,183 32,007 1 Issuances under the 1987 Stock Option and Incentive Plan and other plans
23
Six months ended June 30, (in thousands, except per ---------------------- % Primary reason(s) for share amounts) 1999 1998 change significant change* - ---------------------------------------------------------------------------------------------------------- Revenues..................... $721,935 $735,523 (2) Decreases for the electric utility and savings bank segments Operating income............. 112,742 110,575 2 Increases for the electric utility and savings bank segments Income (loss) from: Continuing operations..... $ 43,510 $ 45,740 (5) Higher operating income, lower preferred stock dividends and lower income taxes**, more than offset by lower AFUDC and higher preferred securities distributions and interest expense Discontinued operations..... - (1,124) NM Discontinued operations of real estate subsidiary in 1998 ---------------------- Net income............... $ 43,510 $ 44,616 (2) ====================== Basic earnings per common share Continuing operations..... $ 1.35 $ 1.43 (6) See explanation for "Income (loss) from continuing operations" Discontinued operations... - (0.03) NM See explanation for "Income (loss) from discontinued operations" ---------------------- $ 1.35 $ 1.40 (4) ====================== Weighted-average number of common shares outstanding... 32,168 31,982 1 Issuances under the 1987 Stock Option and Incentive Plan and other plans
* Also see segment discussions which follow. ** Income taxes decreased primarily due to the lower income before income taxes, the impact of the formation of ASB Realty Corporation (see savings bank segment discussion which follows) and the favorable resolution in 1998 of prior years' tax audit issues. NM Not meaningful. 24 Following is a general discussion of the results of operations by business segment. Electric utility - ----------------
Three months ended June 30, (in thousands, except per ----------------------------- % Primary reason(s) for significant barrel amounts) 1999 1998 change change - -------------------------------------------------------------------------------------------------------------------------- Revenues.................... $252,272 $244,548 3 3.2% higher KWH sales ($7 million) and higher rates at MECO ($3 million), partly offset by lower fuel oil prices, the effects of which are passed on to customers ($2 million) Expenses Fuel oil................... 47,226 44,449 6 Higher KWHs generated, partly offset by lower fuel oil prices Purchased power............ 67,649 69,091 (2) Lower KWHs purchased and fuel prices Other...................... 93,061 89,310 4 Higher maintenance and depreciation and amortization expenses, partly offset by lower other operation expenses Operating income............ 44,336 41,698 6 Higher revenues and lower other operation expenses, partly offset by higher maintenance and depreciation and amortization expenses Net income for common stock............. 19,224 18,689 3 Higher operating income, partly offset by lower AFUDC Kilowatthour sales (millions)............... 2,219 2,152 3 Fuel oil price per barrel... $17.88 $18.22 (2)
25
Six months ended June 30, (in thousands, except per ----------------------------- % Primary reason(s) for significant barrel amounts) 1999 1998 change change - ------------------------------------------------------------------------------------------------------------------------- Revenues......................... $490,063 $502,810 (3) Lower fuel oil prices, the effects of which are passed on to customers ($22 million), partly offset by 1.8% higher KWH sales ($7 million) and higher rates at MECO ($6 million) Expenses Fuel oil........................ 92,104 101,180 (9) Lower fuel oil prices, partly offset by higher KWHs generated Purchased power................. 127,629 135,674 (6) Lower fuel prices and KWHs purchased Other........................... 185,093 181,697 2 Higher maintenance and depreciation and amortization expenses, partly offset by lower other operation expenses Operating income................. 85,237 84,259 1 Higher KWH sales and higher rates at MECO and lower other operation expenses, partly offset by higher maintenance and depreciation and amortization expenses (note: lower revenues were offset by lower fuel oil and purchased power expenses and lower taxes, other than income taxes) Net income for common stock.................. 36,305 37,951 (4) Higher operating income, more than offset by lower AFUDC Kilowatthour sales (millions).................... 4,354 4,279 2 Fuel oil price per barrel ....... $17.41 $20.89 (17)
Kilowatthour (KWH) sales in the second quarter and first six months of 1999 increased 3.2% and 1.8%, respectively, from the same periods in 1998, partly due to an increase in the number of customers and warmer weather. Although KWH sales were higher, electric utility net income decreased 4% during the first six months of 1999, primarily due to a 27% increase in maintenance expenses, including a major scheduled combustion turbine overhaul, a 9% increase in depreciation and amortization expense and a 64% decrease in AFUDC. Depreciation increased and AFUDC decreased due to the nonaccrual of AFUDC at Keahole and a lower construction in progress base on which AFUDC is calculated because of additions to plant in 1998. Partly offsetting the higher other expenses for the first half of 1999 was a 7% decrease in other operation expenses, primarily due to lower employee benefits expense. 26 Updated KWH sales forecast In May 1999, HECO, HELCO and MECO updated their five-year KWH sales forecast as follows:
Actual Forecast ---------------------------------------------------------- 1998 1999 2000 2001 2002 2003 - --------------------------------------------------------------------------------------------------------------- Sales (millions of KWH) (1) HECO (Oahu)......................... 6,938 6,951 6,969 6,991 7,057 7,128 HELCO (Hawaii)...................... 903 905 911 919 932 946 MECO (Maui, Lanai, Molokai)......... 1,029 1,056 1,078 1,104 1,133 1,167 ----------------------------------------------------------------------- Total................................. 8,870 8,912 8,958 9,014 9,122 9,241 ======================================================================= Increase (decrease) from previous year (%)............ (1.0) 0.5 0.5 0.6 1.2 1.3 =======================================================================
(1) Assumes, among other things, the impact of demand-side management programs, normalized weather based on a 23-year average and visitor arrival growth beginning in 2001 (primarily due to better than expected Westbound arrivals, and expected improvements in Japan's economy and the value of the yen). Competition The electric utility industry is becoming increasingly competitive. IPPs are well established in Hawaii and continue to actively pursue new projects. Customer self-generation, with or without cogeneration, has made inroads in Hawaii and is a continuing competitive factor. Competition in the generation sector in Hawaii is moderated, however, by the scarcity of generation sites, various permitting processes and lack of interconnections to other electric utilities. HECO has 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. Legislation has been introduced in Congress that would restructure the electric utility industry with a view toward increasing competition by, for example, allowing customers to choose their generation supplier. Some of the bills would exempt Alaska and Hawaii. Also, the proposed "Comprehensive Electricity Competition Act," submitted to Congress in May 1999, includes a provision that would permit states to "opt out" of the proposed retail competition deadline of not later than January 1, 2003. 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. See note (3) in HECO's "Notes to Consolidated Financial Statements." In their statement of position, HECO and its subsidiaries proposed to achieve some of the benefits of competition through proposals for (1) competitive bidding for new generation, (2) performance-based ratemaking (which would include an index-based price cap, an earnings sharing mechanism and a benchmark incentive plan) and (3) innovative pricing provisions (including rate restructuring, expanded time-of-use rates, customer migration rates such as standby charges, flexible pricing to encourage economic development and to compete with customer generation options, new service options and two-part rates incorporating real-time pricing). HECO and its subsidiaries suggest in their statement of position that these proposals be implemented through PUC approval of applications submitted in a series of separate proceedings to be initiated by HECO in 1999 and 2000. In May 1999, the PUC approved HECO's standard form contract for customer retention, which allows HECO to provide an 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% discount on base energy rates for "Large Power" customers and an 11.27% discount on base energy rates for general service demand customers. 27 PUC regulation of electric utility rates The PUC has broad discretion in its regulation of the rates charged by HEI's electric utility subsidiaries and in other matters. Any adverse decision and order (D&O) by the PUC concerning the level or method of determining electric utility rates, the authorized returns on equity or other matters, or any prolonged delay in rendering a D&O in a rate or other proceeding, could have a material adverse effect on the Company's financial condition and results of operations. Upon a showing of probable entitlement, the PUC is required to issue an interim D&O in a rate case within 10 months from the date of filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed). There is no time limit for rendering a final D&O. Interim rate increases are subject to refund with interest, pending the final outcome of the case. Management cannot predict with certainty when D&Os in pending or future rate cases will be rendered or the amount of any interim or final rate increase that may be granted. Recent rate requests HEI's electric utility subsidiaries initiate PUC proceedings from time to time to request electric rate increases to cover rising operating costs, the cost of purchased power and the cost of plant and equipment, including the cost of new capital projects to maintain and improve service reliability. As of August 6, 1999, 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 11.4% for HECO (D&O issued on December 11, 1995 and based on a 1995 test year), 11.65% for HELCO (D&O issued on April 2, 1997 and based on a 1996 test year) and 10.94% for MECO (D&O issued on April 6, 1999 and based on a 1999 test year). Hawaii Electric Light Company, Inc. - ----------------------------------- In March 1998, HELCO filed a request to increase rates by 11.5%, or $17.3 million in annual revenues, based on a 1999 test year and a 12.5% ROACE, primarily to recover costs relating to (1) an agreement to buy power from Encogen's 60 MW plant and (2) adding two combustion turbines (CT-4 and CT-5) at HELCO's Keahole power plant. Due to the EAB's denial of HELCO's motion for reconsideration of the EAB's November 25, 1998 decision (see "HELCO power situation--PSD permit" in note (3) to HECO's "Notes to consolidated financial statements") and the delay in purchasing power from Encogen, HELCO's test year 1999 rate increase application was withdrawn in March 1999. New applications are expected to be filed closer to the time when the new generation facilities are expected to be completed. On July 22, 1999, HELCO filed with the PUC a Notice of Intent to file an application for an increase in rates based on a 2000 calendar year test period. A Notice of Intent must be filed at least two months prior to the filing of a general rate increase application. The increase is primarily to recover (1) costs relating to an agreement to buy power from Encogen's planned 60 MW plant, (2) depreciation of and return on additional investments in plant and equipment since the last rate case, including pre-PSD permit construction at the Keahole power plant, and (3) increases in other operation and maintenance expenses. Maui Electric Company, Limited - ------------------------------ In January 1998, MECO filed a request to increase rates by 15.3%, or $22.4 million in annual revenues, based on a 1999 test year and a 12.75% ROACE, primarily to recover costs relating to the addition of generating unit M17 in late 1998. In November 1998, MECO revised its requested increase to 11.9%, or $16.4 million in annual revenues, based on a 12.75% ROACE. In December 1998, MECO received an interim D&O from the PUC, effective January 1, 1999, authorizing an 8.5%, or $11.7 million, increase in annual revenues (subject to refund with interest, pending the final outcome of the case), based on a ROACE of 11.12%, which was the ROACE authorized in MECO's prior rate case. In April 1999, MECO received an amended final D&O from the PUC which authorized an 8.2%, or $11.3 million, increase in annual revenues, based on a 1999 test year and a 10.94% ROACE. The amended final D&O required a refund to customers because MECO had previously received under the interim D&O $0.4 million annually in excess of the amount that was finally approved. MECO refunded 28 with interest the excess amounts collected since January 1, 1999, which amounted to approximately $0.1 million. In March 1999, the PUC issued a D&O denying MECO's request to include $0.8 million in its rate base for exhaust flow enhancers, which were provided as part of a settlement for a warranty claim. MECO wrote-off the $0.8 million in the first quarter of 1999. Savings bank - ------------
Three months ended June 30, % -------------------------------- (in thousands) 1999 1998 change Primary reason(s) for significant change - ------------------------------------------------------------------------------------------------------------------ Revenues........... $101,759 $101,268 _ Higher other income (including a gain on the sale of a building), partly offset by lower interest income as a result of lower weighted-average yields on interest-earning assets Operating income... 15,789 12,630 25 Higher net interest income and other income, partly offset by higher office occupancy and equipment expenses (including leases of branch automation terminals) and compensation and employee benefit expenses Net income......... 9,057 7,352 23 Higher operating income Interest rate spread............ 3.21% 3.12% 3 36 basis points decrease in the weighted- average rate on interest-bearing liabilities, partly offset by a 27 basis points decrease in the weighted-average yield on interest-earning assets
29
Six months ended June 30, % ------------------------------------ (in thousands) 1999 1998 change Primary reason(s) for significant change - ------------------------------------------------------------------------------------------------------------------- Revenues.......... $202,039 $203,095 (1) Lower interest income as a result of a lower weighted-average yields on interest-earning assets, partly offset by higher other income (including a gain on the sale of a building) Operating income.. 30,920 28,681 8 Higher net interest income and other income, partly offset by higher office occupancy and equipment expenses (including leases of branch automation terminals) and compensation and employee benefit expenses Net income........ 17,582 15,712 12 Higher operating income and lower effective income tax rate (see discussion below) Interest rate spread........... 3.14% 3.18% (1) 35 basis points decrease in the weighted-average yield on interest-earning assets, partly offset by a 31 basis points decrease in the weighted-average rate on interest-bearing liabilities
ASB continued to be affected by Hawaii's weak economy, including the effects of historically higher amounts of delinquencies, and the relatively flat yield curve. The yield curve has started to widen which should favorably affect ASB's net interest income over time. ASB's interest rate spread--the difference between the weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities -- increased 3% and decreased 1% for the second quarter and first six months of 1999, respectively, compared to the same periods in 1998. Comparing the second quarter of 1999 to the same period in 1998, the weighted- average rate on interest-bearing liabilities decreased more than the weighted- average yield on interest-earning assets decreased. On April 1, 1999, ASB reduced the rates offered on passbook/statement savings accounts by 25 basis points. Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. ASB experienced an outflow of deposits of $192 million ($109 million of which were certificates of deposits) in the first six months of 1999, partly offset by $55 million of interest credited to accounts. ASB also derives funds from borrowings, payments of interest and principal on outstanding loans receivable and mortgage-backed securities, and other sources. In recent years, advances from the Federal Home Loan Bank (FHLB) of Seattle and securities sold under agreements to repurchase have become more significant sources of funds as the demand for deposits decreased due in part to increased competition from money market and mutual funds. Using sources of funds with a higher cost than deposits, such as advances from the FHLB, puts downward pressure on ASB's interest rate spread and net interest income. In the slow Hawaii economy, ASB has experienced an increase in loan loss reserves. During the first six months of 1999, ASB added $6.1 million to its allowance for loan losses. As of June 30, 1999, ASB's allowance for loan losses was 1.21% of average loans outstanding, up from 1.15% a year ago. The following table presents the changes in the allowance for loan losses for the periods indicated. 30
Six months ended June 30, ------------------------------- (in thousands) 1999 1998 - -------------------------------------------------------------------------------------------- Allowance for loan losses, beginning of period............... $39,779 $29,950 Additions to provisions for losses........................... 6,098 6,348 Allowance for losses on loans returned to Bank of America, FSB......................................................... - (107) Net charge-offs.............................................. (7,470) (1,427) ------------- ------------- Allowance for loan losses, end of period..................... $38,407 $34,764 ============= =============
Management has been disposing of nonperforming loans which has resulted in higher charge-offs. In the first half of 1999, proceeds from the sale of three nonperforming commercial real estate loans and from short sales of nonperforming residential loans were invested in earning assets. 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 six months of 1999, ASB and subsidiaries' effective income tax rate was 34.4% compared to 35.8% for the same period in 1998. Although the State of Hawaii has indicated that it may challenge the tax treatment of this reorganization, ASB believes that its tax position is proper. Other - -----
Three months ended June 30, % ---------------------------------- (in thousands) 1999 1998 change Primary reason(s) for significant change - ------------------------------------------------------------------------------------------------------------- Revenues....... $15,657 $14,849 5 Freight transportation subsidiaries' higher general freight and interstate revenues, dividends in 1999 from the HEIPC Group's investment in Cagayan Electric Power & Light Co., Inc. (CEPALCO) and other income from a corporate-owned life insurance policy Operating loss.......... (1,415) (214) (561) Higher revenues, offset by higher general and administrative expenses at the holding companies and higher maintenance expense at the HEIPC Group Six months ended June 30, % ---------------------------------- (in thousands) 1999 1998 change Primary reason(s) for significant change - ------------------------------------------------------------------------------------------------------------- Revenues........ $29,833 $29,618 1 Other income from a corporate-owned life insurance policy, partly offset by lower revenues at the other subsidiaries Operating (3,415) (2,365) (44) Higher revenues, offset by higher loss........... general and administrative expenses at the holding companies and higher maintenance expense at the HEIPC Group
31 The "other" business segment includes results of operations from Hawaiian Tug & Barge Corp. and its subsidiary, Young Brothers, Limited, maritime freight transportation companies; HEI Investment Corp., a company primarily holding investments in leveraged leases; the HEIPC Group, companies formed to pursue independent power and integrated energy services projects in Asia and the Pacific; Pacific Energy Conservation Services, Inc., a contract services company primarily providing windfarm operational and maintenance services to an affiliated electric utility; HEI District Cooling, Inc., a company formed to develop, build, own, operate and/or maintain central chilled water, cooling system facilities, and other energy related products and services; ProVision Technologies, Inc., a company formed to sell, install, operate and maintain on- site power generation equipment and auxiliary appliances in Hawaii and the Pacific Rim; Hawaiian Electric Industries Capital Trust I, HEI Preferred Funding, LP and Hycap Management, Inc., companies formed primarily for the purpose of effecting the issuance of 8.36% Trust Originated Preferred Securities; HEI and HEI Diversified, Inc., holding companies; and eliminations of intercompany transactions. Freight transportation The freight transportation subsidiaries recorded operating income of $1.6 million and $2.2 million in the second quarter and first half of 1999, respectively, compared with $1.5 million and $2.1 million in the same periods of 1998. The freight transportation subsidiaries continued to be negatively impacted by the slow economic activity on the neighbor islands and the slow construction industry in Hawaii. See note (9) in HEI's "Notes to consolidated financial statements" for a discussion of the sale of YB and certain assets of HTB. Independent power and integrated energy services HEIPC was formed in 1995 and its subsidiaries have been and will be formed from time to time to pursue independent power and integrated energy services projects in Asia and the Pacific. The HEIPC Group recorded operating losses of $1.5 million and $2.1 million in the second quarter and first half of 1999, respectively, compared with $1.0 million and $1.6 million in the same periods of 1998. The increase in operating losses was due in part to a mechanical failure of a unit at Tanguisson, Guam (described below). 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 at Tanguisson, Guam. In November 1996, HPG assumed operational control of the Tanguisson facility. HPG's total cost to repair the two units was $15 million. In the second quarter of 1999, a mechanical failure of one of the units resulted in additional expenses for HPG, which accounts for most of the variance in operating losses for the quarter and year-to-date. It is expected that the unit will be returned to service in September 1999. HPG may be able to recover some or all of the negative financial impacts resulting from the mechanical failure from various parties, including an insurance carrier. 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 September 1998, HEIPC (through a wholly owned, indirect subsidiary) acquired an effective 60% interest in a joint venture, Baotou Tianjiao Power Co., Ltd., formed to design, construct, own, operate and manage a 200 MW coal-fired power plant to be located inside BaoSteel's complex in Inner Mongolia, Peoples Republic of China. See note (7), "China project," in HEI's "Notes to consolidated financial statements." In December 1998, HEIPC (through a wholly owned, indirect subsidiary) invested $7.6 million to acquire convertible cumulative nonparticipating 8% preferred shares in CEPALCO, an electric distribution company in the Philippines. The acquisition is a strategic move which puts the HEIPC Group in a position to participate in the eventual privatization of the National Power Corporation and growth in the electric 32 distribution business in the Philippines. In May 1999, the HEIPC subsidiary also signed a memorandum of agreement to acquire 5% of CEPALCO common stock for approximately $2.2 million. The HEIPC Group is actively pursuing other projects in Asia and the Pacific. The success of any project undertaken by the HEIPC Group will be dependent on many factors, including the economic, political, monetary, technological, regulatory and logistical circumstances surrounding each project and the location of the project. Due to political or regulatory actions or other circumstances, projects may be delayed or even prohibited. There is no assurance that any project undertaken by 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. The HEIPC Group is pursuing additional international projects that are subject to approval by the HEIPC and HEI Boards of Directors. Discontinued operations See note (8) in HEI'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 and YB based on current cost-based rate-making regulations. Management believes HECO and its subsidiaries' and YB's 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, 1999, HEI's and HECO's consolidated regulatory assets amounted to $114 million and $112 million, respectively. Contingencies - ------------- See note (7) in HEI's "Notes to consolidated financial statements" and note (3) in HECO's "Notes to consolidated financial statements" for discussions of contingencies. Year 2000 issue - --------------- The following discussion includes numerous forward-looking statements. The following discussion includes forward looking statements related, but not limited, to the costs of remediation, the effect of such costs on HEI's and HECO's financial condition and liquidity, anticipated dates of completion of remediation work, future performance of remediated systems, third party remediation, contingency plans and risks, and most reasonably likely worst case scenarios. Also, see "Forward-looking information" on page v. HEI consolidated The Company is aware of the Year 2000 date issues associated with the practice of encoding only the last two digits of four digit years in computer equipment, software and devices with embedded technology. Year 2000 date issues, if not properly addressed, may result in computer errors that could cause a disruption of business operations. Further, the Company could be adversely impacted by Year 2000 date issues if suppliers, customers and other related businesses do not address the issues successfully. HEI and subsidiary management have developed Year 2000 programs and have teams in place that are actively assessing, renovating, validating and implementing Year 2000 ready systems. All significant computer-based systems are being included in the inventory and assessment process. Priority is being given to systems that are considered mission or business critical. HEI and each business unit have appointed a Year 2000 project manager who provides periodic reporting to their respective senior management and board of directors. Both the electric utility and the savings bank segments are subject to external oversight by their respective regulators. Although substantial effort is being devoted to the Year 2000 issue, no absolute assurance can be given that the Company will successfully avoid all problems that may arise. Further, no 33 absolute assurance can be given that the Year 2000 problems of other entities will not have a material adverse impact on the Company's systems or results of operations. Costs. Management believes that the cost to remediate its systems to become - ------ Year 2000 ready will not have a material adverse effect on the Company's financial condition or liquidity. The total cost of initiatives undertaken primarily for Year 2000 remediation is estimated at $10.8 million, of which approximately $8.4 million has been incurred through June 30, 1999. The cost to remediate systems and the target dates provided below represent management's best estimates at this time. These estimates are based on information provided by various work units within the Company and external parties such as vendors and business partners. Numerous assumptions have been made regarding future dates, including the continued availability of internal and external resources, third party remediation plans and the successful testing of mission critical systems. Electric utility State of readiness. HECO and its subsidiaries have identified information - ------------------- technology (IT) and non-IT systems which will require Year 2000 remediation work. HECO has prioritized these systems by importance, business risk and Year 2000 exposure, allocating resources accordingly. Remediation work for each of the systems includes an assessment phase, a renovation and validation phase and an implementation phase. Overall, the assessment phase is substantially complete for HECO's and its subsidiaries' systems and it is estimated that 70% of the renovation and validation phase has been completed as of June 30, 1999, with lesser amounts of work completed on the implementation phase. The scheduled completion date for each critical system is not later than September 1999, except as discussed below. In December 1998, HECO and its subsidiaries replaced the majority of their business-critical applications with an integrated application suite that is represented to be Year 2000 ready. The installation of an integrated application suite has both simplified and lowered the cost of Year 2000 remediation efforts. HECO and its subsidiaries have identified third parties with whom they have significant business relationships and are corresponding with these vendors and service providers to determine their Year 2000 readiness. Significant third parties include fuel suppliers, independent power producers, financial institutions and large customers. Approximately 87% of the vendors contacted have responded to HECO regarding their compliance. HECO has formed an Oahu Power Partners Year 2000 Group to provide a forum to share information among HECO, independent power producers and fuel suppliers. HECO has contracted with two of its major vendors of power plant equipment for their services in assessing, remediating and testing their installed control systems. HECO and these vendors have completed remediation of nine of HECO's 15 generating units which could be affected by Year 2000 problems and have tested seven of the nine. HECO has remediated and tested generating units with sufficient generating capacity to meet projected peak load on Oahu for January 1, 2000. HECO expects to have remediated the remaining units needed for reserve capacity in August, September and November, 1999. HELCO and MECO have remediated and tested generating units with sufficient generating capacity to meet projected peak load on Hawaii and Lanai, respectively, for January 1, 2000. By September 1, 1999, MECO expects to have remediated and tested generating units with sufficient generating capacity to meet projected peak load on Maui and Molokai for January 1, 2000. Costs. HECO management believes that the cost to remediate its systems to - ------ become Year 2000 ready will not have a material adverse effect on HECO's consolidated financial condition or liquidity. The total cost of initiatives undertaken primarily for Year 2000 remediation is estimated at $4.3 million, of which $2.5 million has been incurred through June 30, 1999. Risks. The Year 2000 remediation effort addresses two distinct areas of risk-- - ------ (1) electric systems, which deliver power to customers, and (2) business systems, which handle data processing. Importantly, with respect to the electric systems, neither the generation nor distribution systems are fully dependent on automated control systems. Because HECO and its subsidiaries have the capability to manually control the generation and dispatching of power and have some degree of diversity and redundancy in 34 their systems, HECO believes the most reasonably likely worst case scenario would be brief, localized power outages and billing, payment, collection and/or reporting errors or delays. Contingency plans. Contingency plans in the event of a Year 2000 problem are - ------------------ being developed for HECO and its subsidiaries. HECO and its subsidiaries plan to have approximately 300 employees on standby on September 9, 1999 and December 31, 1999, and on other critical dates in 1999 and 2000, as deemed necessary. Work crews will be able to manually operate equipment, making a prolonged power outage unlikely. Savings Bank State of readiness. ASB and its subsidiaries follow guidelines provided by the - ------------------- Office of Thrift Supervision (OTS), which require ASB to first renovate its mission critical systems. ASB, in its assessment, identified IT and non-IT mission critical systems requiring Year 2000 remediation work. IT systems include outsourced and in-house mainframe systems and applications, licensed vendor applications, ATMs, desktop applications and high speed check sorting. ASB has prioritized these systems by importance, business risk, and Year 2000 exposure, allocating resources accordingly. The OTS guidelines use a five-phase approach to Year 2000 issues--an awareness phase, assessment phase, renovation phase, validation phase and implementation phase. As of July 19, 1999, ASB has completed the 5-phase project of its mission critical systems. Re-testing may be warranted due to system upgrades and regulatory requirements. ASB and its subsidiaries identified third parties with whom they have significant relationships including software-hardware systems providers, large customers and a service bureau. ASB has implemented a Customer Impact Program that monitors the activities of its large business and deposit customers. ASB continues to monitor its service and supply vendors for Year 2000 compliance. ASB initially reported a total of 426 vendors. Since then that number has been reduced due to the termination of a vendor's product or service and the consolidation of vendors who are utilized by various departments. To date, ASB has identified 375 of 396 vendors who are compliant or are making efforts to be compliant by January 1, 2000. Costs. The total cost of initiatives undertaken by ASB primarily for Year 2000 - ------ remediation is estimated at $5.8 million, of which approximately $5.3 million has been incurred through June 30, 1999. Risks. The Year 2000 remediation effort addresses various areas of risk, - ------ primarily in ASB's business systems, including in-house applications, vendor applications, service bureau applications and electronic banking. ASB believes that the most reasonably likely worst case scenario would be a localized disruption of customer services. ASB believes off-line processing at all branch sites is feasible for up to five working days. Contingency plans. ASB's overall contingency plan provides the broad steps that - ------------------ ASB could take if entire systems or partial systems were lost. During 1998, ASB engaged a consultant who assisted in the development of detailed contingency plans for mission critical systems. ASB is using these contingency plans as models to develop similar detailed plans for other departments. ASB's contingency plans include implementing off-line or manual procedures, implementing stand-in programs, activating the disaster recovery plan and relocating certain operations to the recovery site. ASB will backup critical reports and files prior to yearend 1999. Further, ASB and its subsidiaries will have personnel on standby at midnight on December 31, 1999 and on other critical dates in 1999 and 2000, as deemed necessary. Accounting changes - ------------------ See note (6) and note (5) in HEI's and HECO's respective "Notes to consolidated financial statements." 35 FINANCIAL CONDITION Liquidity and capital resources - ------------------------------- The Company and consolidated HECO each believes that its ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund their respective construction programs and investments and to satisfy debt and other cash requirements in the foreseeable future. The consolidated capital structure of HEI was as follows:
(in millions) June 30, 1999 December 31, 1998 - ----------------------------------------------------------------------------------------------------- Short-term borrowings................... $ 157 7% $ 223 10% Long-term debt.......................... 995 45 900 40 HEI- and HECO-obligated preferred securities of trust subsidiaries..... 200 9 200 9 Preferred stock of electric utility subsidiaries........................... 34 2 81 4 Minority interests...................... 4 - 4 - Common stock equity..................... 833 37 827 37 ------------ ------------ ------------ ------------ $2,223 100% $2,235 100% ============ ============ ============ ============
ASB's deposit liabilities, securities sold under agreements to repurchase and advances from the FHLB are not included in the table above. For the first six months of 1999, net cash provided by operating activities of HEI consolidated was $100 million. Net cash used in investing activities was $237 million, largely due to ASB's origination of loans and purchase of mortgage-backed securities, net of repayments, and HECO's consolidated capital expenditures. Net cash used by financing activities was $122 million as a result of several factors, including net decreases in securities sold under agreements to repurchase, deposit liabilities and short-term borrowings, the redemption of certain series of the electric utilities subsidiaries' preferred stock and the payment of common stock dividends and trust preferred securities distributions, partly offset by net increases in advances from FHLB and long-term debt. Total HEI consolidated financing requirements for 1999 through 2003, including net capital expenditures (which exclude the AFUDC and capital expenditures funded by third-party cash contributions in aid of construction), long-term debt retirements (excluding repayments of advances from FHLB of Seattle and securities sold under agreements to repurchase) and preferred stock retirements, are estimated to total $1.2 billion. Of this amount, approximately $0.8 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 55% of the consolidated financing requirements, with debt financing providing the remaining requirements. Additional debt and equity financing may be required to fund activities not included in the 1999-2003 forecast, such as the development of additional independent power projects by the HEIPC Group in Asia and the Pacific, or to fund changes in requirements, such as increases in the amount of or an acceleration of capital expenditures of the electric utilities. On March 2, 1999, HEI filed a registration statement with the SEC to register $300 million of Medium-Term Notes, Series C (Series C Notes). On May 5, 1999, HEI sold $100 million of its Series C Notes, with $200 million of Series C Notes remaining available for issuance from time to time. The $100 million of Series C Notes sold have a fixed interest rate of 6.51% with a maturity date of May 5, 2014. At the option of the holder, HEI may be required to repay the notes on May 5, 2006 at a repayment price equal to 98.1% of the principal amount to be repaid. Following is a discussion of the liquidity and capital resources of HEI's largest segments. 36 Electric utility HECO's consolidated capital structure was as follows:
(in millions) June 30, 1999 December 31, 1998 - ------------------------------------------------------------------------------------------------------ Short-term borrowings from nonaffiliates and affiliate........ $ 123 7% $ 139 8% Long-term debt...................... 627 37 622 36 HECO-obligated preferred securities of trust subsidiaries.............. 100 6 100 6 Preferred stock..................... 34 2 81 5 Common stock equity................. 797 48 787 45 ------------ ----------- ------------ ---------- $1,681 100% $1,729 100% ============ =========== ============ ==========
Operating activities provided $93 million in net cash during the first six months of 1999. Investing activities used net cash of $39 million, primarily for capital expenditures. Financing activities used net cash of $91 million, including $31 million for the payment of common and preferred dividends and preferred securities distributions, $42 million for preferred stock redemptions and $16 million for the net repayment of short-term borrowings, partially offset by a $5 million net increase in long-term debt. The electric utilities' consolidated financing requirements for 1999 through 2003, including net capital expenditures, long-term debt retirements, preferred stock redemptions and sinking fund requirements, are currently estimated to total $660 million. HECO's consolidated internal sources, after the payment of common stock and preferred stock dividends, are expected to provide approximately 79% of the consolidated financing requirements, with debt and equity financing providing the remaining requirements. As of June 30, 1999, $25 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, MECO and HELCO remain undrawn. Also as of June 30, 1999, an additional $88 million of special purpose revenue bonds were authorized by the Hawaii Legislature for issuance for the benefit of HECO and MECO prior to the end of 1999 and an additional $100 million of revenue bonds were authorized for issuance for the benefit of HECO and HELCO prior to the end of 2003. It is anticipated that the Department of Budget and Finance of the State of Hawaii will issue and sell in August 1999 an aggregate of $61.4 million in refunding special purpose revenue bonds on behalf of HECO, MECO and HELCO. The proceeds of the sale (exclusive of accrued interest) will be used to provide a portion of the funds required for the refunding prior to stated maturity of the 7.2% Series 1984 Revenue Bonds ($11.4 million) and the 7-5/8% Series 1988 Revenue Bonds ($50 million). HECO estimates that it will require approximately $26 million in new common equity, in addition to retained earnings, over the five-year period 1999 through 2003. The PUC must approve issuances of long-term debt and equity 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 1999 through 2003 are currently estimated to total $608 million. Approximately 75% of forecast gross capital expenditures, which includes the allowance for funds used during construction and capital expenditures funded by third-party cash contributions in aid of construction, is for transmission and distribution projects, with the remaining 25% primarily for generation projects. For 1999, electric utility net capital expenditures are estimated to be $142 million. Gross capital expenditures are estimated to be $157 million, comprised of approximately $120 million for transmission and distribution projects, $12 million for new generation projects and $25 million for general plant and existing generation projects. Drawdowns of proceeds from previous and future sales of tax-exempt special purpose revenue bonds, sales of common stock to HEI and the generation of funds from internal sources are expected to provide the cash needed for the net capital expenditures. 37 Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of KWH sales and peak load, the availability of purchased power, the availability of generating sites and transmission and distribution corridors, the ability to obtain adequate and timely rate increases, escalation in construction costs, demand-side management programs and requirements of environmental and other regulatory and permitting authorities. Savings bank
June 30, December 31, % (in millions) 1999 1998 change - -------------------------------------------------------------------------------------------------- Total assets.............................. $5,644 $5,692 (1) Mortgage-backed securities................ 1,906 1,791 6 Loans receivable, net..................... 3,204 3,143 2 Deposit liabilities....................... 3,729 3,866 (4) Securities sold under agreements to repurchase............................... 476 515 (8) Advances from Federal Home Loan Bank...... 926 806 15
As of June 30, 1999, ASB was the third largest financial institution in the state based on total assets of $5.6 billion and deposits of $3.7 billion. For the first six months of 1999, net cash provided by ASB's operating activities was $26 million. Net cash used in ASB's investing activities was $186 million, due largely to the origination of loans and purchase of mortgage-backed securities, net of repayments. Net cash used in financing activities was $66 million largely due to a net decrease of $39 million in securities sold under agreements to repurchase, a net decrease of $137 million in deposit liabilities, $10 million in common and preferred stock dividends, partly offset by a net increase in FHLB advances of $120 million. Minimum liquidity levels are currently governed by the regulations adopted by the OTS. ASB was in compliance with OTS liquidity requirements as of June 30, 1999. 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, 1999, ASB was in compliance with the OTS minimum capital requirements (noted in parentheses) with a tangible capital ratio of 5.6% (1.5%), a core capital ratio of 5.6% (3.0%) and a risk-based capital ratio of 12.1% (8.0%). FDIC regulations restrict the ability of financial institutions that are not "well-capitalized" to compete on the same terms as "well-capitalized" institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of June 30, 1999, ASB was "well-capitalized" (ratio requirements noted in parentheses) with a leverage ratio of 5.6% (5.0%), a Tier-1 risk-based ratio of 11.1% (6.0%) and a total risk-based ratio of 12.1% (10.0%). Significant interstate banking legislation has been enacted at both the federal and state levels. Under the federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, a bank holding company may acquire control of a bank in any state, subject to certain restrictions. Under state law, effective June 1, 1997, a bank chartered under state law may merge with an out-of-state bank and convert all branches of both banks into branches of a single bank, subject to certain restrictions. Although the federal and state laws apply only to banks, such legislation may nonetheless affect the competitive balance among banks, thrifts and other financial institutions and the level of competition among financial institutions doing business in Hawaii. For a discussion of the unfavorable disparity in the Financing Corporation assessment rates that ASB and other thrifts have paid in relation to the rates that most commercial banks have paid, see note (4) in HEI's "Notes to Consolidated Financial Statements." By law, the Financing Corporation's assessment rate on deposits insured by the Bank Insurance Fund must be one-fifth the rate on deposits insured by the Savings Association Insurance Fund until the insurance funds are merged or until January 1, 2000, 38 whichever occurs first, at which time the FICO interest obligation for both banks and thrifts should thereafter be identical, at a currently estimated rate of 2.4 cents per $100 of deposits. Certain legislative proposals advanced to eliminate thrift charters, if adopted, could have a material adverse effect on the Company. For example, if thrift charters were eliminated and ASB obtained a bank charter, HEI and its subsidiaries might become subject to the restrictions on the permissible activities of a bank holding company. While certain of the proposals that have been advanced would "grandfather" the activities of existing savings and loan holding companies such as HEI, management cannot predict whether or in what form any of these proposals might ultimately be adopted nor the extent to which the business of HEI or ASB might be affected. Item 3. Quantitative and qualitative disclosures about market risk - ------------------------------------------------------------------ The Company's results are impacted by ASB's ability to manage interest rate risk. For quantitative and qualitative information about the Company's market risks, see pages 39 to 41 of HEI's 1998 Annual Report to Stockholders. U.S. Treasury yields at June 30, 1999 and December 31, 1998 were as follows:
June 30, 1999 December 31, 1998 ----- ------------- ----------------- 3 month 4.76 4.46 1 year 5.05 4.52 5 year 5.65 4.54 10 year 5.79 4.65 30 year 5.97 5.09
Interest rates (as measured by U.S. Treasury yields) have increased between 30 and 114 basis points from December 31, 1998 to June 30, 1999 and had a negative effect on the market value of ASB's interest-sensitive net earning assets. On the positive side, in the six months ended June 30, 1999, ASB's interest- sensitive net earning assets have grown. Overall, management believes there was an immaterial, favorable change between those dates in the Company's quantitative disclosures of its interest-sensitive assets, liabilities and off- balance sheet items. 39 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. YB collective bargaining agreement YB has a collective bargaining agreement covering the period of July 1, 1996 through June 30, 1999 with the International Longshoremen's and Warehousemen's Union, Hawaii Division, Local 142. The agreement covers all regularly scheduled employees, receiving and delivery clerks on the docks loading and discharging vessels, all maintenance personnel, documentation clerks and customer service representatives employed by YB in the state. The agreement excludes confidential employees, professional employees, supervisory employees, guards and other clerical personnel. Renegotiation of this agreement typically follows completion of the West Coast (Pacific Maritime Association) and Longshore Hawaii contracts and begins six to eight months after the expiration of the agreement. Since June 30, 1999, the agreement has been extended on a daily basis. Written notice of cancellation must be given at least 72 hours in advance. B. Ratio of earnings to fixed charges The following tables set forth the ratio of earnings to fixed charges for HEI and its subsidiaries for the periods indicated: Ratio of earnings to fixed charges excluding interest on ASB deposits
Years ended December 31, Six months ----------------------------------------------------------------------------- ended June 30, 1999 1998 1997 1996 1995 1994 - ----------------- ------- ------ ------ ------ ------ 1.79 1.85 1.89 1.93 2.02 2.31 ================= ======= ====== ====== ====== ======
Ratio of earnings to fixed charges including interest on ASB deposits
Years ended December 31, Six months ----------------------------------------------------------------------------- ended June 30, 1999 1998 1997 1996 1995 1994 - ----------------- ------- ------ ------ ------ ------ 1.45 1.47 1.58 1.56 1.60 1.73 ================= ======= ====== ====== ====== ======
For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent the sum of (i) pretax income from continuing operations (excluding undistributed net income or net loss from less than fifty-percent-owned persons) and (ii) fixed charges (as hereinafter defined, but excluding capitalized interest). "Fixed charges" are calculated both excluding and including interest on ASB's deposits during the applicable periods and represent the sum of (i) interest, whether capitalized or expensed, 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 40 to an amount representing the pretax earnings required to cover such dividend requirements and (v) the preferred securities distribution requirements of trust subsidiaries. The following table sets forth the ratio of earnings to fixed charges for HECO and its subsidiaries for the periods indicated: Ratio of earnings to fixed charges
Years ended December 31, Six months ----------------------------------------------------------------------------------- ended June 30, 1999 1998 1997 1996 1995 1994 - ----------------- ------------- ------------- ------------ ------------ ------------- 2.98 3.33 3.26 3.58 3.46 3.47 ================= ============= ============= ============ ============ =============
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. 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, 1999 and 1998 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 12.2 Computation of ratio of earnings to fixed charges, six months ended June 30, 1999 and 1998 HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 27.1 Financial Data Schedule June 30, 1999 and six months ended June 30, 1999 HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 27.1(a) Restated Financial Data Schedule June 30, 1998 and six months ended June 30, 1998 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 27.2 Financial Data Schedule June 30, 1999 and six months ended June 30, 1999
41 (b) Reports on Form 8-K Subsequent to March 31, 1999, HEI and/or HECO filed Current Reports, Forms 8-K, with the SEC as follows:
Dated Registrant/s Items reported - --------------------------------------------------------------------------------------------- April 26, 1999 HEI/HECO Item 5: HEI's April 27, 1999 news release reporting first quarter 1999 earnings, "HELCO power situation," "MECO rate request" and "China project," and Item 7: "Computation of ratio of earnings to fixed charges" and the "Consent of KPMG LLP in connection with the Registration Statement on S-3 (Regis. No. 333-73225)" May 26, 1999 HEI/HECO Item 5: "HECO and subsidiaries' kilowatthour sales forecast" and "HELCO power situation update" August 3, 1999 HEI/HECO Item 5: Financial information of HECO and its subsidiaries for the second quarter and six months ended June 30, 1999 and other updated information August 4, 1999 HEI Item 5: HEI's August 4, 1999 news release: Hawaiian Electric Industries, Inc. Selling Maritime Freight Transportation Operations
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signature of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof. HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC. (Registrant) (Registrant) By /s/ Robert F. Mougeot By /s/ Paul Oyer ---------------------- -------------- Robert F. Mougeot Paul A. Oyer Financial Vice President and Financial Vice President and Chief Financial Officer Treasurer (Principal Financial Officer of HEI) (Principal Financial Officer of HECO) Date: August 12, 1999 Date: August 12, 1999 42 EX-12.1 2 HEI AND SUBSIDIARIES COMPUTATION OF RATIO HEI Exhibit 12.1 ---------------- Hawaiian Electric Industries, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Six months ended Six months ended June 30, June 30, ------------------------------- ------------------------------- (dollars in thousands) 1999 (1) 1999 (2) 1998 (1) 1998 (2) - ---------------------------------------------------------------------------------------------------------- Fixed charges Total interest charges (3)............. $ 75,187 $138,782 $ 70,530 $142,795 Interest component of rentals.......... 2,225 2,225 1,766 1,766 Pretax preferred stock dividend requirements of subsidiaries.......... 1,794 1,794 4,788 4,788 Preferred securities distributions of trust subsidiaries.................. 8,007 8,007 6,192 6,192 ------------- ------------- ------------- ------------- Total fixed charges.................... $ 87,213 $150,808 $ 83,276 $155,541 ============= ============= ============= ============= Earnings Pretax income from continuing operations............................ $ 69,986 $ 69,986 $ 74,592 $ 74,592 Fixed charges, as shown................ 87,213 150,808 83,276 155,541 Interest capitalized................... (1,374) (1,374) (3,319) (3,319) ------------- ------------- ------------- ------------- Earnings available for fixed charges... $155,825 $219,420 $154,549 $226,814 ============= ============= ============= ============= Ratio of earnings to fixed charges..... 1.79 1.45 1.86 1.46 ============= ============= ============= =============
(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. Note: Six months ended June 30, 1998 ratios have been restated to remove the effects of discontinued operations. EX-12.2 3 HECO AND SUBSIDIARIES COMPUTATION OF RATIO HECO Exhibit 12.2 ----------------- Hawaiian Electric Company, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Six months ended June 30, -------------------------------- (dollars in thousands) 1999 1998 - --------------------------------------------------------------------------------------------- Fixed charges Total interest charges.................................... $24,513 $24,715 Interest component of rentals............................. 380 349 Pretax preferred stock dividend requirements of subsidiaries............................................. 756 2,035 Preferred securities distributions of trust subsidiaries.. 3,827 2,013 --------------- --------------- Total fixed charges....................................... $29,476 $29,112 =============== =============== Earnings Income before preferred stock dividends of HECO........... $36,944 $39,682 Income taxes (see note below)............................. 22,731 25,534 Fixed charges, as shown................................... 29,476 29,112 AFUDC for borrowed funds.................................. (1,239) (3,319) --------------- --------------- Earnings available for fixed charges...................... $87,912 $91,009 =============== =============== Ratio of earnings to fixed charges........................ 2.98 3.13 =============== =============== Note: Income taxes is comprised of the following: Income tax expense relating to operating income from regulated activities.................................. $22,789 $25,560 Income tax benefit relating to loss from nonregulated activities............................... (58) (26) --------------- --------------- $22,731 $25,534 =============== ===============
EX-27.1 4 HEI FINANCIAL DATA SCHEDULE 6/30/99
5 This schedule contains summary financial information extracted from Hawaiian Electric Industries, Inc. and subsidiaries' consolidated balance sheet as of June 30, 1999 and consolidated statement of income for the six months ended June 30, 1999 and is qualified in its entirety by reference to such financial statements. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 154,231 2,019,704 149,726 0 0 0 3,211,311 1,122,256 8,116,828 0 995,254 100,000 134,293 664,415 168,858 8,116,828 0 721,935 0 609,193 5,868 0 36,888 69,986 26,476 43,510 0 0 0 43,510 1.35 1.35
EX-27.1(A) 5 HEI RESTATED FINANCIAL DATA SCH. 6/30/98
5 This schedule was restated for discontinued operations and contains summary fnancial information extracted from Hawaiian Electric Industries, Inc. and subsidiaries' consolidated balance sheet as of June 30, 1998 and consolidated statement of income for the six months ended June 30, 1998 and is qualified in its entirety by reference to such financial statements. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 253,586 2,131,690 150,020 0 0 0 3,070,515 1,022,822 8,156,015 0 910,907 83,370 148,293 659,399 164,807 8,156,015 0 735,523 0 624,948 239 0 35,744 74,592 28,852 45,740 (1,124) 0 0 44,616 1.40 1.39
EX-27.2 6 HECO FINANCIAL DATA SCH. 6/30/99
OPUR1 This schedule contains summary financial information extracted from Hawaiian Electric Company, Inc. and subsidiaries' consolidated balance sheet as of June 30, 1999 and consolidated statement of income and cash flows for the six months ended June 30, 1999 and is qualified in its entirety by reference to such financial statements. 0000046207 HAWAIIAN ELECTRIC COMPANY 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 PER-BOOK 1,939,270 0 177,495 12,228 146,017 2,275,010 85,387 295,529 415,944 796,860 100,000 34,293 626,754 0 0 123,127 0 0 0 0 593,976 2,275,010 487,483 22,789 404,560 427,349 60,134 4,398 64,532 27,588 36,944 639 36,305 26,197 41,185 93,230 0 0
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