-----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, ICzGCTSjyD/lmNRbFdQoup9CqA14Rd6+B0JQzDfXL5Dha9JV5fX+pmO01P5MOvaS x/HtDZkH729jbbY79Fjxog== 0001021408-02-004092.txt : 20020415 0001021408-02-004092.hdr.sgml : 20020415 ACCESSION NUMBER: 0001021408-02-004092 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020325 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08503 FILM NUMBER: 02584624 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-04955 FILM NUMBER: 02584625 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-K405 1 d10k405.txt FORM 10-K =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission Registrant; State of Incorporation; I.R.S. Employer File Number Address; and Telephone Number Identification No. - ------------------------- ------------------------------------------------------------- -------------------------- 1-8503 HAWAIIAN ELECTRIC INDUSTRIES, INC. (A Hawaii Corporation) 99-0208097 900 Richards Street, Honolulu, Hawaii 96813 Telephone (808) 543-5662 1-4955 HAWAIIAN ELECTRIC COMPANY, INC. (A Hawaii Corporation) 99-0040500 900 Richards Street, Honolulu, Hawaii 96813 Telephone (808) 543-7771
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Registrant Title of each class on which registered - ------------------------------------ --------------------------------------------------- ----------------------------- Hawaiian Electric Industries, Inc. Common Stock, Without Par Value New York Stock Exchange Hawaiian Electric Industries, Inc. Guarantee with respect to 8.36% Trust Originated New York Stock Exchange Preferred Securities /SM/ (TOPrS /SM/) Hawaiian Electric Industries, Inc. Preferred Stock Purchase Rights New York Stock Exchange Hawaiian Electric Company, Inc. Guarantee with respect to 8.05% Cumulative New York Stock Exchange Quarterly Income Preferred Securities Series 1997 (QUIPS/SM/) Hawaiian Electric Company, Inc. Guarantee with respect to 7.30% Cumulative New York Stock Exchange Quarterly Income Preferred Securities Series 1998 (QUIPS/SM/)
Securities registered pursuant to Section 12(g) of the Act: Registrant Title of each class - --------------------------------------------- ------------------------------- Hawaiian Electric Industries, Inc. None Hawaiian Electric Company, Inc. Cumulative Preferred Stock =============================================================================== 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___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] ===============================================================================
Aggregate market value of Number of shares of the voting stock held by common stock nonaffiliates of the outstanding of the registrants on registrants on March 13, 2002 March 13, 2002 --------------------------------- ------------------------ Hawaiian Electric Industries, Inc. $1,526,683,388.88 36,023,676 (Without par value) Hawaiian Electric Company, Inc. na 12,805,843 ($6 2/3 par value)
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DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K into which the document is Document incorporated - ------------------------------------------------ ---------------------------------------- Annual Reports to Stockholder(s) of the following registrants for the fiscal year ended December 31, 2001: Hawaiian Electric Industries, Inc. ................................. Parts I, II, III and IV Hawaiian Electric Company, Inc. (except for pages 2, 53 and 55).................................. Parts I, II, III and IV Portions of Proxy Statement of Hawaiian Electric Industries, Inc., dated March 13, 2002, for the Annual Meeting of Stockholders................ Part III
This combined Form 10-K represents separate filings by Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc. Information contained herein relating to any individual registrant is filed by each registrant on its own behalf. Neither registrant makes any representations as to the information relating to the other registrant. =============================================================================== TABLE OF CONTENTS Page Glossary of Terms.............................................................................................ii Forward-Looking Statements....................................................................................vi PART I Item 1. Business....................................................................................... 1 Item 2. Properties.....................................................................................48 Item 3. Legal Proceedings..............................................................................50 Item 4. Submission of Matters to a Vote of Security Holders............................................50 Executive Officers of the Registrant (Hawaiian Electric Industries, Inc.).....................................50 PART II Item 5. Market for Registrants' Common Equity and Related Stockholder Matters..........................51 Item 6. Selected Financial Data........................................................................52 Item 7. Managements' Discussion and Analysis of Financial Condition and Results of Operations...................................................................52 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.....................................53 Item 8. Financial Statements and Supplementary Data....................................................53 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........53 PART III Item 10. Directors and Executive Officers of the Registrants............................................53 Item 11. Executive Compensation.........................................................................56 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................60 Item 13. Certain Relationships and Related Transactions.................................................61 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................61 Independent Auditors' Report - Hawaiian Electric Industries, Inc..............................................63 Independent Auditors' Report - Hawaiian Electric Company, Inc.................................................64 Index to Exhibits.............................................................................................69 Signatures....................................................................................................89
i GLOSSARY OF TERMS Defined below are certain terms used in this report:
Terms Definitions - ----- ----------- 1935 Act Public Utility Holding Company Act of 1935 AES Hawaii AES Hawaii, Inc., formerly known as AES Barbers Point, Inc. ASB American Savings Bank, F.S.B., a wholly-owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corp. (and its subsidiary since March 15, 2001, Bishop Insurance Agency of Hawaii, Inc.) ASB Service Corporation, AdCommunications, Inc., American Savings Mortgage Co., Inc. and ASB Realty Corporation BIF Bank Insurance Fund BoA Bank of America, FSB BLNR Board of Land and Natural Resources of the State of Hawaii Btu British thermal unit CDUP Conservation District Use Permit CERCLA Comprehensive Environmental Response, Compensation and Liability Act Chevron Chevron Products Company, a fuel oil supplier Company Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc., Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I, HECO Capital Trust II, HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, Pacific Energy Conservation Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc., HEI Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III, HEI Preferred Funding, LP, The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.), HEI Power Corp. and its subsidiaries and Malama Pacific Corp. and its subsidiaries Consumer Advocate Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii CT Combustion turbine DLNR Department of Land and Natural Resources of the State of Hawaii D&O Decision and order DOD Department of Defense - federal DOH Department of Health of the State of Hawaii DSM Demand-side management DTCC Dual-train combined-cycle EAPRC East Asia Power Resources Corporation ECA Energy cost adjustment Enserch Enserch Development Corporation EPA Environmental Protection Agency - federal ERL Environmental Response Law of the State of Hawaii FDIC Federal Deposit Insurance Corporation
ii GLOSSARY OF TERMS (continued)
Terms Definitions - ----- ----------- FDICIA Federal Deposit Insurance Corporation Improvement Act of 1991 federal U.S. Government FHLB Federal Home Loan Bank FICO Financing Corporation FIRREA Financial Institutions Reform, Recovery, and Enforcement Act of 1989 Hamakua Partners Hamakua Energy Partners, L.P., formerly known as Encogen Hawaii, L.P. HRD Hawi Renewable Development, Inc. HCPC Hilo Coast Power Company, formerly Hilo Coast Processing Company HC&S Hawaiian Commercial & Sugar Company, a division of A&B-Hawaii, Inc. HECO Hawaiian Electric Company, Inc., an electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I and HECO Capital Trust II HECO's Portions of Hawaiian Electric Company, Inc.'s 2001 Annual Report to Annual Report Stockholder filed as HECO Exhibit 13, which portions are incorporated into this Form 10-K by reference HECO's Hawaiian Electric Company, Inc.'s Consolidated Financial Statements, Consolidated incorporated into Parts I, II and IV of this Form 10-K by reference to pages 21 Financial to 52 of HECO's Annual Report Statements HECO's MD&A Hawaiian Electric Company, Inc.'s Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated into Parts I, II and IV of this Form 10-K by reference to pages 4 to 18 of HECO's Annual Report HEI Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., HEI Diversified, Inc., Pacific Energy Conservation Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc., HEI Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III, The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.), HEI Power Corp. and Malama Pacific Corp. HEI's Hawaiian Electric Industries, Inc.'s 2001 Annual Report to Stockholders, which is Annual Report filed as HEI Exhibit 13 and incorporated into this Form 10-K by reference HEI's Hawaiian Electric Industries, Inc.'s Consolidated Financial Statements, Consolidated incorporated into Parts I, II and IV of this Form 10-K by reference to pages 30 Financial to 64 of HEI's Annual Report Statements HEI's MD&A Hawaiian Electric Industries, Inc.'s Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated into Parts I, II and IV of this Form 10-K by reference to pages 4 to 25 of HEI's Annual Report HEIDI HEI Diversified, Inc., a wholly-owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B.
iii GLOSSARY OF TERMS (continued)
Terms Definitions - ----- ----------- HEIII HEI Investments, Inc. (formerly HEI Investment Corp.), a wholly-owned subsidiary of HEI Power Corp. HEIPC HEI Power Corp., a wholly-owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several subsidiaries. On October 23, 2001, the HEI Board of Directors adopted a formal plan to exit the international power business engaged in by HEI Power Corp. and its subsidiaries. HEIPC Group HEI Power Corp. and its subsidiaries HEIPI HEI Properties, Inc., a wholly-owned subsidiary of Hawaiian Electric Industries, Inc. HELCO Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc. HITI Hawaiian Interisland Towing, Inc. HTB Hawaiian Tug & Barge Corp. On November 10, 1999, HTB sold substantially all of its operating assets and the stock of Young Brothers, Limited, and changed its name to The Old Oahu Tug Services, Inc. IPP Independent power producer IRP Integrated resource plan Kalaeloa Kalaeloa Partners, L.P. KCP Kawaihae Cogeneration Partners KDC Keahole Defense Coalition kv kilovolt KIP Kalaeloa Investment Partners KPP Kahua Power Partners LLC KWH Kilowatthour LSFO Low sulfur fuel oil MBtu Million British thermal unit MECO Maui Electric Company, Limited, an 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. MSFO Medium sulfur fuel oil MW Megawatt na Not applicable NOV Notice of Violation OPA Federal Oil Pollution Act of 1990 OTS Office of Thrift Supervision, Department of Treasury PCB Polychlorinated biphenyls
iv GLOSSARY OF TERMS (continued)
Terms Definitions - ----- ----------- PECS Pacific Energy Conservation Services, Inc., a wholly-owned subsidiary of Hawaiian Electric Industries, Inc. PGV Puna Geothermal Venture PPA Power purchase agreement PSD permit Prevention of Significant Deterioration/Covered Source permit PUC Public Utilities Commission of the State of Hawaii PURPA Public Utility Regulatory Policies Act of 1978 QF Qualifying Facility under the Public Utility Regulatory Policies Act of 1978 QTL Qualified Thrift Lender RCRA Resource Conservation and Recovery Act of 1976 Registrant Hawaiian Electric Industries, Inc. or Hawaiian Electric Company, Inc. ROACE Return on average common equity see When used with reference to pages in the HEI Annual Report, HECO Annual Report, HEI's Consolidated Financial Statements, HEI's MD&A, HECO's Consolidated Financial Statements or HECO's MD&A, "see" means that the referenced information is incorporated by reference to those documents as Exhibits to this Form 10-K SAIF Savings Association Insurance Fund SEC Securities and Exchange Commission SOP Statement of Position ST Steam turbine state State of Hawaii Tesoro Tesoro Hawaii Corp. dba BHP Petroleum Americas Refining Inc., a fuel oil supplier TOOTS The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp. (HTB)), a wholly-owned subsidiary of Hawaiian Electric Industries, Inc. On November 10, 1999, HTB sold YB and substantially all of HTB's operating assets and changed its name UIC Underground Injection Control UST Underground storage tank YB Young Brothers, Limited, which was sold on November 10, 1999, was formerly a wholly-owned subsidiary of Hawaiian Tug & Barge Corp.
v FORWARD-LOOKING STATEMENTS - -------------------------------------------------------------------------------- This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and its subsidiaries contain "forward-looking statements," which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as "expects," "anticipates," "intends," "plans," "believes," "predicts," "estimates" or similar expressions. In addition, any statements concerning future financial performance (including future revenues, expenses, earnings or losses or growth rates), ongoing business strategies or prospects and possible future actions, which may be provided by management, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about HEI and its subsidiaries, the performance of the industries in which they do business and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance. Risks, uncertainties and other important factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, the following: . the effects of international, national and local economic conditions, including the condition of the Hawaii tourist and construction industries and the Hawaii housing market; . the effects of weather and natural disasters; . the effects of terrorist acts and the war on terrorism; . the timing and extent of changes in interest rates; . the risks inherent in changes in the value of and market for securities available for sale; . product demand and market acceptance risks; . increasing competition in the electric utility and banking industries; . capacity and supply constraints or difficulties; . fuel oil price changes and the continued availability of the electric utilities' energy cost adjustment clauses; . new technological developments; . federal, state and international governmental and regulatory actions, including changes in laws, rules and regulations applicable to HEI and its subsidiaries; decisions by the Hawaii Public Utilities Commission in rate cases and other proceedings and by other agencies and courts on land use, environmental and other permitting issues; required corrective actions (such as with respect to environmental conditions, capital adequacy and business practices); and changes in taxation; . the effects of HEI and Hawaiian Electric Company, Inc. (HECO) securities rating changes by securities rating agencies; . the results of financing efforts; . the ultimate net proceeds from the disposition of assets and settlement of liabilities of discontinued or sold operations; . the ultimate outcome of tax positions taken, including with respect to discontinued operations; . the risks inherent in holding for sale financial instruments whose market values may change; and . other risks or uncertainties described elsewhere in this report and in other periodic reports previously and subsequently filed by HEI and/or HECO with the Securities and Exchange Commission. Forward-looking statements speak only as of the date of the report, presentation or filing in which they are made. vi PART I ------ ITEM 1. BUSINESS HEI - --- HEI was incorporated in 1981 under the laws of the State of Hawaii and is a holding company with its principal subsidiaries engaged in the electric utility, banking and other businesses operating primarily in the State of Hawaii. HEI's predecessor, HECO, was incorporated under the laws of the Kingdom of Hawaii (now the State of Hawaii) on October 13, 1891. As a result of a 1983 corporate reorganization, HECO became an HEI subsidiary and common shareholders of HECO became common shareholders of HEI. HECO and its operating subsidiaries, Maui Electric Company, Limited (MECO) and Hawaii Electric Light Company, Inc. (HELCO), are regulated electric public utilities providing the only electric public utility service on the islands of Oahu, Maui, Lanai, Molokai and Hawaii. HECO also owns all the common securities of HECO Capital Trust I and HECO Capital Trust II (Delaware statutory business trusts), which were formed to effect the issuances of $50 million of 8.05% cumulative quarterly income preferred securities in March 1997 and $50 million of 7.30% cumulative quarterly income preferred securities in December 1998, respectively, for the benefit of HECO, MECO and HELCO. Besides HECO, HEI also owns directly or indirectly the following subsidiaries: HEI Diversified, Inc. (HEIDI) (a holding company) and its subsidiary, American Savings Bank, F.S.B. (ASB), and the subsidiaries of ASB; Pacific Energy Conservation Services, Inc. (PECS); ProVision Technologies, Inc.; HEI Properties, Inc. (HEIPI); HEI Leasing, Inc.; Hycap Management, Inc. and its subsidiary; HEI District Cooling, Inc. (currently inactive); Hawaiian Electric Industries Capital Trust I; Hawaiian Electric Industries Capital Trust II and III (at all times inactive entities); The Old Oahu Tug Service, Inc. (TOOTS); HEI Power Corp. (HEIPC) and its subsidiaries (discontinued operations); and Malama Pacific Corp. (MPC) and its subsidiaries (discontinued operations). ASB, acquired in 1988, was the third largest financial institution in the State of Hawaii and had 70 retail branches as of December 31, 2001. On December 6, 1997, ASB acquired substantially all of the Hawaii deposits of Bank of America, FSB (BoA), most of its Hawaii branches and certain of its Hawaii-based loans. The acquisition increased ASB's assets by $1.8 billion and its deposits by $1.7 billion. In March 1998, ASB formed a subsidiary, ASB Realty Corporation, which elects to be taxed as a real estate investment trust. On March 15, 2001, a subsidiary of ASB acquired Bishop Insurance Agency of Hawaii, Inc., which primarily markets commercial property and casualty insurance products as an insurance agency. HEIDI was also the parent company of HEIDI Real Estate Corp., which was formed in February 1998. In September 1999, HEIDI Real Estate Corp.'s name was changed to HEIPI, and HEIDI transferred ownership of HEIPI to HEI. HEIPI currently holds passive investments. PECS was formed in 1994 and currently is a contract services company providing limited support services in Hawaii. ProVision Technologies, Inc. was formed in October 1998 to sell, install, operate and maintain on-site power generation equipment and auxiliary appliances in Hawaii and the Pacific Rim. HEI Leasing, Inc. was formed in February 2000 to own passive investments and real estate subject to leases. Hycap Management, Inc., including its subsidiary HEI Preferred Funding, LP (a limited partnership in which Hycap Management, Inc. is the sole general partner), and Hawaiian Electric Industries Capital Trust I (a Delaware statutory business trust in which HEI owns all the common securities) were formed to effect the issuance of $100 million of 8.36% HEI-obligated trust preferred securities in 1997. HEI District Cooling, Inc. was formed in August 1998 to develop, build, own, lease, operate and/or maintain, either directly or indirectly, central chilled water cooling system facilities, and other energy related products and services for commercial and residential buildings, but is currently inactive. Hawaiian Tug & Barge Corp. (HTB) was acquired in 1986 and provided ship assist and charter towing services and owned Young Brothers, Limited (YB), a regulated intrastate public carrier of waterborne freight among the Hawaiian 1 Islands. In November 1999, HTB sold substantially all of its operating assets and the stock of YB for a nominal gain, changed its name to TOOTS and ceased operations. For information about the Company's discontinued operations, see Note 14 to HEI's Consolidated Financial Statements, which is incorporated herein by reference to pages 60 to 61 of HEI's Annual Report. For financial information about the Company's industry segments, see Note 2 to HEI's Consolidated Financial Statements, which is incorporated herein by reference to pages 40 to 41 of HEI's Annual Report. For additional information about the Company, see HEI's MD&A, HEI's "Quantitative and Qualitative Disclosures about Market Risk" and HEI's Consolidated Financial Statements, incorporated herein by reference to pages 4 to 25, 25 to 29 and 30 to 64, respectively, of HEI's Annual Report. ELECTRIC UTILITY - ---------------- HECO AND SUBSIDIARIES AND SERVICE AREAS HECO, MECO and HELCO are regulated operating electric public utilities engaged in the production, purchase, transmission, distribution and sale of electricity on the islands of Oahu; Maui, Lanai and Molokai; and Hawaii, respectively. HECO was incorporated under the laws of the Kingdom of Hawaii (now State of Hawaii) in 1891. HECO acquired MECO in 1968 and HELCO in 1970. In 2001, the electric utilities' revenues amounted to approximately 75% of HEI's consolidated revenues and the electric utilities' operating income amounted to approximately 76% of HEI's consolidated operating income. The islands of Oahu, Maui, Lanai, Molokai and Hawaii have a combined population currently estimated at 1,164,000, or approximately 95% of the population of the State of Hawaii, and comprise a service area of 5,766 square miles. The principal communities served include Honolulu (on Oahu), Wailuku and Kahului (on Maui) and Hilo and Kona (on Hawaii). The service areas also include numerous suburban communities, resorts, U.S. Armed Forces installations and agricultural operations. The state has granted HECO, MECO and HELCO nonexclusive franchises, which authorize the utilities to construct, operate and maintain facilities over and under public streets and sidewalks. HECO's franchise covers the City & County of Honolulu, MECO's franchises cover the County of Maui and the County of Kalawao, and HELCO's franchise covers the County of Hawaii. Each of these franchises will continue in effect for an indefinite period of time until forfeited, altered, amended or repealed. For additional information about HECO, see HEI's MD&A, HEI's "Quantitative and Qualitative Disclosures about Market Risk" and HEI's Consolidated Financial Statements, incorporated herein by reference to pages 4 to 25, 25 to 29 and 30 to 64, respectively, of HEI's Annual Report, and HECO's MD&A, HECO's "Quantitative and Qualitative Disclosures about Market Risk" and HECO's Consolidated Financial Statements incorporated herein by reference to pages 4 to 18, 19 to 20 and 21 to 52, respectively, of HECO's Annual Report. SALES OF ELECTRICITY HECO, MECO and HELCO provide the only electric public utility service on the islands they serve. The following table sets forth the number of electric customer accounts as of December 31, 2001, 2000 and 1999 and electric sales revenues for each of the years then ended:
2001 2000 1999 ---------------------------------------------------------------------------------- Customer Electric sales Customer Electric sales Customer Electric sales (dollars in thousands) accounts revenues accounts revenues accounts revenues - -------------------------------------------------------------------------------------------------------------- HECO ................... 280,911 $ 882,308 278,260 $ 880,663 275,467 $ 729,557 MECO ................... 58,840 203,847 57,601 192,823 56,410 156,808 HELCO .................. 65,241 193,209 63,778 192,174 62,478 158,962 ---------------------------------------------------------------------------------- 404,992 $1,279,364 399,639 $1,265,660 394,355 $1,045,327 ==================================================================================
2 Revenues from the sale of electricity in 2001 were from the following types of customers in the proportions shown: HECO MECO HELCO Total - ---------------------------------------------------------------------------- Residential......................... 31% 35% 41% 33% Commercial.......................... 33 35 40 34 Large light and power............... 35 29 19 32 Other............................... 1 1 - 1 ------------------------------------- 100% 100% 100% 100% ===================================== HECO and its subsidiaries derived approximately 10%, 10% and 9% of their operating revenues from the sale of electricity to various federal government agencies in 2001, 2000 and 1999, respectively. Formerly one of HECO's larger customers, the Naval Base at Barbers Point, Oahu, closed in 1999 with redevelopment of the base to occur through 2020. Considering (1) that the base closure will necessitate relocation of essential flight operations and support personnel to another base on Oahu and (2) the Naval Air Station Barbers Point Community Redevelopment Plan, HECO anticipates that the closure is likely to result in an overall increase in demand for electricity over time. In 1995, HECO and the U.S. General Services Administration (GSA) entered into a Basic Ordering Agreement (GSA-BOA) under which HECO would arrange for the financing and installation of energy conservation projects at federal facilities in Hawaii. Under the GSA-BOA, HECO completed an air conditioning upgrade project and provided design work for solar water heating at a federal office building in downtown Honolulu in 1997 and 1998. In 2001 and 2002, HECO and the U.S. Department of Agriculture's Hawaii Fruit Fly Production Facility signed contracts for HECO to perform an energy and environmental study and detailed design for water reclamation, process automation and energy efficiency upgrades. In 1996, HECO and the Department of Defense (DOD) entered into an umbrella Basic Ordering Agreement (DOD-BOA). In December 2001, a new DOD-BOA was signed. Under the DOD-BOAs energy audits, feasibility design studies and construction projects have been completed or are in progress. Completed projects include construction of an 1800-ton central chiller plant at the Pearl Harbor Naval Shipyard, construction of a central chiller plant at Schofield Barracks and installation of solar water heating and retrofit lighting at three Navy housing facilities. Projects in progress and scheduled for completion in 2002 include a $10 million energy conservation project at the Pearl Harbor Naval Shipyard and a $2 million residential solar water heating project at the Army's Helemano housing. In 1997, HECO and the U.S. Postal Service (USPS) signed a Shared Energy Savings Contract. Under the Contract, HECO performed feasibility studies at 11 USPS sites on Oahu. An energy efficiency project at the USPS's primary mail processing facility on Oahu is currently in progress. Executive Order 13123, issued in 1999, mandates that each federal agency develop and implement a program to reduce energy consumption by 35% by the year 2010 to the extent that these measures are cost effective. The 35% reduction will be measured relative to the agency's 1985 energy use. HECO continues to work with various federal agencies to implement demand-side management (DSM) programs that will help them achieve their energy reduction objectives. Neither HEI nor HECO management can predict with certainty the impact of Executive Order 13123 on HEI's or HECO's future financial condition, results of operations or liquidity. 3 SELECTED CONSOLIDATED ELECTRIC UTILITY OPERATING STATISTICS
2001 2000 1999 1998 1997 ------------------------------------------------------------------ KWH sales (millions) Residential.................................... 2,665.2 2,627.2 2,550.5 2,503.9 2,531.0 Commercial..................................... 3,016.1 2,923.5 2,781.5 2,674.9 2,676.8 Large light and power.......................... 3,636.5 3,666.9 3,598.3 3,636.4 3,700.7 Other.......................................... 52.6 54.1 54.7 54.8 54.7 ------------------------------------------------------------------ 9,370.4 9,271.7 8,985.0 8,870.0 8,963.2 ================================================================== KWH net generated and purchased (millions) Net generated.................................. 6,042.4 6,247.0 6,115.1 5,958.0 5,885.9 Purchased...................................... 3,861.6 3,572.0 3,391.7 3,434.1 3,622.8 ------------------------------------------------------------------ 9,904.0 9,819.0 9,506.8 9,392.1 9,508.7 ================================================================== Losses and system uses (%)..................... 5.2 5.4 5.3 5.4 5.5 Energy supply (yearend) Generating capability--MW...................... 1,673 1,673 1,651 1,664 1,634 Firm purchased capability--MW.................. 530 532 472 474 474 ------------------------------------------------------------------ 2,203 2,205 2,123 2,138 2,108 ================================================================== Gross peak demand--MW /1/...................... 1,614 1,574 1,527 1,532 1,573 Btu per net KWH generated...................... 10,675 10,818 10,789 10,684 10,799 Average fuel oil cost per Mbtu (cents)......... 539.3 538.5 329.7 308.8 405.9 Customer accounts (yearend) Residential.................................... 352,132 347,316 342,957 338,454 336,094 Commercial..................................... 50,974 50,434 49,549 48,873 48,671 Large light and power.......................... 542 547 550 573 582 Other.......................................... 1,344 1,342 1,299 1,289 1,279 ------------------------------------------------------------------ 404,992 399,639 394,355 389,189 386,626 ================================================================== Electric revenues (thousands) Residential.................................... $ 425,287 $ 421,129 $ 356,631 $ 340,395 $ 367,432 Commercial..................................... 436,751 422,977 345,808 322,772 347,308 Large light and power.......................... 409,977 414,067 336,434 331,957 369,878 Other.......................................... 7,349 7,487 6,454 6,309 6,764 ------------------------------------------------------------------ $1,279,364 $1,265,660 $1,045,327 $1,001,433 $1,091,382 ================================================================== Average revenue per KWH sold (cents) Residential.................................... 15.96 16.03 13.98 13.60 14.52 Commercial..................................... 14.48 14.47 12.43 12.07 12.97 Large light and power.......................... 11.27 11.29 9.35 9.13 9.99 Other.......................................... 13.98 13.84 11.80 11.52 12.38 Average revenue per KWH sold................... 13.65 13.65 11.63 11.29 12.18 Residential statistics Average annual use per customer account (KWH) 7,620 7,618 7,490 7,425 7,559 Average annual revenue per customer account.... $ 1,216 $ 1,221 $ 1,047 $ 1,009 $ 1,097 Average number of customer accounts............ 349,782 344,882 340,528 337,218 334,811 - ---------------------------------------------------------------------------------------------------------------------
/1/ Sum of the peak demands on all islands served, noncoincident and nonintegrated. 4 GENERATION STATISTICS The following table contains certain generation statistics as of December 31, 2001 and for the year ended December 31, 2001. The capability available for operation at any given time may be less than the generating capability shown because of capability restrictions or temporary outages for inspection, maintenance, repairs or unforeseen circumstances.
Island of Island of Island of Island of Island of Oahu- Maui- Lanai- Molokai- Hawaii- HECO MECO MECO MECO HELCO Total - -------------------------------------------------------------------------------------------------------------------------- Generating and firm purchased capability (MW) at December 31, 2001 /1/ Conventional oil-fired steam units..... 1,160.0 37.6 - - 69.7 1,267.3 Diesel................................. - 96.1 10.4 9.9 38.0 154.4 Combustion turbines (peaking units).... 103.0 - - - - 103.0 Combustion turbines.................... - 42.4 - 2.2 45.3 89.9 Combined-cycle unit.................... - 58.0 - - - 58.0 Firm contract power /2/................ 406.0 16.0 - - 108.5 530.5 ------------------------------------------------------------------------------ 1,669.0 250.1 10.4 12.1 261.5 2,203.1 ============================================================================== Gross peak demand (MW)..................... 1,233.0 191.0 5.2 6.5 178.1 1,613.8 /3/ Reserve margin............................. 35.4% 30.9% 101.9% 87.6% 46.8% 36.5% Annual load factor......................... 73.5% 70.7% 65.2% 71.5% 68.9% 72.6%/3/ KWH net generated and purchased (millions)..................... 7,643.3 1,142.7 28.4 39.1 1,050.5 9,904.0 - ---------------------------------------------------------------------------------------------------------------------------
/1/ HECO units at normal ratings; MECO and HELCO units at reserve ratings. /2/ Nonutility generators (oil-fired except as noted)--HECO: 180 MW (Kalaeloa), 180 MW (AES Hawaii, coal-fired) and 46 MW (refuse-fired); MECO: 16 MW (HC&S, primarily bagasse-fired); HELCO: 28 MW (PGV, geothermal), 22 MW (HCPC, coal-fired) and 58.5 MW (Hamakua Partners). /3/ Noncoincident and nonintegrated. INTEGRATED RESOURCE PLANNING AND REQUIREMENTS FOR ADDITIONAL GENERATING CAPACITY As a result of a proceeding initiated in 1990, the Public Utilities Commission of the State of Hawaii (PUC) issued an order in 1992 requiring the energy utilities in Hawaii to develop integrated resource plans (IRPs). The goal of integrated resource planning is the identification of demand- and supply-side resources and the integration of these resources for meeting near- and long-term consumer energy needs in an efficient and reliable manner at the lowest reasonable cost. In its 1992 order, the PUC adopted a "framework," which established both the process and the guidelines for developing IRPs. The PUC's framework directs that each plan cover a 20-year planning horizon with a five-year program implementation schedule and states that the planning cycle will be repeated every three years. Under the framework, the PUC may approve, reject or require modifications of the utilities' IRPs. The framework also states that utilities are entitled to recover all appropriate and reasonable integrated resource planning and implementation costs, including the costs of planning and implementing DSM programs. Under appropriate circumstances, the utilities have been allowed in the past to recover lost margins resulting from DSM programs and earn shareholder incentives. The PUC has approved IRP cost recovery provisions for HECO, MECO 5 and HELCO. Pursuant to the cost recovery provisions, the electric utilities have been allowed to recover through a surcharge the costs for approved DSM programs (including DSM program lost margins and shareholder incentives), and other incremental IRP costs incurred by the utilities and approved by the PUC, to the extent the costs are not included in their base rates. In October 2001, HECO and the Consumer Advocate finalized agreements, subject to PUC approval, under which HECO's three commercial and industrial DSM programs and two residential DSM programs would be continued until HECO's next rate case (which HECO commits under the agreements to file within three years using a 2003 or 2004 test year). The agreements for the temporary continuation of HECO's existing DSM programs are in lieu of HECO continuing to seek approval of new five-year DSM programs. Any DSM programs to be in place after HECO's next rate case will be determined as part of the case. Under the agreements, HECO will cap the recovery of lost margins and shareholder incentives if such recovery would cause HECO to exceed its current authorized return on rate base. HECO also agrees it will not pursue the continuation of lost margins recovery through a surcharge mechanism or shareholder incentives in future rate cases. Consistent with the agreements, in October 2001, MECO and HELCO filed requests to continue their four existing DSM programs. In November 2001, the PUC issued two decisions and orders (D&O) that, subject to certain reporting requirements and other conditions, approved the agreements regarding the temporary continuation of HECO's five existing DSM programs until HECO's next rate case. In November 2001 (as amended in December 2001), the PUC also issued two D&Os that, subject to certain reporting requirements and other conditions, approved the agreements regarding the temporary continuation of MECO's and HELCO's DSM programs until one year after rates are established in HECO's next rate case. The D&Os also provided for the continued recovery of lost margins and shareholder incentives by MECO and HELCO until rates are established in HECO's next rate case. The D&Os allow MECO and HELCO to request an extension of time for the recovery of lost margins and shareholder incentives for up to one year after rates are established in HECO's next rate case. All of the electric utilities' existing DSM programs are energy efficiency programs designed to reduce the consumption of electricity. In August 2000, pursuant to a stipulation filed by the electric utilities and the parties in the IRP cost proceedings, the PUC issued an order allowing the electric utilities to begin recovering the 1995 through 1999 incremental IRP costs (over a 12 month period for HECO and a 24 month period for HELCO and MECO), subject to refund with interest, pending the PUC's final D&O approving recovery of each respective year's incremental IRP costs. The Consumer Advocate has objected to the recovery of certain incremental IRP costs incurred during the 1995-1998 period, and the electric utilities have filed responses. Schedules have been established for the filing of positions with respect to the 1999, 2000 and 2001 IRP costs. On September 1, 2000, the electric utilities began recovering 1995 through 1999 incremental IRP costs through a surcharge on customer bills. HECO completed the recovery of its 1995 through 1999 incremental IRP costs in August 2001. MECO and HELCO completed the recovery of their 1995-1996 incremental IRP costs in August 2001. MECO and HELCO are scheduled to complete the recovery of their 1997-1999 incremental IRP costs by August 2002. The electric utilities began recovering their 2000 incremental IRP costs, subject to refund with interest pending a final D&O, in November 2001. HECO completed the recovery of its 2000 incremental IRP costs in November 2001. MECO and HELCO are scheduled to complete the recovery of their 2000 incremental IRP costs by August 2002. As of December 31, 2001, the amount of revenues the electric utilities recorded for IRP cost recoveries, subject to refund with interest, amounted to $11.9 million. HECO and MECO expect to begin recovering their incremental 2001 IRP costs, subject to refund with interest pending a final D&O, following the filing of actual 2001 costs (which is expected to occur in late March or early April 2002). In early 2001, the PUC issued its final D&O in the HELCO 2000 test year rate case, in which the PUC concluded that it is appropriate for HELCO to recover its IRP cost through base rates (and included an estimated amount for such costs in HELCO's test year revenue requirements) and to discontinue recovery of incremental IRP costs through the separate surcharge. HELCO will continue to recover its DSM program costs, lost margins and 6 shareholder incentives approved by the PUC in a separate surcharge and also expects to be permitted to recover its incremental IRP costs incurred in 2000, which were incurred prior to the final D&O in its rate case through its surcharge. The utilities have characterized their proposed IRPs as planning strategies, rather than fixed courses of action, and the resources ultimately added to their systems may differ from those included in their 20-year plans. Under the IRP framework, the utilities are required to submit annual evaluations of their plans (including a revised five-year program implementation schedule) and to submit new plans on a three-year cycle, subject to changes approved by the PUC. Prior to proceeding with the DSM programs, separate PUC approval proceedings must be completed, in which the PUC further reviews the details of the proposed programs and the utilities' proposals for the recovery of DSM program expenditures, lost margins and shareholder incentives. HECO's IRP. HECO filed its second IRP with the PUC in January 1998 and updated the status of its DSM and Supply Side Action Plans in July 1999. In January 2001, the parties to the proceeding filed a stipulation for PUC approval to expedite the proceeding and the PUC approved the stipulation, closed the docket and ordered HECO to submit its IRP annual evaluation report and program implementation schedule by October 2002 and its next IRP by October 2005, as stipulated. The PUC also ordered HECO to immediately notify it in writing if HECO requires additional generation prior to the 2009 time frame. On the supply side, HECO's second IRP focused on the planning for the next generating unit addition in the 2009 time frame--a 107 MW simple-cycle diesel-fired combustion turbine, which would be part of a 318 MW diesel-fired 2-on-1 combined-cycle unit. Phases 2 and 3 of the combined-cycle unit would be installed in 2013 and 2016, respectively. In addition, pursuant to HECO's generation asset management program, all existing generating units are currently planned to be operated (future environmental considerations permitting) beyond the 20-year IRP planning period (1998-2017). On the demand side, in November 2001, the PUC issued two D&Os allowing HECO to temporarily continue its five energy efficiency DSM programs until its next rate case. The five energy efficiency DSM programs are designed to reduce the rate of increase in Oahu's energy use, defer construction of new generating units, minimize the state's use of oil, and achieve savings for utility customers who participate in the programs. The energy efficiency DSM programs include incentives for customers to install efficient lighting, refrigeration, water-heating and air-conditioning equipment and industrial motors. HECO's second IRP includes two load management programs (i.e., a Commercial and Industrial Capacity Buy-Back Program and a Residential Direct Load Control Program). In July 2000, the PUC approved HECO's request to withdraw its Residential Direct Load Control Program application. In November 2001, HECO filed a withdrawal of application for its Commercial and Industrial Capacity Buyback Program, and a PUC decision is pending. HECO plans to evaluate load management DSM programs in its next rate case proceeding and in its 2005 IRP. MECO's IRP. MECO filed its second IRP with the PUC in May 2000. A stipulated prehearing order was approved by the PUC in October 2000. The parties filed individual Statements of Position in May 2001. MECO plans to work with the parties to the proceeding and attempt to reach a stipulation for PUC approval to expedite the proceeding, close the docket, and establish a schedule for MECO's next IRP. MECO's second IRP identified changes in key forecasts and assumptions since the development of MECO's initial IRP. On the supply side, MECO's second IRP focused on the planning for the installation of approximately 150 MW of additional generation through the year 2020 on the island of Maui, including 38 MW of generation at its Maalaea power plant site in increments from 2000-2005, 10 MW from the acquisition of a wind resource in 2003 and 100 MW at its new Waena site in increments from 2007-2018, beginning with a 20 MW combustion turbine in 2007. Approximately 4 MW of additional generation through the year 2020 is planned for each of the islands of Lanai and Molokai. MECO completed the installation of the second 20 MW increment at Maalaea in September 2000, and the final increment of 18 MW is expected to be installed in 2005 (assuming receipt of the necessary air permit, for which an application was submitted in December 2001, in or before 2003). 7 On the demand side, in November 2001 the PUC issued a D&O allowing MECO to continue temporarily its four existing energy efficiency DSM programs, which are similar in design to HECO's programs. MECO's IRP included plans for a new energy efficiency DSM program and two new load management DSM programs. MECO does not plan to proceed with a new energy efficiency DSM program at this time, and MECO is in the process of evaluating the load management DSM programs, and will determine at a later date the need for and timing of filing load management DSM program applications. HELCO's IRP. In September 1998, HELCO filed with the PUC its second IRP, which was updated in March 1999 and revised in June 1999. A schedule for the proceeding was approved by the PUC, and the parties to the proceeding completed two rounds of discovery. HELCO plans to work with the parties to the proceeding and, similar to HECO's IRP, attempt to reach a stipulation for PUC approval to expedite the proceeding, close the docket, and establish a schedule for HELCO's next IRP. The second IRP identified changes in key forecasts and assumptions since the development of HELCO's initial IRP. On the supply side, HELCO's second IRP focused on the planning for generating unit additions after near-term additions. The near-term additions proposed in HELCO's second IRP included installing two 20 MW combustion turbines (CTs) at its Keahole power plant site (which additions have been delayed) and proceeding with a power purchase agreement (PPA) with Hamakua Energy Partners, L.P. (Hamakua Partners, formerly Encogen Hawaii, L.P.) for a 60 MW (net) naphtha-fired diesel-fired dual-train combined-cycle (DTCC) (which agreement has been completed). The first CT of the Hamakua Partners facility was installed in August 2000, and the second CT and heat recovery steam turbine generator (ST) were installed in December 2000. (See "HELCO power situation" below.) HELCO's second IRP also included completing a 56 MW (net) DTCC unit at Keahole in 2006 (by adding an 18 MW ST to the two CTs), retiring a number of its older, smaller units after new generation has been added and adding another 60.7 MW diesel-fired DTCC unit at a new West Hawaii site in phases in the 2009-2016 time frame. On the demand side, in December 2001 the PUC issued a D&O allowing HELCO to continue temporarily its four existing energy efficiency DSM programs, which are similar in design to HECO's programs. NEW CAPITAL PROJECTS The capital projects of the electric utilities may be subject to various approval and permitting processes, including obtaining PUC approval of the project, air permits from the Department of Health of the State of Hawaii (DOH) and/or the U.S. Environmental Protection Agency (EPA) and land use permits from the Hawaii Board of Land and Natural Resources (BLNR). Difficulties in obtaining, or the inability to obtain, the necessary approvals or permits could result in project delays, increased project costs and/or project abandonments. Extensive project delays and significantly increased project costs could result in a portion of the project costs being excluded from rates. If a project is abandoned, the project costs are generally written-off to expense, unless the PUC determines that all or part of the costs may be deferred for later recovery in rates. HELCO POWER SITUATION Background. In 1991, HELCO began planning to meet increased electric generation - ---------- demand forecasted for 1994. HELCO's plans were to install at its Keahole power plant two 20 MW combustion turbines (CT-4 and CT-5), followed by an 18 MW heat recovery steam turbine generator (ST-7), at which time these units would be converted to a 56 MW (net) DTCC unit. In January 1994, the PUC approved expenditures for CT-4, which HELCO had planned to install in late 1994. The timing of the installation of HELCO's phased 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 BLNR of a Conservation District Use Permit (CDUP) amendment and (b) obtaining from the DOH and the EPA a Prevention of Significant Deterioration/Covered Source permit (PSD permit) for the Keahole power plant site. The delays are also attributable to lawsuits, claims and petitions filed by independent power producers (IPPs) and other parties challenging these permits and objecting to the expansion, alleging among other things that (1) operation of the expanded Keahole site 8 would not comply with land use regulations (including noise standards) and HELCO's land patent; (2) HELCO cannot operate the plant within current air quality standards; (3) HELCO could alternatively purchase power from IPPs to meet increased electric generation demand; and (4) HELCO's three-year construction deadline expired in April 1999 and HELCO's request for an extension must be heard in a contested case hearing. CDUP amendment. The Third Circuit Court of the State of Hawaii (the Circuit - -------------- Court) ruled in 1997 that because the BLNR had failed to render a valid decision on HELCO's application to amend its land use permit before the statutory deadline in April 1996, HELCO was entitled to use its Keahole site for the expansion project (HELCO's "default entitlement"). Final judgments of the Circuit Court related to this ruling are on appeal to the Hawaii Supreme Court, which in 1998 denied motions to stay the Circuit Court's final judgment pending resolution of the appeals. The Circuit Court's final judgment provided that HELCO must comply with the conditions in its application (part 2 of the final judgment), and that the standard conditions in Hawaii Administrative Rules (HAR) Section 13-2-21, the rules of the Department of Land and Natural Resources of the State of Hawaii (DLNR), apply to the extent the standard conditions are not incompatible with the default provision of HRS Section 183-41 (part 3 of the final judgment). In August 1999, certain plaintiffs filed a joint motion to enforce parts 2 and 3 of the final judgment (relating to applicable conditions) and to stay part 1 of the final judgment (the default entitlement) until such time as the applicable conditions were identified and it was determined whether HELCO had met or could meet the applicable conditions. At a September 1999 hearing, the Circuit Court ruled that the BLNR must issue a written decision by November 30, 1999 on certain issues raised in the administrative petition filed by the Keahole Defense Coalition (KDC) in August 1998, including specific determinations of which conditions are not inconsistent with HELCO's ability to proceed under the default entitlement. At a BLNR meeting on October 22, 1999, the BLNR determined that all 15 standard land use conditions in HAR Section 13-2-21(a) applied to HELCO's default entitlement and that the conditions in HELCO's pre-existing CDUP and amendments continue to apply with respect to those existing permits. The BLNR specifically did not address at that time the question of HELCO's compliance with each of those conditions. The BLNR issued a written decision on November 19, 1999. Certain plaintiffs filed two motions in the Circuit Court attempting to implement their interpretation of the BLNR's ruling. On November 2, 1999, those plaintiffs filed a second joint motion to enforce part 2 and part 3 of the final judgment. In that motion, they alleged that the Keahole project cannot meet the conditions relating to compatibility with the surrounding area and improvement of the existing physical and environmental aspects of the subject area. Furthermore, they claimed that the project would be a prohibited use that cannot be placed in the conservation district, relying on zoning rules implemented by the BLNR in 1994 in furtherance of Act 270, which prohibited fossil fuel fired generating units in a conservation district. However, the Circuit Court had earlier ruled that Act 270 does not apply to HELCO's application, which was filed prior to the effective date of Act 270. Plaintiffs asked that HELCO be enjoined from placing further structures and improvements on the Keahole site and be ordered to remove all existing structures and improvements. In November 1999, the same plaintiffs filed a third joint motion asking that the Circuit Court void HELCO's default entitlement on the basis that HELCO forfeited its default entitlement by allegedly electing, through HELCO's construction of the pre-PSD portions of the project, to build a project different from that described in its application. They also requested that HELCO be enjoined from continuing construction activity at the site and ordered to restore the Keahole site to its pre-August 1992 condition. These two motions were denied by the Circuit Court in December 1999 and the denials were reflected in an Order issued in February 2000. In June 2000, the same plaintiffs filed a fifth joint motion to enforce judgment, generally restating the claims in the second and fourth motions. At a hearing in August 2000, the main issue was how the three-year construction period in the standard land use conditions would be applied to the Keahole project, and there was discussion as to whether the BLNR's August 16, 2000 order (see "BLNR petitions" herein) had addressed that issue and the related issue of whether HELCO was in compliance with that condition. The Circuit Court took the matter under advisement, but at a subsequent hearing on September 18, 2000 the Circuit Court ruled that, as a matter of law, absent any legal or equitable extension 9 authorized by the BLNR pursuant to legal authority, the three-year construction deadline expired on April 26, 1999. The Circuit Court also denied KDC's and the individual plaintiff's request for an injunction barring further construction. In response to this ruling, HELCO filed a request for extension of the construction deadline with the BLNR on October 20, 2000. On October 27, 2000, KDC and another plaintiff filed a motion requesting the Circuit Court to impose a stay on any further activities by HELCO pursuant to HELCO's default entitlement until such time as the Hawaii Supreme Court acts on the pending appeals. At the hearing on December 11, 2000, the Circuit Court granted the motion in part, ordering a stay on the project until such time as an extension of the construction deadline is granted by the BLNR, at which time the Circuit Court would consider lifting the stay. On January 12, 2001, HELCO filed a motion for supplemental final judgment, with the intent of reducing the Circuit Court's September 18, 2000 ruling to a final judgment that would be appealable. A hearing was held on February 5, 2001, at which time the Circuit Court denied the motion because all matters relating to the issue had not been resolved. The Circuit Court clarified that it would retain jurisdiction over any appeals from the BLNR's decision regarding HELCO's request for an extension of the construction deadline, and that HELCO would be able to appeal the September 18, 2000 ruling after those appeals were resolved. In March 2001, an individual plaintiff filed a motion for post-judgment relief with the Circuit Court. Citing testimony in support of the project given by a former BLNR member at the March 2001 public hearing on HELCO's air permit, the individual alleged that the testimony established grounds to conclude that the former BLNR member was unduly influenced by evidence of the need for the project that the BLNR had improperly admitted during the contested case hearing in 1995-1996 and that the BLNR member voted to approve HELCO's application on that basis. In July 2001, the Circuit Court issued an order and directed the individual to file with the Supreme Court a motion to remand the default entitlement judgment "in order that [the Circuit Court] may make a further determination." The individual filed the motion for remand in July 2001. The Supreme Court denied the motion in December 2001. For other developments regarding these issues, particularly HELCO's request for extension of the construction deadline, see "BLNR petitions" herein. PSD permit. 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. In November 1998, the EAB denied the appeals on most of the grounds stated, but remanded the proceedings and directed the DOH to reopen the permit for limited purposes. Following another public hearing in March 2001, a final air permit was reissued by DOH in July 2001. Six appeals were filed by petitioners with the EAB, but those appeals were denied and the final air permit became effective on November 27, 2001. On December 4, 2001, the petitioners filed a Motion for Reconsideration with the EAB, but that motion was denied on January 29, 2002. KDC declaratory judgment action. In February 1997, KDC and three individuals - ------------------------------- filed a lawsuit in the Circuit Court 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 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. The Circuit Court issued various rulings in 1999. Proceedings regarding issues not definitively resolved through those rulings or otherwise were eventually suspended pending any further administrative action by the DOH and BLNR. Of the issues not definitively resolved, Count II, relating to the State Noise Pollution Act, may adversely affect HELCO's ability to construct and operate CT-4 and CT-5. 10 In February 1999, the DOH notified the Circuit Court and the parties of a change in its interpretation of the noise rules it promulgated under the State Noise Pollution Act. The change in interpretation would apply different noise standards to the Keahole plant (which standards the DOH claims to be a 55 dBA daytime and 45 dBA nighttime standard) rather than the previously-applied noise standard (a 70 dBA standard). In response to the new position announced by the DOH, in February 1999 HELCO filed a declaratory judgment action against the DOH, alleging that the noise rules were invalid on constitutional grounds. In March 1999, the Circuit Court granted KDC's motion to dismiss HELCO's 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 Circuit 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. In March 1999, the Circuit Court also 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. HELCO filed a notice of appeal on its unconstitutionality claim in August 1999 and KDC filed a notice of cross-appeal in September 1999. All briefs were filed with the Hawaii Supreme Court by April 2000. The Supreme Court has not yet acted on the appeal. The DOH has not issued any formal enforcement action applying the 55/45 dBA standard to the Keahole plant. Meanwhile, while not waiving possible claims or defenses that it might have against the DOH, HELCO has installed noise mitigation measures on the existing diesel units and CT-2 at Keahole and is exploring possible noise mitigation measures, which can be implemented if necessary, for CT-4 and CT-5. Should the DOH find HELCO in violation of the noise rules under Count II, the BLNR would be called to act on the impact of such violation, if any, on the CDUP (Count III) and the land patent (Count IV). At the request of KDC and others, a status conference was held on December 18, 2000. The judge urged all parties to diligently pursue action on any open issues in the appropriate court or agency having jurisdiction. If and when the DOH and BLNR/DLNR act on all issues relating to Counts II through IV, and depending upon their rulings, the KDC lawsuit may be moot. BLNR petitions. In August 1998, KDC filed with the BLNR a Petition for - -------------- Declaratory Ruling, alleging that the standard conditions in HAR Section 13-2-21 apply to HELCO's default entitlement, 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 three separate Notices of Violation (NOVs) issued by DOH to HELCO in 1992 and 1998 for violation of clean air rules constitute violations under the existing permits and render such permits null and void. The petition requested that the BLNR enjoin HELCO from using the Keahole property under the default entitlement. At a meeting in October 1999, BLNR determined that none of the standard land use conditions were inconsistent with HELCO's ability to proceed under its default entitlement and, therefore, each of the standard land use conditions applied to the expansion. The BLNR did not, at that time, determine whether HELCO had complied with the applicable conditions. The BLNR also determined that specific conditions imposed by the BLNR on HELCO's original CDUP and amendments thereto continued to apply to the existing plant but not to the expansion under the default entitlement. An order to this effect was issued in November 1999. In February 2000, KDC and an individual plaintiff filed with the BLNR a Request to Nullify "Default Entitlement," alleging that HELCO's default entitlement was void because (1) HELCO cannot satisfy all conditions and laws, (2) HELCO forfeited its default entitlement because it redesigned certain facilities it has already constructed to support existing CT-2 rather than CT-4 and CT-5, and (3) the BLNR should exercise its right-to-repurchase clause in HELCO's land patent. In February 2000, the BLNR denied KDC's request. A written decision on the February 2000 rulings was issued in August 2000. 11 At a hearing in September 2000, the Circuit Court ruled that, as a matter of law, absent any legal or equitable extension authorized by the BLNR pursuant to legal authority, the three-year construction deadline expired on April 26, 1999. HELCO filed a request for extension with the BLNR on October 20, 2000. By staff report dated January 20, 2001, the DLNR recommended that an extension be granted through January 26, 2004 and that the matter be handled administratively by the BLNR and not through a contested case hearing, subject to a condition that HELCO apply to the Land Use Commission within one year for a reclassification of the land. However, in January 2001, the BLNR decided that the extension issue should be decided through a contested case hearing, which was held in September 2001. In a document dated November 5, 2001, the hearings officer recommended that the BLNR approve HELCO's request for extension of the construction deadline. The recommendation did not state a time period for the extension, but concluded that an extension is warranted, "under such conditions as the Board may deem advisable." In a document dated November 7, 2001, the hearings officer issued rulings on the opponents' proposed findings of fact, conclusions of law, and motions. Each of the parties filed exceptions to the recommendation and rulings in November 2001. HELCO's exceptions requested that the November 7, 2001 rulings not be adopted, as many of them are arguably inconsistent with the November 5, 2001 recommendation. Oral arguments before the BLNR were conducted in January 2002. The BLNR has not yet issued a decision in this matter. IPP Complaints filed with the PUC and other IPP information. Three IPPs- - ----------------------------------------------------------- Kawaihae Cogeneration Partners (KCP), Enserch Development Corporation (Enserch) and Hilo Coast Power Company (HCPC)-filed separate complaints against HELCO with the PUC in 1993, 1994, and 1997, respectively, alleging that they are entitled to PPAs to provide HELCO with additional capacity. KCP and Enserch each claimed that their proposed facilities would be a substitute for HELCO's planned 56 MW (net) DTCC unit at Keahole. In 1994 and 1995, the PUC allowed HELCO to continue to pursue construction of and commit expenditures for the combustion turbines (CT-4 and CT-5) and the heat recovery steam turbine generator (ST-7), but stated in its 1995 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 Enserch and HCPC complaints have been resolved by HELCO's entry into two PPAs, a 30-year contract with Enserch's project affiliate (now known as Hamakua Partners) and a five-year contract (subject to extension for one-year periods unless terminated prior to an extension period) with HCPC, which contracts were approved by the PUC and which were necessary to ensure reliable service to customers on the island of Hawaii. In the opinion of management, these PPAs do not supplant the need for CT-4 and CT-5. The PPA with HCPC can be terminated by HELCO before the end of the five-year period, for a fee. On October 29, 1999, the Circuit Court ruled that the lease between Waimana and the Department of Hawaiian Home Lands for the site on which KCP's plant was proposed to be built was invalid. In addition, KCP's air permit apparently expired on January 31, 2000. In light of these and other issues, management believes that KCP's pending proposal for a PPA is not viable and, therefore, will not impact the installation of CT-4 and CT-5. Pre-PSD work and notices of violation. The costs for the CT-4 project (and, to a - ------------------------------------- lesser extent, the CT-5 project) included the costs of certain facilities that benefit the existing Keahole power plant, but were originally scheduled to be installed at the same time as the new generating units. HELCO proceeded with the construction of the facilities that could be constructed prior to receipt of the PSD permits for CT-4 and CT-5 (pre-PSD facilities) after receipt of the CDUP amendment (as a result of the Circuit Court orders). (See "CDUP amendment" herein.) Pre-PSD facilities. The pre-PSD facilities include a ------------------ shop/warehouse/administration building (completed in 1998), fire protection system upgrades (completed in September 1999), and a new water treatment system (completed in December 1999 and supplying the demineralized water needs of the existing CT at Keahole). (See Note 11 to HECO's Consolidated Financial Statements.) 12 EPA NOV. 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. In 1999, HELCO put the EPA on notice that certain construction activities not affected by the NOV would continue, and received approval to proceed with certain construction activities. With the issuance of the final air permit effective November 27, 2001, the NOV no longer affects the timing or extent of future construction activities at Keahole. 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 adding new generation. Actions under the plan (such as deferring the retirements of older, smaller units) 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. HELCO filed its final update in April 2001. The PUC then issued an order finding that updates were no longer necessary, and closing the docket. The first increments of new generation to be available to HELCO were added in August and December 2000 (Hamakua Partners' Phase 1 and Phase 2, respectively, of its planned 60 MW DTCC facility). Despite delays in adding new generation, HELCO's mitigation measures (including the extension of power purchases from HCPC) should provide HELCO with sufficient generation reserve margin to cover its projected monthly system peaks with units on scheduled maintenance until additional new generation is added in 2002 (CT-4 and CT-5), and should provide HELCO with sufficient reserve margin in the event of further delays in adding new generation. As new generation is added, HELCO will retire certain older, smaller generating units. Management's evaluation; costs incurred. See Note 11 to HECO's Consolidated - --------------------------------------- Financial Statements. NONUTILITY GENERATION The Company has supported state and federal energy policies which encourage the development of alternate energy sources that reduce the use of fuel oil. The Company's alternate energy sources range from wind, geothermal and hydroelectric power, to energy produced by the burning of bagasse (sugarcane waste) and municipal waste, landfill methane gas and coal. HECO PPAs. HECO currently has three major PPAs. In March 1988, HECO entered into a PPA with AES Barbers Point, Inc. (now known as AES Hawaii, Inc. (AES Hawaii)), a Hawaii-based cogeneration subsidiary of The AES Corporation. The agreement with AES Hawaii, as amended in August 1989, provides that, for a period of 30 years beginning September 1992, HECO will purchase 180 MW of firm capacity. The AES Hawaii 180 MW coal-fired cogeneration plant, which became operational in September 1992, utilizes a "clean coal" technology. The facility is designed to sell sufficient steam to be a "Qualifying Facility" (QF) under the Public Utility Regulatory Policies Act of 1978 (PURPA). In October 1988, HECO entered into an agreement with Kalaeloa Partners, L.P. (Kalaeloa), a limited partnership whose sole general partner was an indirect, wholly-owned subsidiary of ASEA Brown Boveri, Inc. (ABB), which has guaranteed certain of Kalaeloa's obligations and, through affiliates, contracted to design, build, operate and maintain the facility. The agreement with Kalaeloa, as amended, provides that HECO will purchase 180 MW of firm capacity for a period of 25 years beginning in May 1991. The Kalaeloa facility, which was completed in the second quarter of 1991, is a combined-cycle operation, consisting of two oil-fired combustion turbines burning low sulfur fuel oil (LSFO) and a steam turbine that utilizes waste heat from the combustion turbines. The facility is designed to sell sufficient steam to be a QF. As of February 28, 1997, the ownership of Kalaeloa was restructured so that 1% was owned by the ABB subsidiary as the general partner and 99% was owned by Kalaeloa Investment Partners 13 (KIP) as the limited partner. KIP is a limited partnership comprised of PSEG Hawaiian Management, Inc. and PSEG Hawaiian Investment, Inc. (nonregulated affiliates of Public Service Enterprise Group Incorporated) and Harbert Power Corporation. Subsequently, HECO consented to, and the PUC approved of, the transfer of the general partner partnership interest from the ABB subsidiary to an entity affiliated with the owners of KIP. HECO also entered into a PPA in March 1986 and a firm capacity amendment in April 1991 with the City and County of Honolulu with respect to a 64 MW refuse-fired plant (H-POWER). The H-POWER facility began to provide firm energy in 1990 and currently supplies HECO with 46 MW of firm capacity. The firm capacity amendment provides that HECO will purchase firm capacity until mid-2015. HECO purchases energy on an as-available basis from three nonutility generators. The largest are diesel-fired qualifying cogeneration facilities at the two oil refineries (10 MW and 18 MW) on Oahu. The other nonutility generator is an approximately 3 MW combustion turbine fired by methane gas from a landfill. The PUC has approved and allowed rate recovery for the firm capacity and purchased energy costs related to HECO's three major PPAs that provide a total of 406 MW of firm capacity, representing 24% of HECO's total generating and firm purchased capacity on the island of Oahu as of December 31, 2001. The PUC also has approved and allowed rate recovery for the purchased energy costs related to HECO's as-available energy PPAs. MECO and HELCO power purchase agreements. As of December 31, 2001, MECO and HELCO had PPAs for 16 MW and 112 MW of currently available firm capacity, respectively. MECO has a PPA with Hawaiian Commercial & Sugar Company (HC&S) for 16 MW of firm capacity. The HC&S generating units primarily burn bagasse (sugar cane waste) along with secondary fuels of oil or coal. In March 1998, an HC&S unit failed and HC&S lost 10 MW of generating capacity. HC&S replaced the unit and put it into operation in the second quarter of 2000. HC&S, however, has since struggled to meet its contractual obligations to MECO in 2000 and 2001 due to operational constraints that led to several claims of force majeure by HC&S. The constraints have been primarily due to an extended drought condition on Maui that impacts HC&S' irrigation pumping load for its sugar cane operations. There has also been a higher than normal reduction in energy produced due to other equipment outages. With the completion of some maintenance activities and the easing of drought conditions, HC&S has resumed more normal energy sales to MECO. On January 23, 2001, MECO rescinded a December 27, 1999 PPA termination notice that it had sent to HC&S and agreed with HC&S that neither party would issue to the other a notice of termination prior to the end of 2002. Given the two-year notice required for termination, the PPA will remain in effect at least through December 31, 2004, and from year-to-year thereafter, subject to termination after such date on not less than two years' prior notice. In the intervening time, negotiations for a new PPA are expected. HELCO has a 35-year PPA with Puna Geothermal Venture (PGV) for 30 MW of firm capacity from its geothermal steam facility expiring on December 31, 2027. In mid-1998, PGV's output began to decline from 30 MW to approximately 24 MW. By late 1999, PGV completed the addition of a new geothermal resource well and restoration of two reinjection wells. In December 1999, PGV began delivering 27 MW to 28 MW of firm capacity. In January 2000, PGV began delivering 30 MW of firm capacity using a temporary well connection. PGV made the installation permanent, and returned to providing 30 MW of firm capacity in February 2000. PGV's output has been in decline since the middle of 2000. The loss of generation has been attributed to poor quality steam (i.e., high liquid water content and debris) emanating from its source wells. PGV is considering further equipment upgrades and additional wells in order to recover 30 MW output. PGV expects this work to be completed in 2002. In December 1994, at a time when HELCO's contract with HCPC was set for delivery of 18 MW, HCPC filed a Chapter 11 bankruptcy petition. In July 1995, the bankruptcy court approved an amended and restated PPA with HCPC for 22 MW of firm capacity and the dismissal of HCPC from bankruptcy. That agreement terminated on December 31, 1999. On October 4, 1999, HELCO entered into a PPA with HCPC effective January 1, 2000 through December 31, 2004, subject to early termination by HELCO after two years, whereby HELCO continues to 14 purchase 22 MW of firm capacity from HCPC's coal-fired facility. The PPA extends for one-year periods thereafter, unless terminated prior to an extension period. The PPA was amended on November 5, 1999. The PUC approved the PPA, as amended, on December 7, 1999. See the "HELCO Power Situation" section above. In October 1997, HELCO entered into an agreement with Encogen, a limited partnership whose general partners were wholly-owned special-purpose subsidiaries of Enserch and Jones Capital Corporation. Enserch Corporation and J.A. Jones, Inc., the parent companies of Enserch and Jones Capital Corporation, respectively, guaranteed certain of Encogen's obligations. The agreement provides that HELCO will purchase up to 60 MW (net) of firm capacity for a period of 30 years. The DTCC facility, which primarily burns naphtha, consists of two oil-fired combustion turbines and a steam turbine that utilizes waste heat from the combustion turbines. The facility is designed to sell sufficient steam to be a QF. The PUC approved the agreement on July 14, 1999. On November 8, 1999, HELCO entered into a PPA Novation with Encogen and Hamakua Partners, which recognizes the transfer of the obligations of Encogen under the PPA to Hamakua Partners. Hamakua Partners was formed as result of the sale of the general partner and limited partner partnership interests of Enserch to entities affiliated with TECO Energy Inc., which is a Florida-based energy company and parent company of Tampa Electric Company, a regulated electric utility. TECO Energy Inc. has replaced the guarantee of Enserch Corporation of certain of Hamakua Partners' obligations. On August 12, 2000, Hamakua Partners began providing HELCO with firm capacity from the first phase of a two-phase construction completion schedule. On December 31, 2000, Hamakua Partners began providing firm capacity from the entire facility, following completion of the second phase of construction. In June 2001, Hamakua Partners demonstrated 60 MW output from the facility. Since then, the output has deteriorated due to technical problems in the steam turbine, and as of January 2002, output from Hamakua Partners is limited to 56 MW. Hamakua Partners expects to resolve the technical difficulties with the steam turbine and return to 60 MW output by June 2002. See the "HELCO Power Situation" section above. HELCO purchases energy on an as-available basis from a number of nonutility generators. The largest include an 11 MW run-of-the-river hydroelectric facility and a 7 MW wind facility. Apollo Energy Corporation (Apollo), the owner of the wind facility, has an existing contract to provide HELCO with as-available windpower through June 29, 2002 (and extending thereafter until terminated by HELCO or Apollo). Apollo filed a petition for hearing with the PUC on April 28, 2000, alleging that it had unsuccessfully attempted to negotiate a new power purchase agreement with HELCO. Apollo had offered to repower its existing 7 MW facility by the end of 2000 and to install additional wind turbines, up to a total allowed capacity of 15 MW, by the end of 2001. The parties agreed to limit to four issues the matters being presented to the PUC for guidance: whether Apollo is entitled to capacity payments; whether Apollo is entitled to a minimum purchase rate; whether certain performance standards should apply; and whether HELCO's proposed dispute resolution provision should apply. A hearing on these issues was held on October 3-5, 2000. On May 30, 2001, the PUC issued a D&O in which it ordered HELCO and Apollo to continue to negotiate a PPA, consistent with the terms of the D&O, and to submit by August 13, 2001 either a finalized PPA or status reports informing the PUC of matters preventing finalization of a PPA. HELCO and Apollo were unable to agree to a PPA by August 13, 2001, and each submitted status reports. Apollo now wants to be allowed to supply up to 20 MW of power. The parties have continued to negotiate following August 13, 2001, but have not reached agreement, and have submitted letters to the PUC updating the status of negotiations. On August 17, 1999, HELCO entered into a PPA with Kahua Power Partners LLC (KPP) for the purchase of as-available energy from KPP's proposed 10 MW windfarm. The PPA was amended by Amendment No. 1 dated April 4, 2000. The PUC approved the PPA, as amended, on June 1, 2001. KPP has not begun construction of its windfarm. On January 8, 2001, HELCO entered into a PPA with Hawi Renewable Development, Inc. (HRD) for the purchase of approximately 3 MW of as-available energy from HRD's proposed 5 MW windfarm. An amendment to the PPA is expected to be completed in the first half 2002, after which the PPA, as amended, will be submitted to the PUC for 15 approval. HELCO may purchase energy from HRD by the end of 2002, assuming receipt of a timely PUC approval and completion of construction as scheduled. The PUC has approved and allowed rate recovery for the firm capacity and purchased energy costs for MECO's and HELCO's approved firm capacity and as- available energy PPAs. FUEL OIL USAGE AND SUPPLY The rate schedules of the Company's electric utility subsidiaries include energy cost adjustment (ECA) clauses under which electric rates (and consequently the revenues of the electric utility subsidiaries generally) are adjusted for changes in the weighted-average price paid for fuel oil and certain components of purchased power, and the relative amounts of company-generated power and purchased power. See discussion below under "Rates," and "Regulation of electric utility rates" and "Electric utility revenues" in HECO's MD&A. HECO's steam power plants burn LSFO. HECO's combustion turbine peaking units burn No. 2 diesel fuel (diesel). MECO's and HELCO's steam power plants burn medium sulfur fuel oil (MSFO) and their combustion turbine and diesel engine generating units burn diesel. The LSFO supplied to HECO is primarily derived from Indonesian and other Far East crude oils processed in Hawaii refineries. The MSFO supplied to MECO and HELCO is derived from U.S. domestic crude oil processed in Hawaii refineries. In December 1997, HECO executed contracts for the purchase of LSFO and the use of certain fuel distribution facilities with Chevron Products Company (Chevron) and Tesoro Hawaii Corp. dba BHP Petroleum Americas Refining Inc. (Tesoro). These fuel supply and facilities operations contracts have a term of seven years commencing January 1, 1998. The PUC approved the contracts and permits the inclusion of costs incurred under these contracts in HECO's ECA clauses. HECO pays market-related prices for fuel supplies purchased under these agreements. HECO, MECO and HELCO executed joint fuel supply contracts with Chevron and Tesoro for the purchase of diesel and MSFO supplies and for the use of certain petroleum distribution facilities for a period of seven years commencing January 1, 1998. The PUC approved these contracts and permits the electric utilities to include fuel costs incurred under these contracts in their respective ECA clauses. The electric utilities pay market-related prices for diesel and MSFO supplied under these agreements. The diesel supplies acquired by the Lanai Division of MECO are purchased under a contract with a local petroleum wholesaler, Lanai Oil Co., Inc. On March 1, 2000, the PUC approved an amended contract with a term extending through December 31, 2001, and further extending through December 31, 2003 unless terminated as of the end of 2001. This agreement has been extended through December 31, 2003. See the fuel oil commitments information set forth in the "Fuel contracts" section in Note 11 to HECO's Consolidated Financial Statements. The following table sets forth the average cost of fuel oil used by HECO, MECO and HELCO to generate electricity in the years 2001, 2000 and 1999:
HECO MECO HELCO Consolidated ---------------------------------------------------------------------------------------------------- $/Barrel (cent)/MBtu $/Barrel (cent)/MBtu $/Barrel (cent)/MBtu $/Barrel (cent)/MBtu - ----------------------------------------------------------------------------------------------------------- 2001 31.90 508.3 40.00 670.0 31.96 514.8 33.49 539.3 2000 31.63 503.1 38.91 651.0 35.37 577.1 33.44 538.5 1999 18.68 297.4 25.65 430.2 22.97 373.7 20.46 329.7
The average per-unit cost of fuel oil consumed to generate electricity for HECO, MECO and HELCO reflects a different volume mix of fuel types and grades. In 2001, over 99% of HECO's generation fuel consumption consisted of LSFO. The balance of HECO's fuel consumption was diesel. Diesel made up approximately 75% of MECO's and 16 21% of HELCO's fuel consumption. MSFO made up the remainder of the fuel consumption of MECO and HELCO. In general, MSFO is the least costly fuel, diesel is the most expensive fuel and the price of LSFO falls between the two on a per- barrel basis. The prices of LSFO, MSFO and diesel fell in early 2001, reached a peak in the June-July period, then trended lower through the remainder of 2001. Compared to the price levels prevailing in 2000, the 2001 prices for LSFO and diesel averaged approximately 5% lower and the prices for MSFO averaged approximately 12% lower. The prices in January 2002 continued the downward trend. In June 1999, HELCO and MECO exercised an option to extend for two years commencing January 1, 2000 their existing contracts with Hawaiian Interisland Towing, Inc. (HITI) for the shipment of MSFO and diesel supplies from their fuel supplier's facilities on Oahu to storage locations on the islands of Hawaii and Maui, respectively. The PUC had approved these contracts and issued a final order in June 1994 that permitted HELCO and MECO to include the fuel transportation and related costs incurred under the original contracts in their respective ECA clauses. Freight rates charged under the contracts are related to published indices for industrial commodities prices and labor costs. As a result of a formal competitive bidding process, successor ocean transportation contracts between MECO and HELCO and HITI were executed in December 2000 for service commencing January 1, 2002. These contracts provide for the employment of a new double-hull bulk petroleum barge at freight rates approximately the same as under the prior agreements for an initial term of 5 years with options for three additional five-year extensions. On December 10, 2001, the PUC approved these contracts and permits the recovery of freight costs incurred in MECO's and HELCO's ECA clauses. HITI never takes title to the fuel oil or diesel fuel, but does have custody and control while the fuel is in transit from Oahu. If there were an oil spill in transit, HITI is contractually obligated to indemnify HELCO and/or MECO. HITI has liability insurance coverage for oil spill related damage of $1 billion. State law provides a cap of $700 million on liability for releases of heavy fuel oil transported interisland by tank barge. HELCO and/or MECO may be responsible for any clean-up and/or fines that HITI or its insurance carrier does not cover. The prices that HECO, MECO and HELCO pay for purchased energy from nonutility generators are generally linked to the price of oil. The AES Hawaii energy prices vary primarily with an inflation indicator. The energy prices for Kalaeloa, which purchases LSFO from Tesoro, vary primarily with world LSFO prices. The H-POWER, HC&S, PGV and HCPC energy prices are based on the Companies' respective PUC-filed short-run avoided energy cost rates (which vary with their respective composite fuel costs), subject to minimum floor rates specified in their approved PPAs. The Hamakua Partners energy prices vary primarily with HELCO's diesel costs. The Company estimates that 76% of the net energy generated and purchased by HECO and its subsidiaries in 2002 will be generated from the burning of oil. Increases in fuel oil prices are passed on to customers through the electric utility subsidiaries' ECA clauses. Failure by the Company's oil suppliers to provide fuel pursuant to the supply contracts and/or substantial increases in fuel prices could adversely affect consolidated HECO's and the Company's financial condition, results of operations and/or liquidity. HECO, however, maintains an inventory of fuel oil in excess of one month's supply. HELCO and MECO maintain approximately a one month's supply of both MSFO and diesel. The PPAs with AES Hawaii and Hamakua Partners require that they maintain certain minimum fuel inventory levels. TRANSMISSION SYSTEMS HECO has 138 kilovolt (kv) transmission and 46 kv subtransmission lines. HELCO has 69 kv transmission and 34.5 kv subtransmission lines. MECO has 69 kv transmission and 23 kv subtransmission lines on Maui, 34.5 kv transmission lines on Molokai and 12 kv distribution lines on Lanai. The electric utilities' overhead and underground transmission and subtransmission lines, as well as their distribution lines, are uninsured because the amount of insurance available is limited and the premiums are extremely high. Lines are added when needed to serve increased loads and/or for reliability reasons. In some design districts on Oahu, lines must be placed underground. By state law, the PUC generally must determine whether new 46 kv, 17 69 kv or 138 kv lines can be constructed overhead or must be placed underground. The process of acquiring permits and regulatory approvals for new lines can be contentious, time consuming (leading to project delays) and costly. HECO system. HECO serves Oahu's electricity requirements with firm capacity generating units located in West Oahu (1,057 MW); Waiau, adjacent to Pearl Harbor (499 MW); and Honolulu (113 MW). HECO's nonfirm power sources (approximately 32 MW) are located primarily in West Oahu. HECO transmits power to its service areas on Oahu through approximately 217 miles of overhead and underground 138 kv transmission lines (of which approximately 6 miles are underground) and approximately 570 miles of overhead and underground 46 kv subtransmission lines. See "Oahu transmission system" in HECO's MD&A. HELCO system. HELCO serves the island of Hawaii's electricity requirements with firm capacity generating units located in West Hawaii (40 MW) and East Hawaii (221 MW). HELCO's nonfirm power sources total 26 MW. HELCO transmits power to its service area on the island of Hawaii through approximately 468 miles of 69 kv overhead lines and approximately 173 miles of 34.5 kv overhead lines. MECO system. MECO serves its electricity requirements with firm capacity generating units located on the island of Maui (250 MW), Molokai (12 MW) and Lanai (10 MW). MECO has no nonfirm power sources. MECO transmits power to its service area on the islands of Maui, Molokai and Lanai through approximately 128 miles of 69 kv overhead lines and approximately 10 miles of 34.5 kv overhead lines. RATES HECO, MECO and HELCO are subject to the regulatory jurisdiction of the PUC with respect to rates, issuance of securities, accounting and certain other matters. See "Regulation and other matters--Electric utility regulation." All rate schedules of HECO and its subsidiaries contain ECA clauses as described previously. Under current law and practices, specific and separate PUC approval is not required for each rate change pursuant to automatic rate adjustment clauses previously approved by the PUC. Rate increases, other than pursuant to such automatic adjustment clauses, require the prior approval of the PUC after public and contested case hearings. PURPA requires the PUC to periodically review the ECA clauses of electric and gas utilities in the state, and such clauses, as well as the rates charged by the utilities generally, are subject to change. See "Regulation of electric utility rates," "Recent rate requests" and "Electric utility revenues" in HECO's MD&A. PUBLIC UTILITIES COMMISSION OF THE STATE OF HAWAII Dennis Yamada is the Chairman of the PUC and has served on the PUC since 1994. In December 2001, Wayne Kimura became a commissioner on the PUC, replacing a commissioner who resigned in October 2001. Commissioner Kimura was formerly with the State Department of Accounting and General Services as State Comptroller. In January 2002, Janet Kawelo became a commissioner on the PUC, replacing a commissioner who resigned at the end of December 2001. Commissioner Kawelo was previously the Deputy Director for the State Department of Land and Natural Resources. Commissioners Kimura and Kawelo are serving as commissioners subject to Senate confirmation. MOST RECENT RATE REQUESTS Hawaiian Electric Company, Inc. - ------------------------------- . In December 1993, HECO filed a request to increase rates based on a 1995 test year. HECO requested a 4.1% increase (as revised), or $28.2 million in annual revenues, based on a 13.25% return on average common equity (ROACE). In December 1995, HECO received a final D&O authorizing a 1.3%, or $9.1 million, increase in annual revenues, based on a 1995 test year and an 11.4% ROACE. 18 . HECO has not initiated a rate case for several years, but in 2001 it committed to initiate a rate case within three years, using a 2003 or 2004 test year, as part of the agreement described in "Other regulatory matters" in HECO's MD&A. Hawaii Electric Light Company, Inc. - ----------------------------------- . In March 1995, HELCO filed a request to increase rates based on a 1996 test year. In February 1996, HELCO revised its requested increase to 6.2%, or $8.9 million in annual revenues, based on a 12.5% ROACE. In March 1996, HELCO received an interim D&O authorizing a 4.8%, or $6.8 million, increase in annual revenues, based on an 11.65% ROACE. In April 1997, HELCO received a final D&O which made the interim increase final. . In March 1998, HELCO filed a request to increase rates 11.5%, or $17.3 million in annual revenues, based on a 1999 test year and a 12.5% ROACE, primarily to recover costs relating to (1) an agreement to buy power from Hamakua Partners 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 permits" above) and a delay in adding the Hamakua Partners plant from 1999 to 2000, HELCO's test year 1999 rate increase application was withdrawn in March 1999. . See "Recent rate requests--Hawaii Electric Light Company, Inc." in HECO's MD&A for a discussion of the PUC's final D&O on HELCO's rate increase based on a 2000 test year. Maui Electric Company, Limited - ------------------------------ . In February 1995, MECO filed a request to increase rates based on a 1996 test year. MECO's final requested increase was 3.8%, or $5.0 million in annual revenues, based on an 11.5% ROACE. In January 1996, MECO received an interim D&O authorizing an increase of 2.8%, or $3.7 million in annual revenues, based on an 11.5% ROACE, effective February 1, 1996. In April 1997, MECO received a final D&O authorizing a 2.9%, or $3.9 million increase in annual revenues, $0.2 million more annually than the interim increase and based on an 11.5% ROACE. . In May 1996, MECO filed a request to increase rates 13%, or $18.9 million in annual revenues, based on a 1997 test year and a 12.9% ROACE, primarily to recover the costs related to the anticipated 1997 addition of new generating unit M17. In November 1996, MECO filed a motion with the PUC to approve a stipulation between MECO and the Consumer Advocate which would provide MECO with an increase in annual revenues of $1.5 million, based on an 11.65% ROACE. In May 1997, the stipulated increase was revised to $1.3 million after considering the final decision in the 1996 test year case. The primary reason for the stipulation was a delay in the expected in-service date for MECO's generating unit M17 until late 1998, because of delays in obtaining the necessary PSD permit from the DOH/EPA. In December 1997, MECO received a final D&O authorizing no additional increase in annual revenues, based on an 11.12% ROACE. . See "Recent rate requests--Maui Electric Company, Limited" in HECO's MD&A for a discussion of MECO's rate increase based on a 1999 test year. REGULATORY ASSET RELATED TO BARBERS POINT TANK FARM PROJECT COSTS See Note 6 to HECO's Consolidated Financial Statements. COMPETITION In December 1996, the PUC instituted a proceeding to identify and examine the issues surrounding electric competition and to determine the impact of competition on the electric utility infrastructure in Hawaii. See "Competition" in HECO's MD&A. Management cannot predict what changes, if any, may result from these efforts or what impact, if any, the changes may have on the Company's or consolidated HECO's financial condition, results of operations or liquidity. 19 In the order initiating the proceeding, the PUC recognized that Hawaii's stand-alone island energy systems are different from the interconnected systems of the contiguous states, but also recognized the need to determine how to respond in Hawaii to changes occurring in the industry. The PUC set forth a preliminary enumeration of the issues, including feasible forms of competition, the regulatory compact, public interest benefits, long-term integrated resource planning, appropriate treatment of potential stranded costs and the identification of the objectives and the establishment of a time frame for the introduction of competition in the electric industry. There are 19 parties in the proceeding including the Consumer Advocate, HECO, HELCO, MECO, the Department of Business, Economic Development & Tourism of the State of Hawaii (DBEDT), the Counties of Maui, Hawaii and Kauai, the Department of Defense (the DOD, HECO's largest customer), various IPPs and others. Following a number of meetings, and the submission and presentation to the collaborative group of preliminary Statements of Position (SOPs), the parties individually submitted final SOPs that were compiled and sent to the PUC in October 1998. HECO's position in the proceeding was that retail competition is not feasible in Hawaii, but that some of the benefits of competition can be achieved through (1) competitive bidding for new generation, (2) performance-based ratemaking (PBR), 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 suggested in its SOP that these proposals be implemented through applications for PUC approval in a series of separate proceedings to be initiated by HECO. HECO pointed out in its SOP that the conditions making electric industry restructuring feasible elsewhere generally are not present in Hawaii. Among other considerations, none of the island electric systems is interconnected, the island electricity markets are relatively small and there are barriers to entry by new generation suppliers. While the other parties' SOPs generally support competitive bidding for new generation, there is no consensus as to whether or as to the extent Hawaii's electricity markets should be restructured to introduce further competition. For example, the Consumer Advocate agreed that full scale retail generation competition was not now feasible in Hawaii, but proposed immediate rate unbundling and customer education, followed by rulemaking proceedings (1) to open transmission and distribution access on a limited basis (such as when new generation is needed) and determine the degree of any stranded cost recovery through nonbypassable access charges, (2) to permit conservation and energy management services to be provided to retail customers on a competitive basis, and (3) to implement competition for other customer services (metering and billing), as determined to be appropriate. The DOD also recognized that retail generation competition was not now feasible, and proposed rate unbundling, the establishment of cost-based rates, the offering of additional rate options, PBR, and investigation of the unbundling and separate pricing of customer services. DBEDT proposed (1) rate unbundling, (2) competition for customer services and energy efficiency services, and (3) if additional analysis by the PUC confirms the feasibility of retail generation competition on Oahu, open transmission and distribution access for generators, divestiture of generation and customer service functions by utilities, and the formation of independent system operators. In May 1999, the PUC approved HECO's standard form contract for customer retention that allows HECO to provide a rate option for customers who would otherwise reduce their energy use from HECO's system by using energy from a nonutility generator. Based on HECO's current rates, the standard form contract provides a 2.77% and an 11.27% discount on base energy rates for "Large Power" and "General Service Demand" customers, respectively. In March 2000, the PUC approved a similar standard form contract which, based on HELCO's current rates, provides a 10.00% discount on HELCO's base energy rates for "Large Power" and "General Service Demand" customers. In December 1999, HECO, HELCO and MECO filed an application with the PUC seeking permission to implement PBR in future rate cases. The proposed PBR would have allowed adjustments in HECO and its subsidiaries' rates (for up to five years after a rate case) based on an index-based price cap, an earnings sharing mechanism and a service quality mechanism. In early 2001, the PUC dismissed the electric utilities' PBR proposal without prejudice, 20 indicating it declines at this time to change its current cost of service/rate of return methodology for determining electric utility rates. In January 2000, the PUC submitted a status report on its competition investigation to the 2000 Legislature, at the Legislature's request. In the report, the PUC stated that competitive bidding for new power supplies (i.e., wholesale generation competition) is a logical first step to encourage competition in the state's electric industry and that it plans to proceed with an examination of the feasibility of competitive bidding. The PUC also indicated its plans to review specific policies to encourage renewable energy resources in the power generation mix. The report states that "further steps" by the PUC "will involve the development of specific policies to encourage wholesale competition and the continuing examination of other areas suitable for the development of competition." ELECTRIC AND MAGNETIC FIELDS Research on potential adverse health effects from exposure to electric and magnetic fields (EMF) continues. To date, no definite relationship between EMF and health risks has been clearly demonstrated. In 1996, the National Academy of Sciences examined more than 500 studies and stated that "the current body of evidence does not show that exposure to EMFs presents a human-health hazard." An extensive study released in 1997 by the National Cancer Institute and the Children's Cancer Group found no evidence of increased risk for childhood leukemia from EMF. In 1999, the National Institute of Environmental Health Sciences Director's Report concluded that while EMF could not be found to be "entirely safe," the evidence of a health risk was "weak" and did not warrant "aggressive" regulatory actions. Consequently, HECO and its subsidiaries are monitoring the research and continue to participate in utility industry funded studies on EMF and, where technically feasible and economically reasonable, continue to reduce EMF in the design and installation of new transmission and distribution facilities. Management cannot predict the impact, if any, the EMF issue may have on HECO, HELCO and MECO in the future. EXEMPTION FROM REAL PROPERTY TAXES FOR HECO, HELCO AND MECO In April 2001, the Governor of the State of Hawaii signed into law Act 64, which provides for the sharing of the Public Service Company (PSC) tax revenues between the state and counties of the state. This legislation is consistent with a settlement agreement that was entered into in January 2001 by the state, the counties and the utility companies doing business in Hawaii. The sharing of the PSC tax revenues took effect on July 1, 2001. In accordance with the settlement agreement, the utilities subject to the PSC tax pay the same amount of PSC taxes they would have under the old law, which imposed taxes on electric revenues at rates ranging from 5.885% to 8.2%. However, the state now receives the taxes calculated at a 4% rate and counties now receive the revenues from the taxes in excess of 4%. In order to share in these revenues, the counties must provide by ordinance for a real property tax exemption for real property used by a public utility in its public utility business and owned by the public utility (or leased to it by a lease under which the public utility is required to pay the taxes) and must not have denied the exemption to the utility with regard to such property. The counties have waived and released claims for real property tax due and payable before July 1, 2001. Consequently, all the complaints and tax appeals filed by the utilities against the state in Tax Appeal Court before January 11, 2001 have been dismissed. Under the settlement agreement, however, the County of Hawaii will keep the approximately $0.1 million real property tax installment HELCO paid under protest on August 20, 2000. The counties of Oahu, Hawaii and Maui have passed the enabling statutes in accordance with the settlement agreement or have existing statutes which exempt HECO, HELCO and MECO from the real property tax in their respective counties of operation. LEGISLATION Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the utilities and their customers. For example, Congress is considering an energy plan that could increase the domestic supply of oil as well as increase support for energy conservation programs and mandate the use of renewables by utilities. The 2002 Hawaii legislature is considering measures that would undertake a comprehensive 21 audit of the state's electric utility regulatory policies, energy policies and support for reducing Hawaii's dependence on imported petroleum for electrical generation. Management cannot at this time predict the impact of these proposals or the likelihood of their eventual passage and enactment into law. The Hawaii legislature did not consider deregulation in its 2001 session, but passed a law that requires electric utilities to establish "renewables portfolio standard" goals of 7% by December 31, 2003, 8% by December 31, 2005 and 9% by December 31, 2010. HECO, HELCO and MECO are permitted to aggregate their renewable portfolios in order to achieve these goals. Any electric utility whose percentage of sales of electricity represented by renewable energy does not meet these goals will have to report to the PUC and provide an explanation for not meeting the renewables portfolio standard. The PUC could then grant a waiver from the standard or an extension of time for meeting the standard. The PUC may also provide incentives to encourage electric utilities to exceed the standards or meet the standards earlier, or both, but as yet no such incentives have been proposed. The new law also requires that electric utilities offer net energy metering to solar, wind turbine, biomass or hydroelectric generating systems (or hybrid systems) with a capacity up to 10 kilowatts (i.e., a customer-generator may be a net user or supplier of energy and will make payments to or receive credits from the electric utility accordingly). BANK--AMERICAN SAVINGS BANK, F.S.B. - ----------------------------------- GENERAL ASB was granted a federal savings bank charter in January 1987. Prior to that time, ASB had operated since 1925 as the Hawaii division of American Savings & Loan Association of Salt Lake City, Utah. As of December 31, 2001, ASB was the third largest financial institution in the State of Hawaii with total assets of $6.0 billion and deposits of $3.7 billion. HEI agreed with the Office of Thrift Supervision's (OTS) predecessor regulatory agency that ASB's regulatory capital would be maintained at a level of at least 6% of ASB's total liabilities, or at such greater amount as may be required from time to time by regulation. Under the agreement, HEI's obligation to contribute additional capital was limited to a maximum aggregate amount of approximately $65.1 million. At December 31, 2001, HEI's maximum obligation to contribute additional capital has been reduced to approximately $28.3 million because of additional capital contributions of $36.8 million by HEI to ASB since the acquisition, exclusive of capital contributions made in connection with ASB's acquisition of most of the Hawaii operations of BoA (see below). ASB is subject to OTS regulations on dividends and other distributions applicable to financial institutions regulated by the OTS. Effective December 6, 1997, ASB acquired certain loans and other assets and assumed certain deposits and other liabilities of the Hawaii operations of BoA pursuant to a Purchase and Assumption Agreement executed on May 26, 1997, as amended. ASB used the purchase method of accounting to account for the transaction. In this transaction, ASB assumed liabilities with an estimated fair value of $1.7 billion and paid a $0.1 billion premium on certain transferred deposit liabilities. The estimated fair value of tangible and intangible assets acquired, including cash of $0.8 billion, amounted to $1.8 billion. ASB recorded the excess of the purchase price over the estimated fair value of the identifiable net assets acquired of $72 million as goodwill and recorded the core deposit premium of approximately $20 million as an intangible asset. The accounting treatment for goodwill and other intangible assets will change for 2002 and subsequent years. See "Business combinations, goodwill and other intangible assets" in Note 1 of HEI's Consolidated Financial Statements. ASB's earnings depend primarily on its net interest income--the difference between the interest income earned on interest-earning assets (loans receivable and investment and mortgage/asset-backed securities) and the interest expense incurred on interest-bearing liabilities (deposit liabilities and borrowings, including advances from the Federal Home Loan Bank (FHLB) of Seattle). For additional information about ASB, see the sections under "Bank" in HEI's MD&A, HEI's "Quantitative and Qualitative Disclosures about Market Risk" and Note 4 to HEI's Consolidated Financial Statements. 22 The following table sets forth selected data for ASB for the years indicated:
Years ended December 31, ------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------- Common equity to assets ratio Average common equity divided by average total assets/1/............... 6.65% 6.22% 6.09% Return on assets Net income for common stock divided by average total assets/1/,/2/..... 0.81 0.68 0.62 Return on common equity Net income for common stock divided by average common equity/1/,/2/.... 12.3 11.0 10.2 Tangible efficiency ratio Total general and administrative expenses divided by net interest income and other income.............................................. 56 57 58 /1/ Average balances calculated using the average daily balances during 2001 (except for return on common equity, which is calculated using the average month-end balance) and the average month-end balances during 2000 and 1999. /2/ Net income includes amortization of goodwill and core deposit intangibles. In 2002 and subsequent years, goodwill will no longer be amortized, but will be tested for impairment at least annually.
CONSOLIDATED AVERAGE BALANCE SHEET The following table sets forth average balances of ASB's major balance sheet categories for the years indicated. Average balances have been calculated using the daily average balances during 2001 and the average month-end balances during 2000 and 1999.
Years ended December 31, ---------------------------------------------- (in thousands) 2001 2000 1999 - -------------------------------------------------------------------------------------------------- Assets Investment securities............................ $ 308,712 $ 287,906 $ 218,628 Mortgage/asset-backed securities................. 2,345,630 2,058,706 1,894,953 Loans receivable, net............................ 2,963,521 3,215,879 3,191,847 Other............................................ 391,040 380,609 414,153 ---------------------------------------------- $ 6,008,903 $ 5,943,100 $ 5,719,581 ============================================== Liabilities and stockholder's equity Deposit liabilities.............................. $ 3,638,136 $ 3,537,312 $ 3,706,750 Other borrowings................................. 1,778,766 1,880,952 1,505,109 Other............................................ 117,366 80,262 84,540 Stockholder's equity............................. 474,635 444,574 423,182 ---------------------------------------------- $ 6,008,903 $ 5,943,100 $ 5,719,581 ==============================================
In 2001, mortgage/asset-backed securities increased and loans receivable decreased largely because ASB exchanged loans for $393 million of mortgage/asset-backed securities. ASSET/LIABILITY MANAGEMENT See HEI's "Quantitative and Qualitative Disclosures about Market Risk" in HEI's Annual Report. INTEREST INCOME AND INTEREST EXPENSE The following table sets forth average balances, interest and dividend income, interest expense and weighted-average yields earned and rates paid, for certain categories of interest-earning assets and interest-bearing liabilities 23 for the years indicated. Average balances for each year have been calculated using the average month-end or daily average balances during the year.
Years ended December 31, ------------------------------------------------ (dollars in thousands) 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------- Loans Average balances......................................... $ 2,963,521 $ 3,215,879 $ 3,191,847 Interest income ......................................... 231,858 254,502 244,566 Weighted-average yield................................... 7.82% 7.91% 7.66% Mortgage/asset-backed securities Average balances......................................... $ 2,345,630 $ 2,058,706 $ 1,894,953 Interest income ......................................... 152,181 152,340 122,281 Weighted-average yield................................... 6.49% 7.40% 6.45% Investments/1/ Average balances......................................... $ 308,712 $ 287,906 $ 218,628 Interest and dividend income ............................ 15,612 16,733 13,132 Weighted-average yield................................... 5.06% 5.81% 6.01% Total interest-earning assets Average balances......................................... $ 5,617,863 $ 5,562,491 $ 5,305,428 Interest and dividend income ............................ 399,651 423,575 379,979 Weighted-average yield................................... 7.11% 7.61% 7.16% Deposits Average balances......................................... $ 3,638,136 $ 3,537,312 $ 3,706,750 Interest expense......................................... 116,531 119,192 120,338 Weighted-average rate.................................... 3.20% 3.37% 3.25% Borrowings Average balances......................................... $ 1,778,766 $ 1,880,952 $ 1,505,109 Interest expense......................................... 97,054 119,683 86,830 Weighted-average rate.................................... 5.46% 6.36% 5.77% Total interest-bearing liabilities Average balances......................................... $ 5,416,902 $ 5,418,264 $ 5,211,859 Interest expense......................................... 213,585 238,875 207,168 Weighted-average rate.................................... 3.94% 4.41% 3.97% Net balance, net interest income and interest rate spread Net balance............................................ $ 200,961 $ 144,227 $ 93,569 Net interest income.................................... 186,066 184,700 172,811 Interest rate spread................................... 3.17% 3.20% 3.19% /1/ Includes stock in the FHLB of Seattle.
24 The following table shows the effect on net interest income of (1) changes in interest rates (change in weighted-average interest rate multiplied by prior year average portfolio balance) and (2) changes in volume (change in average portfolio balance multiplied by prior period rate). Any remaining change is allocated to the above two categories on a pro rata basis.
Increase (decrease) due to ---------------------------------------- (in thousands) Rate Volume Total - ---------------------------------------------------------------------------------------------------- Year ended December 31, 2001 vs. 2000 - ------------------------------------- Income from interest-earning assets Loan portfolio...................................... $ (2,867) $ (19,777) $ (22,644) Mortgage/asset-backed securities.................... (19,981) 19,822 (159) Investments......................................... (2,269) 1,148 (1,121) ---------------------------------------- (25,117) 1,193 (23,924) ---------------------------------------- Expense from interest-bearing liabilities Deposits............................................ (6,041) 3,380 (2,661) FHLB advances and other borrowings.................. (16,352) (6,277) (22,629) ---------------------------------------- (22,393) (2,897) (25,290) ---------------------------------------- Net interest income.................................... $ (2,724) $ 4,090 $ 1,366 ======================================== Year ended December 31, 2000 vs. 1999 - ------------------------------------- Income from interest-earning assets Loan portfolio...................................... $ 8,073 $ 1,863 $ 9,936 Mortgage/asset-backed securities.................... 18,944 11,115 30,059 Investments......................................... (449) 4,050 3,601 ---------------------------------------- 26,568 17,028 43,596 ---------------------------------------- Expense from interest-bearing liabilities Deposits............................................ 4,408 (5,554) (1,146) FHLB advances and other borrowings.................. 9,544 23,309 32,853 ---------------------------------------- 13,952 17,755 31,707 ---------------------------------------- Net interest income.................................... $ 12,616 $ (727) $ 11,889 ========================================
OTHER INCOME In addition to net interest income, ASB has various sources of other income, including fee income from servicing loans, fees on deposit accounts, rental income from premises and other income. Other income totaled approximately $45.0 million in 2001, $27.3 million in 2000 and $29.9 million in 1999. The increase in other income for 2001 was primarily due to a $8.0 million gain on sale of investment and mortgage/asset-backed securities, increases in fees from ATM and debit cards and increases in revenues from sales of annuity products. LENDING ACTIVITIES General. Loans and mortgage/asset-backed securities of $5.2 billion represented 86.7% of total assets at December 31, 2001, compared to $5.3 billion, or 88.5%, and $5.2 billion, or 88.7%, at December 31, 2000 and 1999, respectively. ASB's loan portfolio consists primarily of conventional residential mortgage loans, which are neither insured by the Federal Housing Administration nor guaranteed by the Veterans Administration. 25 The following tables set forth the composition of ASB's loan and mortgage/asset-backed securities portfolio:
December 31, ------------------------------------------------------------------------------ 2001 2000 1999 ------------------------------------------------------------------------------ (dollars in thousands) Balance % of total Balance % of total Balance % of total - ------------------------------------------------------------------------------------------------------------------- Real estate loans/1/ Conventional (1-4 unit residential) $2,242,329 43.02% $2,719,754 51.49% $2,725,395 52.56% Commercial real estate............. 196,515 3.77 156,177 2.95 170,663 3.29 Construction and development....... 52,043 1.00 38,913 0.74 43,706 0.84 ------------------------------------------------------------------------------ 2,490,887 47.79 2,914,844 55.18 2,939,764 56.69 Less Deferred fees and discounts...... (17,946) (0.34) (21,588) (0.41) (24,083) (0.46) Undisbursed loan funds........... (22,910) (0.45) (17,559) (0.33) (19,368) (0.37) Allowance for loan losses........ (26,085) (0.50) (24,800) (0.47) (22,319) (0.43) ------------------------------------------------------------------------------ Total real estate loans, net....... 2,423,946 46.50 2,850,897 53.97 2,873,994 55.43 ------------------------------------------------------------------------------ Other loans Loans on deposits.................. 7,288 0.14 8,021 0.15 14,496 0.28 Consumer and other loans........... 245,199 4.70 230,330 4.36 230,437 4.44 Commercial loans................... 197,333 3.79 134,784 2.55 106,098 2.05 ------------------------------------------------------------------------------ 449,820 8.63 373,135 7.06 351,031 6.77 Less Deferred fees and discounts...... - - - - - - Undisbursed loan funds........... (5) - (58) - (118) - Allowance for loan losses........ (16,139) (0.31) (12,649) (0.24) (13,029) (0.25) ------------------------------------------------------------------------------ Total other loans, net............. 433,676 8.32 360,428 6.82 337,884 6.52 ------------------------------------------------------------------------------ Mortgage/asset-backed securities, net of discounts................ 2,354,849 45.18 2,070,827 39.21 1,973,146 38.05 ------------------------------------------------------------------------------ Total loans and mortgage/asset-backed securities, net............... $5,212,471 100.00% $5,282,152 100.00% $5,185,024 100.00% ==============================================================================
/1/ Includes renegotiated loans. 26
December 31, ------------------------------------------------------------ 1998 1997 ------------------------------------------------------------ (dollars in thousands) Balance % of total Balance % of total - ------------------------------------------------------------------------------------------------------------------- Real estate loans/1/ Conventional (1-4 unit residential)................. $2,654,408 53.79% $2,498,171 50.97% Commercial real estate.............................. 198,530 4.03 216,509 4.42 Construction and development........................ 35,274 0.72 32,569 0.67 ------------------------------------------------------------ 2,888,212 58.54 2,747,249 56.06 Less Deferred fees and discounts.. .................... (21,229) (0.43) (16,055) (0.33) Undisbursed loan funds...... ..................... (14,685) (0.30) (13,724) (0.28) Allowance for loan losses.. ...................... (27,944) (0.57) (20,450) (0.42) ------------------------------------------------------------ Total real estate loans, net........................ 2,824,354 57.24 2,697,020 55.03 ------------------------------------------------------------ Other loans Loans on deposits................................... 16,836 0.34 17,473 0.36 Consumer and other loans............................ 236,396 4.79 258,764 5.28 Commercial loans.................................... 94,045 1.91 88,315 1.80 ------------------------------------------------------------ 347,277 7.04 364,552 7.44 Less Deferred fees and discounts....................... (7) - (14) - Undisbursed loan funds............................ (16,592) (0.34) (16,211) (0.33) Allowance for loan losses......................... (11,835) (0.24) (9,500) (0.19) ------------------------------------------------------------ Total other loans, net.............................. 318,843 6.46 338,827 6.92 ------------------------------------------------------------ Mortgage/asset-backed securities, net of discounts.. 1,791,353 36.30 1,865,027 38.05 ------------------------------------------------------------ Total loans and mortgage/asset-backed securities, net............................... $4,934,550 100.00% $4,900,874 100.00% ============================================================
/1/ Includes renegotiated loans. Origination, purchase and sale of loans. Generally, loans originated and purchased by ASB are secured by real estate located in Hawaii. As of December 31, 2001, approximately $35.2 million of loans purchased from other lenders were secured by properties located in the continental United States. For additional information, including information concerning the geographic distribution of ASB's mortgage/asset-backed securities portfolio and the geographic concentration of credit risk, see Note 13 to HEI's Consolidated Financial Statements. The amount of loans originated during 2001, 2000, 1999, 1998 and 1997 were $1.0 billion, $0.5 billion, $0.6 billion, $0.6 billion and $0.3 billion, respectively. The demand for loans is primarily dependent on the Hawaii real estate market and loan refinancing activity. The increase in loan originations during 2001 was primarily due to the low interest rate environment, which resulted in higher loan refinancings. The increase in loans originated in 1998 from 1997 was due primarily to higher refinancings. The decrease in loans originated in 2000 from 1999 was due in part to a rise in interest rates and a slow Hawaii real estate market. Residential mortgage lending. ASB is permitted to lend up to 100% of the appraised value of the real property securing a loan. Its general policy is to require private mortgage insurance when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase price at origination. For nonowner-occupied residential properties, the loan-to-value ratio may not exceed 90% of the lower of the appraised value or purchase price at origination. 27 Construction and development lending. ASB provides both fixed and adjustable rate loans for the construction of one-to-four residential unit and commercial properties. Construction and development financing generally involves a higher degree of credit risk than long-term financing on improved, occupied real estate. Accordingly, all construction and development loans are priced higher than loans secured by completed structures. ASB's underwriting, monitoring and disbursement practices with respect to construction and development financing are designed to ensure sufficient funds are available to complete construction projects. As of December 31, 2001, 2000 and 1999, construction and development loans represented 1.8%, 1.2% and 1.3%, respectively, of ASB's gross loan portfolio. Although construction and development loans are a small part of ASB's current loan portfolio, during 2001, ASB enhanced its commercial real estate lending capabilities to diversify its loan portfolio and plans to increase construction and development lending in the future. See "Loan portfolio risk elements." Multifamily residential and commercial real estate lending. Permanent loans secured by multifamily properties (generally apartment buildings), as well as commercial and industrial properties (including office buildings, shopping centers and warehouses), are originated by ASB for its own portfolio as well as for participation with other lenders. In 2001, 2000 and 1999, loan originations on these types of properties accounted for approximately 8.3%, 4.2% and 1.1%, respectively, of ASB's total mortgage loan originations. During 2001, ASB enhanced its commercial real estate lending capabilities and plans to increase commercial real estate lending in the future. The objective of commercial real estate lending is to diversify ASB's loan portfolio. Consumer lending. ASB offers a variety of secured and unsecured consumer loans. Loans secured by deposits are limited to 90% of the available account balance. ASB also offers VISA cards, automobile loans, general purpose consumer loans, home equity lines of credit, checking account overdraft protection and unsecured lines of credit. In 2001, 2000 and 1999, gross loan originations of these types accounted for approximately 18.3%, 19.1% and 23.4%, respectively, of ASB's total loan originations. Corporate banking/commercial lending. ASB is authorized to make both secured and unsecured corporate banking loans to business entities. This lending activity is designed to diversify ASB's asset structure, shorten maturities, provide rate sensitivity to the loan portfolio and attract business checking deposits. As of December 31, 2001, 2000 and 1999, corporate banking loans represented 6.9%, 4.2% and 3.6%, respectively, of ASB's total net loan portfolio. Loan origination fee and servicing income. In addition to interest earned on loans, ASB receives income from servicing loans, for late payments and from other related services. Servicing fees are received on loans originated and subsequently sold by ASB through a securitization process and also on loans for which ASB acts as collection agent on behalf of third-party purchasers. ASB generally charges the borrower at loan settlement a loan origination fee of 1% of the amount borrowed. See "Loan origination and commitment fees" in Note 1 to HEI's Consolidated Financial Statements. Loan portfolio risk elements. When a borrower fails to make a required payment on a loan and does not cure the delinquency promptly, the loan is classified as delinquent. If delinquencies are not cured promptly, ASB normally commences a collection action, including foreclosure proceedings in the case of secured loans. In a foreclosure action, the property securing the delinquent debt is sold at a public auction in which ASB may participate as a bidder to protect its interest. If ASB is the successful bidder, the property is classified in a real estate owned account until it is sold. ASB's real estate acquired in settlement of loans represented 0.24%, 0.15% and 0.08% of total assets at December 31, 2001, 2000 and 1999, respectively. In addition to delinquent loans, other significant lending risk elements include: (1) loans which accrue interest and are 90 days or more past due as to principal or interest, (2) loans accounted for on a nonaccrual basis (nonaccrual loans), and (3) loans on which various concessions are made with respect to interest rate, maturity, or other terms due to the inability of the borrower to service the obligation under the original terms of the agreement (renegotiated loans). ASB had no loans that were 90 days or more past due on which interest was being accrued as of the dates presented in the table below. The level of nonaccrual and renegotiated loans represented 1.5%, 1.5%, 2.3%, 3.1% 28 and 2.4%, of ASB's total net loans outstanding at December 31, 2001, 2000, 1999, 1998 and 1997, respectively. The following table sets forth certain information with respect to nonaccrual and renegotiated loans as of the dates indicated:
December 31, ------------------------------------------------------------------ (in thousands) 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Nonaccrual loans-- Real estate 1-4 unit residential ........................... $22,495 $26,738 $43,750 $47,565 $36,812 Income property.... ............................ 10,129 15,132 18,747 29,456 29,955 ------------------------------------------------------------------ Total real estate................................. 32,624 41,870 62,497 77,021 66,767 Commercial........................................ 1,965 2,872 2,192 2,030 776 Consumer.......................................... 3,018 2,844 3,777 6,454 4,266 ------------------------------------------------------------------ Total nonaccrual loans............................ $37,607 $47,586 $68,466 $85,505 $71,809 ================================================================== Renegotiated loans not included above-- Real estate 1-4 unit residential.... ....................... $ - $ 48 $ 876 $ 1,705 $ 2,264 Commercial............... ...................... 2,681 - - - - Income property........... ..................... 3,874 - 5,154 10,559 - ------------------------------------------------------------------ Total renegotiated loans.......................... $ 6,555 $ 48 $ 6,030 $12,264 $ 2,264 ==================================================================
ASB's policy generally is to place mortgage loans on a nonaccrual status (i.e., interest accrual is suspended) when the loan becomes 90 days or more past due or on an earlier basis when there is a reasonable doubt as to its collectability. Loans on nonaccrual status amounted to $37.6 million (1.3% of total loans), $47.6 million (1.4% of total loans), $68.4 million (2.1% of total loans), $85.5 million (2.6% of total loans) and $71.8 million (2.3% of total loans) at December 31, 2001, 2000, 1999, 1998 and 1997, respectively. In 1998, the increase in nonaccrual loans was a result of Hawaii's weak economy and was primarily due to a $10.3 million increase in nonaccruing, smaller balance residential loans. In 2000 and 1999, the $20.9 million and $17.0 million, respectively, decrease in nonaccrual loans was primarily due to increased charge-offs and lower delinquencies. In 2001, the decrease in nonaccrual loans of $10.0 million was primarily due to lower delinquencies in residential loans and an income property loan taken into real estate owned. At December 31, 2001, ASB had one renegotiated income property loan and eight renegotiated commercial loans. The income property loan is currently making timely monthly principal and interest payments while the commercial loans are making timely monthly interest only payments. Allowance for loan losses. ASB maintains an allowance for loan losses that it believes is adequate to absorb estimated inherent losses on all loans. The level of allowance for loan losses is based on a continuing assessment of existing risks in the loan portfolio, historical loss experience, changes in collateral values, and current and anticipated economic conditions. ASB uses a risk rating system to evaluate its business and commercial real estate loans. Loans are rated based on the degree of risk at origination and periodically thereafter, as appropriate. A credit review department performs an evaluation of these loan portfolios to ensure compliance with the internal risk rating system and timeliness of rating changes. Adverse changes in any of the risk factors could result in higher charge-offs and loan loss provisions. When loans are deemed impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate and the fair value of the collateral securing the loan. Impairment losses are charged to the provision for loan losses and included in the allowance for loan losses. 29 The following table presents the changes in the allowance for loan losses for the years indicated:
Years ended December 31, ------------------------------------------------------------------ (dollars in thousands) 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Allowance for loan losses, beginning of year.............................. $37,449 $35,348 $39,779 $29,950 $19,205 Provision for loan losses........................ 12,500 13,050 16,500 13,802 6,934 Allowance for losses on loans acquired from BoA............................................ - - - - 6,445 Net charge-offs Real estate loans................................ 3,414 6,727 15,215 1,549 992 Other loans...................................... 4,311 4,222 5,716 2,424 1,642 ------------------------------------------------------------------ Total net charge-offs............................ 7,725 10,949 20,931 3,973 2,634 ------------------------------------------------------------------ Allowance for loan losses, end of year........... $42,224 $37,449 $35,348 $39,779 $29,950 ================================================================== Ratio of provision for loan losses during the year to average loans outstanding.............. 0.42% 0.41% 0.52% 0.45% 0.32% ================================================================== Ratio of net charge-offs during the year to average loans outstanding.............. 0.26% 0.34% 0.66% 0.13% 0.12% ==================================================================
In 2001, ASB's allowance for loan losses increased by $4.8 million primarily due to lower net charge-offs as a result of lower delinquencies. In 2000, ASB's allowance for loan losses increased by $2.1 million primarily due to lower net charge-offs as a result of lower delinquencies. In 1999, ASB's allowance for loan losses decreased by $4.4 million due to higher charge-offs. In 1999, management disposed of nonperforming loans at a loss, which resulted in higher charge-offs. ASB increased its allowance for loan losses by $9.8 million in 1998 to establish additional specific loss allowances and in response to a rising trend of delinquencies caused by Hawaii's weak economy. INVESTMENT ACTIVITIES In recent years, ASB's investment portfolio consisted primarily of stock of the FHLB of Seattle, federal agency obligations and mortgage/asset-backed securities. ASB owns private-issue mortgage/asset-backed securities as well as mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA) and Federal National Mortgage Association (FNMA). At December 31, 2001, the various securities rating agencies rated all of the private-issue mortgage/asset-backed securities as investment grade. ASB did not maintain a portfolio of securities held for trading during 2001, 2000 or 1999. As of December 31, 2001, ASB's held-to-maturity investment portfolio consisted of a $84.2 million investment in FHLB stock. As of December 31, 2000, ASB's held-to-maturity investment portfolio, excluding mortgage/asset-backed securities, consisted of a $78.7 million investment in FHLB stock and a $13.1 million investment in collateralized debt obligations. As of December 31, 1999, ASB's held-to-maturity investment portfolio consisted of a $73.8 million investment in FHLB stock, a $71.5 million investment in collateralized debt obligations and a $41.5 million investment in federal agency obligations. The weighted-average rate on investments during 2001, 2000 and 1999 was 7.28%, 5.62% and 6.81%, respectively. The amount that ASB is required to invest in FHLB stock is determined by regulatory requirements. See "Regulation and other matters--Bank regulation--Federal Home Loan Bank System." See "Disposition of certain debt securities" in Note 4 to HEI's Consolidated Financial Statements. 30 On January 1, 2001, ASB reclassified a significant amount of securities from held-to-maturity to available-for-sale (see "Derivative instruments and hedging activities" in Note 1 to HEI's Consolidated Financial Statements). Securities classified as available-for-sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity (see "Material estimates and critical accounting policies-Consolidated-Investment securities" in HEI's MD&A). At December 31, 2001, ASB had mortgage-backed securities issued by FHLMC, GNMA and FNMA valued at $1.5 billion and private-issue mortgage/asset-backed securities valued at $0.9 billion in its available-for-sale investment portfolio. DEPOSITS AND OTHER SOURCES OF FUNDS General. Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. ASB also derives funds from the receipt of interest and principal on outstanding loans receivable and mortgage/asset-backed securities, borrowings from the FHLB of Seattle, securities sold under agreements to repurchase and other sources. ASB borrows on a short-term basis to compensate for seasonal or other reductions in deposit flows. ASB also may borrow on a longer-term basis to support expanded lending or investment activities. Advances from the FHLB and securities sold under agreements to repurchase continue to be a significant source of funds that have higher cost of funds than deposits. Deposits. ASB's deposits are obtained primarily from residents of Hawaii. In 2001 and 2000, ASB had average deposits of $3.6 billion and $3.5 billion, respectively. Net savings inflow in 2001 and 2000 was $94.9 million and $93.0 million, respectively, which compares favorably to the net savings outflow of $374.1 million in 1999. The net savings outflows in 1999 were partly due to competition from the equity market and management's decision not to pursue high-priced certificates of deposit. In addition, during 1999, $235.2 million of collateralized deposits were reclassified to securities sold under agreements to repurchase. In the three years ended December 31, 2001, ASB had no deposits placed by or through a broker. The following table illustrates the distribution of ASB's average deposits and average daily rates by type of deposit for the years indicated. Average balances have been calculated using the average daily balances during 2001 and the average month-end balances during 2000 and 1999.
Years ended December 31, ------------------------------------------------------------------------------------ 2001 2000 ------------------------------------------------------------------------------------ % of Weighted % of Weighted Average total average Average total average (dollars in thousands) balance deposits rate % balance deposits rate % - ------------------------------------------------------------------------------------------------------------------ Passbook accounts............ $1,049,441 28.9% 1.91% $1,058,763 29.9% 2.00% Negotiable order of withdrawal accounts....... 699,997 19.2 0.59 642,074 18.2 0.85 Money market accounts........ 310,048 8.5 2.40 306,950 8.7 2.94 Certificate accounts......... 1,578,650 43.4 5.38 1,529,525 43.2 5.46 ------------------------------------------------------------------------------------ Total deposits............... $3,638,136 100.0% 3.20% $3,537,312 100.0% 3.37% ====================================================================================
31
Year ended December 31, 1999 ----------------------------------------------------------- Average % of total Weighted (dollars in thousands) balance deposits average rate % - -------------------------------------------------------------------------------------------------------------- Passbook accounts............................... $1,120,545 30.2% 2.31% Negotiable order of withdrawal accounts......... 621,140 16.8 0.83 Money market accounts........................... 333,190 9.0 3.28 Certificate accounts............................ 1,631,875 44.0 4.80 ----------------------------------------------------------- Total deposits.................................. $3,706,750 100.0% 3.25% ===========================================================
At December 31, 2001, ASB had $344 million in certificate accounts of $100,000 or more, maturing as follows: (in thousands) Amount - -------------------------------------------------------------------------- Three months or less.................................... $165,662 Greater than three months through six months............ 43,055 Greater than six months through twelve months........... 56,008 Greater than twelve months.............................. 79,618 -------------- $344,343 ============== Deposit-insurance premiums and regulatory developments. The Savings Association - ------------------------------------------------------ Insurance Fund (SAIF) insures the deposit accounts of ASB and other thrifts. The Bank Insurance Fund (BIF) insures the deposit accounts of commercial banks. The Federal Deposit Insurance Corporation (FDIC) administers the SAIF and BIF. In December 1997, ASB acquired BIF-assessable deposits as well as SAIF-assessable deposits from BoA. Congress is currently considering legislation which would merge the SAIF and the BIF. This legislation is supported by the FDIC. In December 1996, the FDIC adopted a risk-based base rate schedule for SAIF deposits, effective January 1, 1997, that was identical to the existing risk-based base rate schedule for BIF deposits: zero to 27 cents per $100 of deposits. Added to this base rate schedule through 1999 was 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 deposits and 1.3 cents per $100 of deposits for BIF deposits (subject to quarterly adjustment). By law, the FICO's assessment rate on deposits insured by the BIF had to be one-fifth the rate on deposits insured by the SAIF until January 1, 2000. Effective January 1, 2000, the assessment rate for funding FICO interest payments became identical for SAIF and BIF deposits at a rate of 2.12 cents per $100 of deposits. As a "well capitalized" thrift, ASB's base deposit insurance premium effective for the December 31, 2001 quarterly payment is zero and its assessment for funding FICO interest payments is 1.82 cents per $100 of SAIF and BIF deposits, on an annual basis, based on deposits as of September 30, 2001. Borrowings. ASB obtains advances from the FHLB of Seattle provided certain standards related to creditworthiness have been met. Advances are secured by a blanket pledge of certain notes held by ASB and the mortgages securing them. To the extent that advances exceed the amount of mortgage loan collateral pledged to the FHLB of Seattle, the excess must be covered by qualified marketable securities held under the control of and at the FHLB of Seattle or at an approved third party custodian. FHLB advances generally are available to meet seasonal and other withdrawals of deposit accounts, to expand lending and to assist in the effort to improve asset and liability management. FHLB advances are made pursuant to several different credit programs offered from time to time by the FHLB of Seattle. At December 31, 2001, 2000 and 1999, advances from the FHLB amounted to $1.0 billion, $1.2 billion and $1.2 billion, respectively. The weighted-average rates on the advances from the FHLB outstanding at December 31, 2001, 2000 and 1999 were 5.41%, 6.67% and 6.25%, respectively. The maximum amount outstanding at any month-end during 2001, 2000 and 1999 was $1.2 billion, $1.3 billion and $1.2 billion, respectively. Advances from 32 the FHLB averaged $1.2 billion, $1.3 billion and $1.0 billion during 2001, 2000 and 1999, respectively, and the approximate weighted-average rate thereon was 5.98%, 6.55% and 6.07%, respectively. Securities sold under agreements to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as liabilities in the consolidated statements of financial condition. The securities underlying the agreements to repurchase continue to be reflected in the asset accounts (see Note 4 "Securities sold under agreements to repurchase" to HEI's Consolidated Financial Statements). At December 31, 2001, 2000 and 1999, the entire outstanding amounts under these agreements of $683 million (including accrued interest of $4.9 million), $597 million (including accrued interest of $5.5 million) and $661 million (including accrued interest of $3.0 million), respectively, were to purchase identical securities. The weighted-average rates on securities sold under agreements to repurchase outstanding at December 31, 2001, 2000 and 1999 were 2.81%, 6.32% and 5.58%, respectively. The maximum amount outstanding at any month-end during 2001, 2000 and 1999 was $722 million, $657 million and $661 million, respectively. Securities sold under agreements to repurchase averaged $629 million, $625 million and $540 million during 2001, 2000 and 1999, respectively, and the approximate weighted-average interest rate thereon was 4.50%, 5.98% and 5.24%, respectively. The following table sets forth information concerning ASB's advances from the FHLB and other borrowings at the dates indicated:
December 31, ---------------------------------------------------- (dollars in thousands) 2001 2000 1999 - -------------------------------------------------------------------------------------------------------- Advances from the FHLB............................. $1,032,752 $1,249,252 $1,189,081 Securities sold under agreements to repurchase..... 683,180 596,504 661,215 ---------------------------------------------------- Total borrowings................................... $1,715,932 $1,845,756 $1,850,296 ==================================================== Weighted-average rate.............................. 4.37% 6.56% 6.01% ====================================================
COMPETITION The primary factors in competing for deposits are interest rates, the quality and range of services offered, marketing, convenience of locations, hours and perceptions of the institution's financial soundness and safety. Competition for deposits comes primarily from other savings institutions, commercial banks, credit unions, money market and mutual funds and other investment alternatives. In Hawaii, there were 2 thrifts, 8 FDIC-insured banks and 100 credit unions at June 30, 2001. Additional competition for deposits comes from various types of corporate and government borrowers, including insurance companies. To meet competition, ASB offers a variety of savings and checking accounts at competitive rates, convenient business hours, convenient branch locations with interbranch deposit and withdrawal privileges at each branch and convenient automated teller machines. ASB also conducts advertising and promotional campaigns. The primary factors in competing for first mortgage and other loans are interest rates, loan origination fees and the quality and range of lending services offered. Competition for origination of first mortgage loans comes primarily from other savings institutions, mortgage banking firms, commercial banks, insurance companies and real estate investment trusts. ASB believes that it is able to compete for such loans primarily through the interest rates and loan fees it charges, the type of mortgage loan programs it offers and the efficiency and quality of the services it provides its borrowers and the real estate business community. In recent years, there has been significant bank and thrift merger activity in Hawaii. Management cannot predict the impact, if any, of these mergers on the Company's future competitive position, results of operations, financial condition or liquidity. Credit Union Developments. The 1934 Federal Credit Union Act states that credit union membership "shall be limited to groups having a common bond of occupation or association" or to groups in a well-defined geographical 33 area. In 1982, the National Credit Union Administration expanded its definition of "common bond" to allow "multiple common bonds"--i.e., small businesses that lacked enough workers to form their own credit unions were allowed to join existing credit unions so long as each group of employees had its own "bond." Government officials estimate that this rule allowed credit unions to add approximately 15 million people to their membership rolls. In February 1998, the Supreme Court decided that this expanded definition of "common bond" was impermissible, holding that the 1934 law required all members of a credit union to share a single common bond. In August 1998, the Credit Union Membership Access Act became law, which, among other things, amended the 1934 law to retroactively authorize credit union membership based on multiple common bonds, as long as each of the relevant groups has (with some exceptions) fewer than 3,000 members. The Credit Union Membership Access Act also facilitates the ability of insured credit unions to convert to mutual savings banks or savings associations, and requires that insured credit unions meet capital standards similar to those enacted for banks and thrifts in 1991. In December 1998, the National Credit Union Administration voted to adopt final rules to implement the Credit Union Membership Access Act. The new rules appear to favor the creation of larger credit unions by facilitating the merger of credit unions with fewer than 3,000 members. Under a Regulatory Flexibility Program to go into effect on March 1, 2002, the National Credit Union Administration will allow certain credit unions to expand the services offered to members. It is too early to evaluate whether these developments will result in increased competition for ASB by credit unions. See "Certain factors that may affect future results and financial condition-Bank-Regulation of ASB--Federal Thrift Charter" in HEI's MD&A for a discussion of the Gramm-Leach-Bliley Act of 1998. OTHER - ----- HEI INVESTMENTS, INC. - ---------------------- In January 2000, HEI Investment Corp. (HEIIC), incorporated in May 1984 primarily to make passive investments in corporate securities and other long-term investments, changed its name to HEI Investments, Inc. (HEIII). HEIII is not an "investment company" under the Investment Company Act of 1940 and has no direct employees. In February 2000, HEIII became a subsidiary of HEIPC. HEIII's long-term investments currently consist primarily of investments in leveraged leases. Since 1985, HEIII (then called HEIIC) has had a 15% ownership interest in an 818 MW coal-fired generating unit in Georgia, which is subject to a leveraged lease agreement. In 1987, HEIIC purchased commercial buildings on leasehold properties located in the continental United States, along with the related lease rights and obligations. These leveraged, purchase-leaseback investments include two major buildings housing operations of Hershey Foods in Pennsylvania and five supermarkets leased to The Kroger Co. in various states. On March 6, 2000, a subsidiary of HEIII, HEIPC Philippines Holding Co., Inc., acquired a 50% interest in EPHE Philippines Energy Company, Inc., which was the owner of approximately 91.7% of the common stock of East Asia Power Resources Corporation (EAPRC), a Philippines holding company primarily engaged in the electric generation business in Manila and Cebu. The Company wrote off this investment as of December 31, 2000 and subsequently classified the write-off in discontinued operations. See Note 14 to HEI's Consolidated Financial Statements. HEI PROPERTIES, INC. - -------------------- HEIDI Real Estate Corp., originally a subsidiary of HEIDI, was formed in February 1998. In September 1999, its name was changed to HEIPI and HEIDI transferred ownership of HEIPI to HEI. HEIPI currently holds an investment in Utech Venture Capital Corporation and an investment in HMS Hawaii, a Hawaii limited partnership. HEI LEASING, INC. - ----------------- HEI Leasing, Inc. was formed in February 2000 to own passive investments and real estate subject to leases. It currently holds no investments or real estate subject to leases. 34 THE OLD OAHU TUG SERVICE, INC. - ------------------------------ On November 10, 1999, HTB changed its name to TOOTS. Prior to that date, HTB was the parent of YB. In November 1999, HTB sold substantially all of its operating assets and the stock of YB and ceased operations. HTB and its wholly-owned subsidiary, YB, had been acquired by HEI in 1986. HTB had provided marine transportation services in Hawaii and the Pacific area, including charter tug and barge and harbor tug operations. YB, which is a regulated interisland cargo carrier, transports general freight and containerized cargo by barge on a regular schedule between all major ports in Hawaii. DISCONTINUED OPERATIONS - ----------------------- For information concerning the Company's discontinued international power operations conducted by HEIPC and its subsidiaries and its discontinued residential real estate development business conducted by MPC and its subsidiaries, see "Certain factors that may affect future results and financial condition-Consolidated-Discontinued operations and asset dispositions" in HEI's MD&A and Note 14 to HEI's Consolidated Financial Statements. REGULATION AND OTHER MATTERS - ---------------------------- HOLDING COMPANY REGULATION HEI and HECO are holding companies within the meaning of the Public Utility Holding Company Act of 1935 (1935 Act). However, under current rules and regulations, they are exempt from the comprehensive regulation of the SEC under the 1935 Act except for Section 9(a)(2) (relating to the acquisition of securities of other public utility companies) through compliance with certain annual filing requirements under the 1935 Act for holding companies which own utility businesses that are intrastate in character. The exemption afforded HEI and HECO may be revoked if the SEC finds that such exemption "may be detrimental to the public interest or the interest of investors or consumers." HEI and HECO may own or have interests in foreign utility operations without adversely affecting this exemption so long as the requirements of other exemptions under the 1935 Act are satisfied. HEI has obtained the PUC certification which is a prerequisite to obtaining an exemption for foreign utility operations and to the Company's maintenance of its exemption under the 1935 Act if it acquires such ownership interests. In 1996, HEI filed with the SEC a Form U-57, "Notification of Foreign Utility Company Status," on behalf of HEI Power Corp. Guam (for the HEIPC Group's Guam project). In 1998, HEI filed two Forms U-57 on behalf of Baotou Tianjiao Power Co., Ltd. (for the HEIPC Group's China project) and on behalf of Cagayan Electric Power & Light Co., Inc. (for the HEIPC Group's investment in that entity). In March 2000, HEI filed a Form U-57 on behalf of EAPRC (for the HEIPC Group's investment in that entity). With the discontinuance of HEIPC's international power operations, no further Form U-57 filings are contemplated. Legislation has been introduced in Congress in the past that would repeal the 1935 Act, leaving the regulation of utility holding companies to be governed by other federal and state laws. Management cannot predict if similar legislation will be proposed or enacted in the future or the final form it might take. HEI is subject to an agreement entered into with the PUC (the PUC Agreement) when HECO became a subsidiary of HEI. The PUC Agreement, among other things, requires HEI to provide the PUC with periodic financial information and other reports concerning intercompany transactions and other matters. It prohibits the electric utilities from loaning funds to HEI or its nonutility subsidiaries and from redeeming common stock of the electric utility subsidiaries without PUC approval. Further, the PUC could limit the ability of the electric utility subsidiaries to pay dividends on their common stock. See "Restrictions on dividends and other distributions" and "Electric utility regulation" (regarding the PUC review of the relationship between HEI and HECO). As a result of the acquisition of ASB, HEI and HEIDI are subject to OTS registration, supervision and reporting requirements as savings and loan holding companies. In the event the OTS has reasonable cause to believe that the continuation by HEI or HEIDI of any activity constitutes a serious risk to the financial safety, soundness, or stability of ASB, the OTS is authorized under the Home Owners' Loan Act of 1933, as amended, to impose certain 35 restrictions in the form of a directive to HEI and any of its subsidiaries, or HEIDI and any of its subsidiaries. Such possible restrictions include limiting (i) the payment of dividends by ASB; (ii) transactions between ASB, HEI or HEIDI, and the subsidiaries or affiliates of ASB, HEI or HEIDI; and (iii) the activities of ASB that might create a serious risk that the liabilities of HEI and its other affiliates, or HEIDI and its other affiliates, may be imposed on ASB. Theoretically, this authority would allow the OTS to prohibit dividends, limit affiliate transactions or otherwise restrict activities as a result of losses suffered by HEI, HEIDI or their other subsidiaries, and thus conceivably may be an indirect means of limiting affiliations between ASB and affiliates engaged in nonfinancial activities. See "Restrictions on dividends and other distributions." OTS regulations also generally prohibit savings and loan holding companies and their nonthrift subsidiaries from engaging in activities other than those which are specifically enumerated in the regulations. Such restrictions, if applicable to HEI and HEIDI, would significantly limit the kinds of activities in which HEI and HEIDI and their subsidiaries may engage. However, the OTS regulations provide for an exemption which is available to HEI and HEIDI if ASB satisfies the qualified thrift lender (QTL) test discussed below. See "Bank regulation--Qualified thrift lender test." ASB must continue to meet the qualified thrift lender test in order to avoid restrictions on the activities of HEI and HEIDI and their subsidiaries. The failure of ASB to satisfy the QTL test could result in a need to divest ASB. ASB met the QTL test at all times during 2001. HEI and HEIDI are prohibited, directly or indirectly, or through one or more subsidiaries, from (i) acquiring control of, or acquiring by merger or purchase of assets, another insured institution or holding company thereof, without prior written OTS approval; (ii) acquiring more than 5% of the voting shares of another savings association or savings and loan holding company which is not a subsidiary; or (iii) acquiring or retaining control of a savings association not insured by the FDIC. No director or officer of HEI or HEIDI, or person beneficially owning more than 25% of such holding company's voting shares, may, except with the prior approval of the OTS, (a) also serve as director, officer, or employee of any insured institution or (b) acquire control of any savings association not a subsidiary of such holding company. ASB Realty Corporation, a subsidiary of ASB, is licensed as a nondepository financial services loan company under the Hawaii Code of Financial Institutions. As a result of its direct or indirect voting control of ASB Realty Corporation, each of HEI, HEIDI and ASB has registered as a "Financial Institution Holding Company" and an "Institution-Affiliated Party" under the Hawaii Code. As a Financial Institution Holding Company, HEI, HEIDI and ASB are subject to examination by the Hawaii Commissioner of Financial Institutions (Hawaii Commissioner) to determine whether their respective conditions or activities are jeopardizing the safety and soundness of ASB Realty Corporation's operations. However, the Hawaii Commissioner is authorized to conduct such an examination only if the Hawaii Commissioner has good cause to believe that the holding company is experiencing financial adversity which might have a material negative impact on the safety and soundness of ASB Realty Corporation. The Hawaii Commissioner has authority to issue a cease and desist order to ASB Realty Corporation, ASB, HEIDI and HEI, if, for example, the Commissioner has reasonable grounds to believe that such entity is violating or about to violate the Hawaii Code or is engaged in or about to engage in illegal, unauthorized, unsafe or unsound practices. In appropriate circumstances, the Commissioner may also have authority to order ASB Realty Corporation to correct any impairment of its capital and surplus and to prohibit ASB, HEIDI and HEI from participating in the affairs of ASB Realty Corporation. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS HEI is a legal entity separate and distinct from its various subsidiaries. As a holding company with no significant operations of its own, the principal sources of its funds are dividends or other distributions from its operating subsidiaries, borrowings and sales of equity. The rights of HEI and, consequently, its creditors and shareholders, to participate in any distribution of the assets of any of its subsidiaries is subject to the prior claims of the creditors and preferred stockholders of such subsidiary, except to the extent that claims of HEI in its capacity as a creditor are recognized. 36 The abilities of certain of HEI's subsidiaries to pay dividends or make other distributions to HEI are subject to contractual and regulatory restrictions. Under the PUC Agreement, in the event that the consolidated common stock equity of the electric utility subsidiaries falls below 35% of total electric utility capitalization, the electric utility subsidiaries would be restricted, unless they obtained PUC approval, in their payment of cash dividends to 80% of the earnings available for the payment of dividends in the current fiscal year and preceding five years, less the amount of dividends paid during that period. The PUC Agreement also provides that the foregoing dividend restriction shall not be construed to relinquish any right the PUC may have to review the dividend policies of the electric utility subsidiaries. The consolidated common stock equity of HEI's electric utility subsidiaries was 52% of their total capitalization (including the current maturities of long-term debt, but excluding short-term borrowings) as of December 31, 2001. As of December 31, 2001, HECO and its subsidiaries had net assets of $877 million, of which approximately $441 million were not available for transfer to HEI without regulatory approval. The ability of ASB to make capital distributions to HEI and other affiliates is restricted under federal law. Subject to a limited exception for stock redemptions that do not result in any decrease in ASB's capital and would improve ASB's financial condition, ASB is prohibited from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, ASB would be deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized. See "Bank regulation--Prompt corrective action." As a Tier-1 institution (one that meets its capital requirements and has not been notified by the OTS that it is in need of more than normal supervision), ASB may make capital distributions in amounts up to one-half of ASB's surplus capital (the amount of its capital in excess of its capital requirement) at the beginning of a calendar year, plus its year-to-date net income for that calendar year. ASB, as a Tier-1 institution, may exceed the foregoing limits if ASB provides a thirty-day advance notice to the OTS and receives no objection within thirty days. However, even in the case of distributions within the permissible limits, a thirty-day advance notice to the OTS is required. HEI and its subsidiaries are also subject to debt covenants, preferred stock resolutions and the terms of guarantees that could limit their respective abilities to pay dividends. The Company does not expect that the regulatory and contractual restrictions applicable to HEI or its direct and indirect subsidiaries will significantly affect the operations of HEI or its ability to pay dividends on its common stock. ELECTRIC UTILITY REGULATION The PUC regulates the rates, issuance of securities, accounting and certain other aspects of the operations of HECO and its electric utility subsidiaries. See the previous discussions under "Electric utility--Rates" and "Electric utility--Rate requests," and "Regulation of electric utility rates" and "Recent rate requests" in HECO's MD&A. Any adverse decision or policy made or adopted by the PUC, or any prolonged delay in rendering a decision, could have a material adverse effect on consolidated HECO's and the Company's financial condition, results of operations or liquidity. The PUC has ordered the electric utility subsidiaries to develop plans for the integration of demand- and supply-side resources available to meet consumer energy needs efficiently, reliably and at the lowest reasonable cost. See the previous discussion under "Electric utility--Integrated resource planning and requirements for additional generating capacity." On December 30, 1996, the PUC issued an order instituting 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 the previous discussion under "Electric utility--Competition." Certain transactions between HEI's electric public utility subsidiaries (HECO, MECO and HELCO) and HEI and affiliated interests, are subject to regulation by the PUC. All contracts (including summaries of unwritten agreements), made on or after July 1, 1988 of $300,000 or more in a calendar year for management, supervisory, 37 construction, engineering, accounting, legal, financial and similar services and for the sale, lease or transfer of property between a public utility and affiliated interests must be filed with the PUC to be effective, and the PUC may issue cease and desist orders if such contracts are not filed. All such affiliated contracts for capital expenditures (except for real property) must be accompanied by comparative price quotations from two nonaffiliates, unless the quotations cannot be obtained without substantial expense. Moreover, all transfers of $300,000 or more of real property between a public utility and affiliated interests require the prior approval of the PUC and proof that the transfer is in the best interest of the public utility and its customers. If the PUC, in its discretion, determines that an affiliated contract is unreasonable or otherwise contrary to the public interest, the utility must either revise the contract or risk disallowance of the payments for ratemaking purposes. In ratemaking proceedings, a utility must also prove the reasonableness of payments made to affiliated interests under any affiliated contract of $300,000 or more by clear and convincing evidence. An "affiliated interest" is defined by statute and includes officers and directors of a public utility, every person owning or holding, directly or indirectly, 10% or more of the voting securities of a public utility, and corporations which have in common with a public utility more than one-third of the directors of that public utility. In January 1993, to address community concerns expressed at the time, HECO proposed that the PUC initiate a review of the relationship between HEI and HECO and the effects of that relationship on the operations of HECO. The PUC opened a docket and initiated such a review to determine whether the HEI-HECO relationship, HEI's diversified activities, and HEI's policies, operations and practices had resulted in or were having any negative effects on HECO, its electric utility subsidiaries and ratepayers. In May 1994, the PUC selected a consultant, Dennis Thomas and Associates, to perform the review. In early 1995, Dennis Thomas and Associates issued its report (the Thomas report) to the PUC. The Thomas report concluded that "on balance, diversification has not hurt electric ratepayers." Other major findings were that (1) no utility assets have been used to fund HEI's nonutility investments or operations, (2) management processes within the electric utilities operate without interference from HEI and (3) HECO's access to capital did not suffer as a result of HEI's involvement in nonutility activities and that diversification did not permanently raise or lower the cost of capital incorporated into the rates paid by HECO's utility customers. The Thomas report also included a number of recommendations, most of which the Company has implemented. In December 1996, the PUC issued an order that adopted the Thomas report in its entirety, ordered HECO to continue to provide the PUC with status reports on its compliance with the PUC agreement (pursuant to which HEI became the holding company of HECO) and closed the investigation and proceeding. The PUC has not required that the Company implement all of the recommendations in the Thomas report. In the order, the PUC also stated that it adopted the recommendation of the DOD that HECO, MECO and HELCO present a comprehensive analysis of the impact that the holding company structure and investments in nonutility subsidiaries have on a case-by-case basis on the cost of capital to each utility in future rate cases and remove such effects from the cost of capital. In its rate increase application filed in the first quarter of 1998, MECO provided an affidavit of a consultant retained by Dennis Thomas and Associates for the review. The consultant stated that "the methodology used to establish the allowed rate of return for electric utility operations inherently avoids any bias which might be introduced by HEI's diversified activities," and further stated that the findings of the comprehensive review conducted for the Thomas report with respect to the availability and cost of capital to HEI and its utility subsidiaries would not be expected to be materially different from those adopted by the PUC in December 1996. The consultant reached similar conclusions in an affidavit provided with HELCO's rate increase application filed in October 1999, which conclusions were updated by an affidavit provided with HELCO's rebuttal testimonies filed in June 2000. See also "Holding company regulation." HECO and its subsidiaries are not subject to regulation by the Federal Energy Regulatory Commission under the Federal Power Act, except under Sections 210 through 212 (added by Title II of PURPA and amended by the Energy Policy Act of 1992), which permit the Federal Energy Regulatory Commission to order electric utilities to interconnect with qualifying cogenerators and small power producers, and to wheel power to other electric utilities. Title I of PURPA, which relates to retail regulatory policies for electric utilities, and Title VII of the Energy Policy Act 38 of 1992, which creates "exempt wholesale generators" (EWGs) as a category that is exempt from the 1935 Act and addresses transmission access, also apply to HECO and its subsidiaries. The Company cannot predict the extent to which cogeneration, EWGs or transmission access will reduce its electrical loads, reduce its current and future generating and transmission capability requirements or affect its financial condition, results of operations or liquidity. Because they are located in the State of Hawaii, HECO and its subsidiaries are exempt by statute from limitations set forth in the Powerplant and Industrial Fuel Act of 1978 on the use of petroleum as a primary energy source. BANK REGULATION ASB, a federally chartered savings bank, and its holding companies are subject to the regulatory supervision of the OTS and, in certain respects, the FDIC and the Hawaii Commissioner of Financial Institutions. See above under "Holding company regulation." In addition, ASB must comply with Federal Reserve Board reserve requirements and OTS liquidity requirements. See "Liquidity and capital resources--Bank" in HEI's MD&A. Deposit insurance coverage. The Federal Deposit Insurance Act, as amended by the Federal Deposit Insurance Corporation Insurance Act of 1991 (FDICIA), and regulations promulgated by the FDIC, govern insurance coverage of deposit amounts. Generally, the deposits maintained by a depositor in an insured institution are insured to $100,000, with the amount of all deposits held by a depositor in the same capacity (even if held in separate accounts) aggregated for purposes of applying the $100,000 limit. For example, all deposits held in a depositor's individual capacity are aggregated with each other but not with deposits maintained by such depositor and his or her spouse in a qualifying joint account, these latter joint deposits being separately insured to an aggregate of $100,000. An individual's interest in deposits at the same institution in any combination of certain retirement accounts and employee benefit plans will be added together and insured up to $100,000 in the aggregate. Institutions that are "well capitalized" under the FDIC's prompt corrective action regulations are generally able to provide "pass-through" insurance coverage (i.e., insurance coverage that passes through to each owner/beneficiary of the applicable deposit) for the deposits of most employee benefit plans (i.e., $100,000 per individual participating, not $100,000 per plan). Consequently, the FDIC deposit insurance regulations require financial institutions to provide employee benefit plan depositors information, not otherwise available, on the institution's capital category and whether "pass-through" deposit insurance is available. As of December 31, 2001, ASB was "well capitalized." Congress is currently considering legislation which would increase the limit on insured accounts. Under this legislation, insurance coverage limits on individual accounts would increase to $130,000. This increase is supported by the FDIC and opposed by the Bush Administration and Federal Reserve Chairman Alan Greenspan. Federal thrift charter. See "Certain factors that may affect future results and financial condition-Bank-Regulation of ASB--Federal Thrift Charter" in HEI's MD&A. Recent legislation. The Gramm-Leach-Bliley Act of 1998 (the Act) imposes on financial institutions an obligation to protect the security and confidentiality of its customers' nonpublic personal information and, on February 1, 2001, the FDIC and OTS issued final guidelines for the establishment of standards for safeguarding such information effective from July 1, 2001. The Act also requires public disclosure of certain agreements entered into by insured depository institutions and their affiliates in fulfillment of the Community Reinvestment Act of 1977, and the filing of an annual report with the appropriate regulatory agencies. On January 10, 2001, the FDIC and the OTS issued final rules implementing these provisions of the Act, effective from April 1, 2001. Although the Act will continue to impose additional compliance costs on ASB, ASB believes that any ongoing compliance costs will not be significant. The International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001(the 2001 Act) imposes on financial institutions a wide variety of additional obligations with respect to such matters as collecting information, monitoring relationships and reporting suspicious activities. Among other things, the 2001 Act requires the U.S. Treasury to issue regulations establishing minimum requirements for verifying the identity of persons seeking to open an account, maintaining records of the information used for such verification, and consulting lists of known or 39 suspected terrorists or terrorist organizations. Although ASB has "know your customer" policies in place, it will not be able to assess the additional cost (if any) of complying with the new regulations until they are issued. The 2001 Act also requires financial institutions to establish anti-money laundering programs and, with respect to correspondent and private banking accounts of non-U.S. persons, to implement appropriate due diligence policies to detect money laundering activities carried out through such accounts. ASB is monitoring the steps being taken by the regulatory agencies to implement these and other provisions of the 2001 Act. Capital requirements. Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), the OTS has set three capital standards for thrifts, each of which must be no less stringent than those applicable to national banks. As of December 31, 2001, ASB was in compliance with all of the minimum standards with a core capital ratio of 6.6% (compared to a 4.0% requirement), a tangible capital ratio of 6.6% (compared to a 1.5% requirement) and risk-based capital ratio of 13.4% (based on risk-based capital of $426.5 million, $171.9 million in excess of the 8.0% requirement). Effective April 1, 1999, the OTS revised its risk-based capital standards as part of the effort by the OTS, FDIC, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency to implement the provisions of the Riegle Community Development and Regulatory Improvement Act of 1994, which requires these agencies to work together to make uniform their respective regulations and guidelines implementing common statutory or supervisory policies. These OTS revisions affect the risk-based capital treatment of: (1) construction loans on presold residential properties; (2) junior liens on 1- to 4-family residential properties; (3) investments in mutual funds; and (4) the core capital leverage ratio for institutions which do not have a composite rating of "1" under the Uniform Financial Institution Rating System (i.e., the CAMELS rating system). Under the new rules, an institution with a composite rating of "1" under the CAMELS rating system must maintain core capital in an amount equal to at least 3% of adjusted total assets. All other institutions must maintain a minimum core capital of 4% of adjusted total assets, and higher capital ratios may be required if warranted by particular circumstances. As of December 31, 2001, ASB met the minimum core capital requirement applicable to it of 4% of adjusted total assets. On March 15, 2001, the OTS issued proposed rules that would reduce certain capital burdens on thrifts by, among others, permitting one-to four-family residential mortgage loans to qualify for a 50% risk rate in calculating capital charges for so long as such loans have a loan-to-value ratio of less than 90%, are not more than 90 days delinquent and are prudently underwritten. Under existing regulations, the maximum loan-to-value ratio for such loans to qualify for a 50% risk ratio is 80% at origination. In addition, the OTS proposed to eliminate the requirement that a thrift must deduct from total capital the portion of a land loan or non-residential construction loan that exceeds an 80% loan-to-value ratio. On January 1, 2002, new OTS regulations went into effect with respect to the capital treatment of certain asset-backed securities. Although ASB is still in the process of analyzing the impact of these new regulations, ASB's preliminary view is that the new regulations will probably have a slight positive impact on ASB's risk-based capital ratio. Affiliate transactions. Significant restrictions apply to certain transactions between ASB and its affiliates, including HEI and its direct and indirect subsidiaries. FIRREA significantly altered both the scope and substance of such limitations on transactions with affiliates and provided for thrift affiliate rules similar to, but more restrictive than, those applicable to banks. For example, ASB is prohibited from making any loan or other extension of credit to an entity affiliated with ASB unless the affiliate is engaged exclusively in activities which the Federal Reserve Board has determined to be permissible for bank holding companies. There are also various other restrictions which apply to certain transactions between ASB and certain executive officers, directors and insiders of ASB. ASB is also barred from making a purchase of or any investment in securities issued by an affiliate, other than with respect to shares of a subsidiary of ASB. Financial Derivatives and Interest Rate Risk. In 1996, the Board of Governors of the Federal Reserve System, the FDIC and the Office of the Comptroller of the Currency issued a joint agency policy statement to bankers to provide 40 guidance on sound practices for managing interest rate risk. However, the OTS has elected not to pursue a standardized policy towards interest rate risk and investment and derivatives activities with the other federal banking regulators. On December 1, 1998, the OTS issued final rules on financial derivatives, effective January 1, 1999. The OTS views these final rules as consistent with, although more detailed than, the 1996 joint policy statement. The purpose of these rules is to update the OTS rules on financial derivatives, which had remained virtually unchanged for over 15 years. Most significantly, the new rules address interest rate swaps, a derivative instrument commonly used by thrifts to manage interest rate risk which was not addressed in the prior OTS rules. Currently ASB does not use interest rate swaps to manage interest rate risk, but may do so in the future. Generally speaking, the new rules permit thrifts to engage in transactions involving financial derivatives to the extent these transactions are otherwise authorized under applicable law and are safe and sound. The new rules have required ASB to revise its internal procedures for handling financial derivative transactions, including increased involvement of the ASB Board of Directors in authorizing and monitoring such transactions. Concurrently with the issuance of the new rules of financial derivative transactions, the OTS also adopted on December 1, 1998 Thrift Bulletin 13a (TB 13a) for purpose of providing guidance on the management of interest rate risks, investment securities and derivatives activities. TB 13a also describes the guidelines OTS examiners will use in assigning the "Sensitivity to Market Risk" component rating under the Uniform Financial Institutions Rating System (i.e., the CAMELS rating system). TB 13a became effective on December 1, 1998, and replaces several previous Thrift Bulletins dealing with interest rate risk and securities activities. On March 15, 2001, the OTS issued proposed rules that would eliminate the interest rate risk component of the OTS's risk-based capital regulations. As a result of waivers granted by the Acting OTS Director, these regulations had never gone into effect and the OTS had relied instead on the interest rate risk guidelines of TB 13a, which would continue in effect even if the risk-based capital regulations were eliminated. If its interest rate risk regulations were eliminated, OTS proposes to apply a 100% risk weight to all stripped, mortgage-related securities regardless of issuer or guarantor. TB 13a updates the OTS's minimum standards for thrift institutions' interest rate risk management practices with regard to board-approved risk limits and interest rate risk measurement systems, and makes several significant changes. First, under TB 13a, institutions no longer set board-approved limits or provide measurements for the plus and minus 400 basis point interest rate scenarios prescribed by the original TB 13. TB 13a also changes the form in which those limits should be expressed. Second, TB 13a provides guidance on how the OTS will assess the prudence of an institution's risk limits. Third, TB 13a raises the size threshold above which institutions should calculate their own estimates of the interest rate sensitivity of Net Portfolio Value (NPV) from $500 million to $1 billion in assets. Fourth, TB 13a specifies a set of desirable features that an institution's risk measurement methodology should utilize. Fifth, TB 13a provides an extensive discussion of "sound practices" for interest rate risk management. TB 13a also contains guidance on thrifts' investment and derivatives activities by describing the types of analysis institutions should perform prior to purchasing securities or financial derivatives. TB13a also provides guidelines on the use of certain types of securities and financial derivatives for purposes other than reducing portfolio risk. Finally, TB 13a provides detailed guidelines for implementing part of the Notice announcing the revision of the CAMELS rating system, published by the Federal Financial Institutions Examination Council. That publication announced revised interagency policies that, among other things, established the Sensitivity to Market Risk component rating (the "S" rating). TB 13a provides quantitative guidelines for an initial assessment of an institution's level of interest rate risk. Examiners have broad discretion in implementing those guidelines. It also provides guidelines concerning the factors examiners consider in assessing the quality of an institution's risk management systems and procedures. 41 Liquidity. Effective July 18 2001, the OTS removed the regulation that required a savings association to maintain an average daily balance of liquid assets of at least 4% of their liquidity base and retained a provision requiring a savings association to maintain sufficient liquidity to ensure safe and sound operations. At December 31, 2001, ASB maintained, in the opinion of management, liquid assets at a level that was sufficient to ensure its safe and sound operation. Supervision. The adoption of FDICIA in 1991 subjected the banking and thrift industries to heightened regulation and supervision. FDICIA made a number of reforms addressing the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions and improvement of accounting standards. FDICIA also limited deposit insurance coverage, implemented changes in consumer protection laws and called for least-cost resolution and prompt corrective action with regard to troubled institutions. Pursuant to FDICIA, the federal banking agencies promulgated regulations which may affect the operations of ASB and its holding companies. Such regulations address, for example, standards for safety and soundness, real estate lending, accounting and reporting, transactions with affiliates, and loans to insiders. Prompt corrective action. FDICIA establishes a statutory framework that is triggered by the capital level of a savings association and subjects it to progressively more stringent restrictions and supervision as capital levels decline. The OTS rules implement the system of prompt corrective action. In particular, the rules define the relevant capital measures for the categories of "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized." A savings association that is "undercapitalized" or "significantly undercapitalized" is subject to additional mandatory supervisory actions and a number of discretionary actions if the OTS determines that any of the actions is necessary to resolve the problems of the association at the least possible long-term cost to the SAIF. A savings association that is "critically undercapitalized" must be placed in conservatorship or receivership within 90 days, unless the OTS and the FDIC concur that other action would be more appropriate. Interest rates. FDIC regulations restrict the ability of financial institutions that are undercapitalized to offer interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of December 31, 2001, ASB was "well capitalized" and thus not subject to these interest rate restrictions. Qualified thrift lender test. FDICIA amended the QTL test provisions of FIRREA by reducing the percentage of assets thrifts must maintain in "qualified thrift investments" from 70% to 65%, and changing the computation period to require that the percentage be reached on a monthly average basis in 9 out of the previous 12 months. The 1997 Omnibus Appropriations Act expanded the types of loans that constitute "qualified thrift investments" from the traditional category of housing-related loans to include small business loans, education loans, loans made through credit card accounts, as well as a basket of other consumer loans and certain other types of assets not to exceed 20% of total assets. Savings associations that fail to satisfy the QTL test by not holding the required percentage of "qualified thrift investments" are subject to various penalties, including limitations on their activities. Failure to satisfy the QTL test would also bring into operation restrictions on the activities that may be engaged in by HEI, HEIDI and their other subsidiaries and could effectively result in the required divestiture of ASB. At all times during 2001, ASB was in compliance with the QTL test. As of December 31, 2001, 89.4% of ASB's portfolio assets was "qualified thrift investments." See "Holding company regulation." Federal Home Loan Bank System. ASB is a member of the FHLB System which consists of 12 regional FHLBs. The FHLB System provides a central credit facility for member institutions. Historically, the FHLBs have served as the central liquidity facilities for savings associations and sources of long-term funds for financing housing. The FHLB may only make long-term advances to ASB for the purpose of providing funds for financing residential housing. At such time as an advance is made to ASB or renewed, it must be secured by collateral from one of the following categories: (1) fully disbursed, whole first mortgages on improved residential property, or securities representing a whole interest in such mortgages; (2) securities issued, insured or guaranteed by the U.S. Government or any 42 agency thereof; (3) FHLB deposits; and (4) other real estate-related collateral that has a readily ascertainable value and with respect to which a security interest can be perfected. The aggregate amount of outstanding advances secured by such other real estate-related collateral may not exceed 30% of ASB's capital. ASB, as a member of the FHLB of Seattle, is required to own shares of capital stock in the FHLB of Seattle in an amount equal to the greater of 1% of ASB's aggregate unpaid residential loan principal at the beginning of each year, 0.3% of total assets or 5% of FHLB advances outstanding and any shares held by ASB in excess of its required minimum may be immediately redeemed by ASB. However, as a result of the Gramm-Leach-Bliley Act, each regional FHLB is required to formulate and submit for Federal Housing Finance Board (Board) approval a plan to meet new minimum capital standards to be promulgated by the Board. The Board issued the final regulations establishing the new minimum capital standards on January 30, 2001. As mandated by Gramm-Leach-Bliley, these regulations require each FHLB to maintain a minimum total capital leverage ratio of 5% of total assets and include risk-based capital standards requiring each FHLB to maintain permanent capital in an amount sufficient to meet credit risk and market risk. In June 2001, the FHLB of Seattle formulated a capital plan to meet these new minimum capital standards, which plan has been submitted to the Board for approval. Until this plan has been approved, ASB will be required to continue to own shares of capital stock in the FHLB of Seattle in accordance with the percentages specified above. If the plan is approved, ASB's obligation to own shares of capital stock in the FHLB of Seattle will be governed by the plan. ASB currently owns capital stock in the FHLB of Seattle in excess of the amount required under current regulations. This excess totals approximately $32.6 million. The new plan would require ASB to own capital stock in the FHLB of Seattle in an amount equal to the total of 3.5% of FHLB of Seattle's advances to ASB plus the greater of (i) 5% of the outstanding balance of loans sold to the FHLB of Seattle by ASB or (ii) 0.75% of ASB's mortgage loans and pass through securities. If the plan were approved in its present form and had applied to ASB as of December 31, 2001, the plan would have increased the capital stock ASB is required to own in the FHLB of Seattle by approximately $11.3 million and would have reduced ASB's excess capital stock in that institution to approximately $21.3 million. In addition, stock in FHLB of Seattle will be subject to a 5-year notice of redemption as opposed to the currently applicable immediate redemption rights. If adopted, this 5-year notice period would have an adverse effect on ASB's liquidity. The FHLB of Seattle has indicated that it expects the Board to approve the plan by June 30, 2002. Community Reinvestment. In 1977, Congress enacted the Community Reinvestment Act (CRA) to ensure that banks and thrifts help meet the credit needs of their communities, including low- and moderate-income areas, consistent with safe and sound lending practices. The OTS will consider ASB's CRA record in evaluating an application for a new deposit facility, including the establishment of a branch, the relocation of a branch or office, or the acquisition of an interest in another bank or thrift. ASB received a CRA rating of "outstanding" from the OTS in December 1997 and such rating was reaffirmed in March 2000. Other laws. ASB is subject to federal and state consumer protection laws which affect lending activities, such as the Truth-in-Lending Law, the Truth-in-Savings Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and several federal and state financial privacy acts. These laws may provide for substantial penalties in the event of noncompliance. ASB believes that its lending activities are in compliance with these laws and regulations. ENVIRONMENTAL REGULATION HEI and its subsidiaries are subject to federal and state statutes and governmental regulations pertaining to water quality, air quality and other environmental factors. Water quality controls. As part of the process of generating electricity, water used for condenser cooling of the electric utility subsidiaries' steam electric generating stations is discharged into ocean waters or into underground injection wells. The subsidiaries are periodically required to obtain permits from the DOH in order to be allowed to discharge the water, including obtaining permit renewals for existing facilities and new permits for new facilities. The electric utility subsidiaries must obtain National Pollutant Discharge Elimination System (NPDES) permits from the 43 DOH to allow wastewater and storm water discharges into state and federal waters for their coastal generating stations and Underground Injection Control (UIC) permits for wastewater discharge to underground injection wells for one MECO facility and several HELCO facilities. The DOH conducted NPDES permit compliance inspections at MECO's Kahului and Maalaea generating stations in July 2001, and at HECO's Waiau generating station in October 2001. All facilities were found to be in compliance with NPDES permit requirements. By letter dated February 13, 2001, the DOH disapproved HELCO's current UIC permit renewal application for the Keahole power plant. The disapproval was based on purported inaccuracies in the application, including certain operations that the DOH considers to be related to the EPA's NOV regarding pre-PSD construction. In consultation with the DOH, HELCO registered the injection wells as inactive. HELCO intends to permit and reactivate the wells upon resolution of land use issues at the Keahole power plant. The Federal Oil Pollution Act of 1990 (OPA) governs actual or threatened oil releases in navigable U.S. waters (inland waters and up to three miles offshore) and waters of the U.S. exclusive economic zone (up to 200 miles to sea from the shoreline). Responsible parties under OPA are jointly and severally strictly liable for 1) oil removal costs incurred by the federal government or the state, and 2) damages to natural resources and real or personal property. Responsible parties include vessel owners and operators. OPA imposes fines and jail terms ranging in severity depending on how the release was caused. OPA also requires that responsible parties submit certificates of financial responsibility sufficient to meet the responsible party's maximum limited liability. HECO is currently involved in an ongoing investigation of the Honolulu Harbor area. (See Note 11 to HECO's Consolidated Financial Statements.) Under the terms of the agreement for the sale of YB, HEI and TOOTS have certain environmental obligations arising from conditions existing prior to the sale of YB, including obligations with respect to the Honolulu Harbor investigation. See Note 3 to HEI's Consolidated Financial Statements. Air quality controls. The generating stations of the utility subsidiaries operate under air pollution control permits issued by the DOH and, in a limited number of cases, by the EPA. The entire electric utility industry is affected by the 1990 Amendments to the Clean Air Act (CAA), recent changes to the National Ambient Air Quality Standard (NAAQS) for ozone, and adoption of a NAAQS for fine particulate matter. Possible changes to the federal New Source Review permitting regulations, as well as new regulatory programs, if enacted, regarding global warming and mandating further reductions of certain air emissions will also pose challenges for the industry. Hawaii utilities may be affected by the air toxics provisions (Title III) of the CAA when the Maximum Allowable Control Technology (MACT) emission standards are proposed for generation units. Hawaii utilities are affected by the CAA's operating permit provisions (Title V). Title V permits have been issued for Honolulu, Waiau, Maalaea, Miki Basin, Hill-Kanoelehua, Puna, Shipman, Kahului and Palaau power plants. Several Title V permit applications are being processed by the DOH and EPA. Initial source tests in December 1989 and subsequent retesting for HELCO's CT-2 generating unit indicated particulate emissions above permitted levels. Following analysis, HECO (on behalf of HELCO) proposed in November 1990 that the permitted particulate limit be increased. By letter dated April 13, 1992, the EPA concurred that revision is warranted. The DOH issued an NOV on August 17, 1992 for the noncomplying emissions. HECO and HELCO worked with the DOH, the manufacturer and a consultant to determine an appropriate new emission limit for particulates as well as oxides of nitrogen. In accordance with discussions with the DOH, CT-2 continues to operate pending issuance of a revised permit. On January 20, 1998, the DOH issued an NOV to HELCO for noncomplying emissions from March 16, 1993 through December 20, 1994 and from March 22, 1996 through November 6, 1997. HELCO paid fines totaling $22,100 in the settlement of both the 1992 and 1998 NOVs. Unit CT-2 is currently operating within all existing permit limits by virtue of its having passed its annual source tests since 1997. The DOH has prepared a draft permit for CT-2 with revised limits for emissions of particulates and nitrogen oxides. A public hearing on the CT-2 permit revisions was held on January 7, 2002. HELCO is awaiting issuance of the final permit. 44 Hazardous waste and toxic substances controls. The operations of the electric utility and former freight transportation subsidiaries are subject to regulations promulgated by the EPA to implement the provisions of the Resource Conservation and Recovery Act (RCRA), the Superfund Amendments and Reauthorization Act and the Toxic Substances Control Act. In 2001, the DOH obtained primacy to operate state-authorized RCRA (hazardous waste) programs. The DOH finalized RCRA administrative rules in mid-June 1994, with the rules becoming effective on June 18, 1994. The DOH's state contingency plan and the State of Hawaii Environmental Response Law (ERL) rules were adopted in August 1995. Whether on a federal or state level, RCRA provisions identify certain wastes as hazardous and set forth measures that must be taken in the transportation, storage, treatment and disposal of these wastes. Some of the wastes generated at steam electric generating stations possess characteristics which make them subject to these EPA regulations. Since October 1986, all HECO generating stations have operated RCRA-exempt wastewater treatment units to treat potentially regulated wastes from occasional boiler waterside and fireside cleaning operations. Steam generating stations at MECO and HELCO also operate similar RCRA-exempt wastewater management systems. The EPA issued a final regulatory determination on May 22, 2000, concluding that fossil fuel combustion wastes do not warrant regulation as hazardous under Subtitle C of RCRA. This determination retains (or maintains) the existing hazardous waste exemption for these types of wastes. It also allows for more flexibility in waste management strategies. The electric utilities' waste characterization programs continue to demonstrate the adequacy of the existing treatment systems. Waste recharacterization studies indicate that treatment facility wastestreams are nonhazardous. RCRA underground storage tank (UST) regulations require all facilities with USTs used for storing petroleum products to comply with costly leak detection, spill prevention and new tank standard retrofit requirements. All HECO, HELCO and MECO USTs currently meet these standards and continue in operation. The DOH conducted solid and hazardous waste compliance inspections under RCRA at HELCO's Hill generating station (including the Kanoelehua base yard) and Puna generating station in April 2000. The DOH issued inspection reports and warning letters to HELCO for the Hill/Kanoelehua facility and the Puna facility in June and July 2000, respectively. HELCO addressed the potential deficiencies at the Hill/Kanoelehua facility and submitted a response to the DOH in July 2000. The DOH issued a return to compliance letter for this facility in late July 2000. HELCO submitted its responses to the DOH's Puna facility's warning letter in September and December 2000. In January 2002, the DOH issued a second warning letter regarding a regulatory interpretation issue related to used oil processing at Puna. Based on follow-up discussions with the DOH, HELCO will submit a permit application to bring closure to the used oil processing issue and submitted a response to the DOH in March 2002. No enforcement action is anticipated. The EPA conducted RCRA compliance inspections at the Kahului and Maalaea generating stations in June 2001. The Kahului facility is currently considered to be in compliance with RCRA requirements. In August 2001, the EPA issued a Warning Letter to MECO for potential RCRA deficiencies at the Maalaea facility, all of which have been addressed by MECO. MECO submitted its response to the warning letter and additional requested data to the EPA in September 2001. EPA has yet to issue its final response for the Maalaea facility. The DOH conducted UST inspections at HELCO's Kona and Kanoelehua operations centers (May 1998); MECO's Kahului T&D baseyard (June 1998); and HECO's Waiau power plant (August 1998), Koolau Baseyard (August 1998) and Kahe power plant (September 1998). Both HELCO facilities were found to be operating in compliance with UST regulations. The DOH subsequently issued NOVs for alleged deficiencies in compliance with UST requirements for MECO's and HECO's facilities. MECO received an NOV in July 1998 for the Kahului baseyard. MECO completed corrective measures and submitted certifications of compliance status to the DOH in March 1999. The DOH issued NOVs to HECO for the Koolau and Kahe facilities in December 1998, and for the Waiau facility in January 1999. HECO completed corrective measures and submitted certifications of compliance status to the DOH for Koolau and Kahe in January 1999, and Waiau in February 1999. No additional enforcement actions by the DOH 45 are anticipated at this time. In July 1999, the DOH conducted a UST inspection at HECO's Ward Avenue Complex. The DOH conducted another follow-up UST inspection at the Ward Avenue Complex in January 2002. The facility was found to be in compliance with UST requirements in both inspections. In removing an existing UST system during a tank replacement project in October 1999, HELCO found petroleum contamination beneath the fuel dispenser system at HELCO's Kanoelehua Baseyard. HELCO submitted a release notification letter to the DOH on October 20, 1999. HELCO excavated and disposed of approximately 350 cubic yards of clean soil and 83 cubic yards of impacted soil at the West Hawaii Sanitary Landfill. HELCO submitted a UST closure report to the DOH on January 14, 2000. There remains some subsurface contamination. The DOH subsequently issued a letter in January 2000 requiring the further delineation of contaminated soils and determination of the need for a ground water monitoring well. HELCO submitted a Short Term Release Report to the DOH in April 2000. HELCO conducted additional soil sampling and installed a groundwater monitoring well per DOH requirements. Sample results indicated that the DOH cleanup levels had been met. HELCO submitted a report and a request for "No Further Action" to the DOH on August 8, 2000. The DOH has not yet responded to HELCO's request. The Emergency Planning and Community Right-to-Know Act under Superfund Amendments and Reauthorization Act Title III requires HECO, MECO and HELCO to report potentially hazardous chemicals present in their facilities in order to provide the public with information on these chemicals so that emergency procedures can be established to protect the public in the event of hazardous chemical releases. All HECO, MECO and HELCO facilities are in compliance with applicable annual reporting requirements to the State Emergency Planning Commission, the Local Emergency Planning Committee and local fire departments. In September 1995, the EPA published a notice of proposed rule making to expand the types of industries required to file annual Toxics Release Inventory reports (i.e., to report facility releases of toxic chemicals). Effective January 1, 1998, the final rule included the steam electric category that was previously exempt from Toxics Release Inventory reporting requirements. The electric utilities implemented actions to comply with reporting requirements. HECO, MECO and HELCO have timely filed release reports since 1998. The Toxic Substances Control Act regulations specify procedures for the handling and disposal of polychlorinated biphenyls (PCB), a compound found in transformer and capacitor dielectric fluids. HECO and its subsidiaries instituted procedures to monitor compliance with these regulations. In addition, HECO implemented a program to identify and replace PCB transformers and capacitors in the HECO system. All HECO, MECO and HELCO facilities are currently believed to be in compliance with PCB regulations. In 1998, the EPA published the final rule on the PCB disposal amendments. The rule provides flexibility in selecting disposal technologies for PCB wastes and expands the list of available decontamination procedures; provides less burdensome mechanisms for obtaining EPA approval for a variety of activities; clarifies and/or modifies certain provisions where implementation questions have arisen; modifies the requirements regarding the use and disposal of PCB equipment; and addresses outstanding issues associated with the notification and manifesting of PCB wastes and changes in the operation of commercial storage facilities. This rule streamlines procedures and focuses on self-implementing requirements and the elimination of duplication. Some activities currently requiring PCB disposal approvals will no longer require those approvals. The EPA believes that this rule will result in substantial cost savings to the regulated community while protecting against unreasonable risk of injury to health and the environment from exposure to PCBs. The ERL, as amended, governs releases of hazardous substances, including oil, in areas within the state's jurisdiction. Responsible parties under the ERL are jointly, severally and strictly liable for a release of a hazardous substance into the environment. Responsible parties include owners or operators of a facility where a hazardous substance comes to be located and any person who at the time of disposal of the hazardous substance owned or operated any facility at which such hazardous substance was disposed. The DOH issued final rules (or State Contingency Plan) implementing the ERL on August 17, 1995. Potential exposure to liability under the ERL/State Contingency Plan is associated with the release of regulated substances, including oil, to the environment. 46 ASB may be subject to the provisions of Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and regulations promulgated thereunder. CERCLA imposes liability for environmental cleanup costs on certain categories of responsible parties, including the current owner and operator of a facility and prior owners or operators who owned or operated the facility at the time the hazardous substances were released or disposed. CERCLA exempts persons whose ownership in a facility is held primarily to protect a security interest, provided that they do not participate in the management of the facility. Although there may be some risk of liability for ASB for environmental cleanup costs in the event ASB forecloses on, and becomes the owner of, property with environmental problems, the Company believes the risk is not as great for ASB as it may be for other depository institutions that have a larger portfolio of commercial loans. SECURITIES RATINGS - ------------------ As of March 13, 2002, the Standard & Poor's (S&P) and Moody's Investors Service's (Moody's) ratings of HEI's and HECO's securities were as follows:
S&P Moody's - --------------------------------------------------------------------------------------------------------------- HEI - --- Commercial paper................................................................ A-2 P-2 Medium-term notes............................................................... BBB Baa2 HEI-obligated preferred securities of trust subsidiary.......................... BB+ Ba1 HECO - ---- Commercial paper................................................................ A-2 P-2 Revenue bonds (insured)......................................................... AAA Aaa Revenue bonds (noninsured)...................................................... BBB+ Baa1 HECO-obligated preferred securities of trust subsidiaries....................... BBB- Baa2 Cumulative preferred stock (selected series).................................... nr Baa3
nr Not rated. The above ratings are not recommendations to buy, sell or hold any securities; such ratings may be subject to revision or withdrawal at any time by the rating agencies; and each rating should be evaluated independently of any other rating. These ratings reflect only the view of the applicable rating agency at the time the ratings are issued, from whom an explanation of the significance of such ratings may be obtained. There is no assurance that any such credit rating will remain in effect for any given period of time or that such rating will not be lowered, suspended or withdrawn entirely by the applicable rating agency if, in such rating agency's judgment, circumstances so warrant. Any such lowering, suspension or withdrawal of any rating may have an adverse effect on the market price or marketability of HEI's and/or HECO's securities, which could increase the cost of capital of HEI and HECO. Neither HEI nor HECO management can predict future rating agency actions or their effects on the future cost of capital of HEI or HECO. S&P has a "Negative" ratings outlook for HEI and HECO due in part to weakness in the Hawaii economy. Moody's has a "Stable" ratings outlook for HEI and HECO. Management believes that, if HEI's and HECO's commercial paper ratings were downgraded, the Company might not be able to sell commercial paper under current market conditions. The revenue bonds in the above table are issued by the Department of Budget and Finance of the State of Hawaii for the benefit of HECO and its subsidiaries, but the source of their repayment are the unsecured obligations of HECO and its subsidiaries under loan agreements and notes issued to the Department, including HECO's guarantees of its subsidiaries' obligations. The payment of principal and interest due on several series of these revenue bonds are insured either by MBIA Insurance Corporation or by Ambac Assurance Corporation, and the ratings of those bonds are based on the ratings of the obligations of the bond insurer rather than HECO. 47 RESEARCH AND DEVELOPMENT - ------------------------ HECO and its subsidiaries expensed approximately $2.6 million, $3.0 million and $2.4 million in 2001, 2000 and 1999, respectively, for research and development. Contributions to the Electric Power Research Institute accounted for most of the expenses. There were also expenses in the areas of energy conservation, environmental and emissions controls, and expenses for studies relative to technologies that are applicable to HECO, its subsidiaries and their customers. EMPLOYEE RELATIONS - ------------------ At December 31, 2001, the Company had 3,189 full-time employees, compared with 3,126 at December 31, 2000. At December 31, 2001 and 2000, HEI had 47 and 49 full-time employees, respectively. HECO At December 31, 2001, HECO and its subsidiaries had 1,930 full-time employees, compared with 1,941 at December 31, 2000. In August 2000, certain electric utility employees ratified new collective bargaining agreements covering approximately 62% of the employees of HECO, HELCO and MECO. See "Collective bargaining agreements" in HECO's MD&A. OTHER The employees of HEI and its direct and indirect subsidiaries, other than the electric utilities, are not covered by any collective bargaining agreement. ITEM 2. PROPERTIES HEI leases office space from a nonaffiliated lessor in downtown Honolulu under a - --- lease that expires on March 31, 2006. HEI also subleases office space from HECO in downtown Honolulu. The properties of HEI's subsidiaries are as follows: ELECTRIC UTILITY - ---------------- See page 5 for the "Generation statistics" of HECO and its subsidiaries, including generating and firm purchased capability, reserve margin and annual load factor. The electric utilities' overhead and underground transmission and distribution systems (with the exception of substation buildings and contents) have a replacement value roughly estimated at $2 billion and are uninsured because the amount of transmission and distribution system insurance available is limited and the premiums are extremely high. HECO owns and operates three generating plants on the island of Oahu at - ---- Honolulu, Waiau and Kahe, with an aggregate generating capability of 1,263 MW at December 31, 2001. The three plants are situated on HECO-owned land having a combined area of 535 acres and one 3 acre parcel of land under a lease expiring December 31, 2018. In addition, HECO owns a total of 126 acres of land on which substations, transformer vaults, distribution baseyards and the Kalaeloa cogeneration facility are located. Electric lines are located over or under public and nonpublic properties. Most of HECO's leases, easements and licenses have been recorded. HECO owns overhead transmission lines, overhead distribution lines, underground cables, poles (fully owned or jointly owned) and steel or aluminum high voltage transmission towers. The transmission system operates at 46,000 and 138,000 volts. The total capacity of HECO's transmission and distribution substations was 6,585,800 kilovoltamperes at December 31, 2001. HECO owns buildings and approximately 11.5 acres of land located in Honolulu which houses its operating, engineering and information services departments and a warehousing center. It also leases an office building and 48 certain office spaces in Honolulu. The lease for the office building expires in November 2004, with an option to further extend the lease to November 2014. The leases for certain office spaces expire on various dates through November 30, 2007 with options to extend to various dates through November 30, 2017. HECO owns 19.2 acres of land at Barbers Point used to situate fuel oil storage facilities with a combined capacity of 970,700 barrels. HECO also owns fuel oil tanks at each of its plant sites with a total maximum usable capacity of 844,600 barrels. MECO owns and operates two generating plants on the island of Maui, at Kahului - ---- and Maalaea, with an aggregate capability of 234.1 MW as of December 31, 2001. The plants are situated on MECO-owned land having a combined area of 28.6 acres. MECO also owns fuel oil storage facilities at these sites with a total maximum usable capacity of 176,355 barrels. MECO also owns 65.7 acres of undeveloped land at Waena. MECO's administrative offices and engineering and distribution departments are located on 9.1 acres of MECO-owned land in Kahului. MECO also owns and operates smaller distribution systems, generation systems (with an aggregate capability of 22.5 MW as of December 31, 2001) and fuel storage facilities on the islands of Lanai and Molokai, primarily on land owned by MECO. HELCO owns and operates five generating plants on the island of Hawaii. These - ----- plants at Hilo (2), Waimea, Kona and Puna have an aggregate generating capability of 153.0 MW as of December 31, 2001 (excluding two small run-of-river hydro units, four 1 MW dispersed generators and one small windfarm). The plants are situated on HELCO-owned land having a combined area of approximately 43 acres. HELCO also owns 6 acres of land in Kona, which is used for a baseyard, and leases 4 acres of land for its baseyard in Hilo under a lease expiring in 2030. The deeds to the sites located in Hilo contain certain restrictions which do not materially interfere with the use of the sites for public utility purposes. HELCO occupies 78 acres of land for the windfarm, pursuant to a long-term operating agreement. BANK - ---- ASB owns its executive office building in downtown Honolulu and land and an - --- operations center in the Mililani Technology Park on Oahu. The following table sets forth information with respect to branches owned and leased by ASB at December 31, 2001.
Number of branches ----------------------------------------------------- Owned Leased Total - ------------------------------------------------------------------------------------------------------------- Oahu................................................. 10 38 48 Maui................................................. 3 5 8 Kauai................................................ 3 3 6 Hawaii............................................... 2 5 7 Molokai.............................................. - 1 1 ----------------------------------------------------- 18 52 70 =====================================================
At December 31, 2001, the net book value of branches and office facilities is approximately $42 million. Of this amount, $36 million represents the net book value of the land and improvements for the branches and office facilities owned by ASB and $6 million represents the net book value of ASB's leasehold improvements. The leases expire on various dates from April 2002 through December 2029 and 24 of the leases have extension provisions. 49 ITEM 3. LEGAL PROCEEDINGS Except as identified in "Item 1. Business," there are no known material pending legal proceedings to which HEI or any of its subsidiaries is a party or to which any of their property is subject. Certain HEI subsidiaries are involved in ordinary routine litigation incidental to their respective businesses. DISCONTINUED OPERATIONS - ----------------------- See Note 14 to HEI's Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS HEI AND HECO: During the fourth quarter of 2001, no matters were submitted to a vote of security holders of the Registrants. EXECUTIVE OFFICERS OF THE REGISTRANT (HEI) The following persons are, or may be deemed, executive officers of HEI. Their ages are given as of February 13, 2002 and their years of company service are given as of December 31, 2001. Officers are appointed to serve until the meeting of the HEI Board of Directors after the next Annual Meeting of Stockholders (which will occur on April 23, 2002) and/or until their successors have been appointed and qualified (or until their earlier resignation or removal). Company service includes service with an HEI subsidiary.
Business experience for HEI Executive Officers past five years - --------------------------------------------------------------------------------------------------------------------- Robert F. Clarke, age 59 Chairman of the Board, President and Chief Executive Officer..................... 9/98 to date President and Chief Executive Officer............................................ 1/91 to 8/98 Director ........................................................................ 4/89 to date (Company service: 14 years) Robert F. Mougeot, age 59 Financial Vice President, Treasurer and Chief Financial Officer.................. 11/00 to date Financial Vice President and Chief Financial Officer............................. 4/89 to 11/00 (Company service: 13 years) Peter C. Lewis, age 67 Vice President - Administration and Corporate Secretary.......................... 1/99 to date Vice President - Administration.................................................. 10/89 to 12/98 (Company service: 33 years) Charles F. Wall, age 62 Vice President and Corporate Information Officer.................................. 7/90 to date (Company service: 11 years) Andrew I. T. Chang, age 62 Vice President - Government Relations............................................ 4/91 to date (Company service: 16 years)
50
Business experience for past five years HEI Executive Officers - ------------------------------------------------------------------------------------------------------------------ (continued) Curtis Y. Harada, age 46 Controller.................................................................. 1/91 to date (Company service: 12 years) T. Michael May, age 55 President and Chief Executive Officer, Hawaiian Electric Company, Inc....... 9/95 to date Director, Hawaiian Electric Industries, Inc................................. 9/95 to date Senior Vice President, Hawaiian Electric Industries, Inc.................... 9/95 to 4/01 (Company service: 9 years) Constance H. Lau, age 49 President and Chief Executive Officer, American Savings Bank, F.S.B......... 6/01 to date Director, Hawaiian Electric Industries, Inc................................. 6/01 to date Chief Operating Officer, American Savings Bank, F.S.B....................... 12/99 to 6/01 Treasurer, Hawaiian Electric Industries, Inc................................ 4/89 to 10/99 (Company service: 17 years)
HEI's executive officers, with the exception of Charles F. Wall and Andrew I. T. Chang, are also officers and/or directors of one or more of HEI's subsidiaries. Mr. May and Ms. Lau are deemed to be executive officers of HEI for purposes of this Item under the definition of Rule 3b-7 of the SEC's General Rules and Regulations under the Securities Exchange Act of 1934. There are no family relationships between any executive officer of HEI and any other executive officer or director of HEI, or any arrangement or understanding between any executive officer and any person pursuant to which the officer was selected. PART II ------- ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS HEI: The information required by this item is incorporated herein by reference to pages 3, 60 (Note 12, "Regulatory restrictions on net assets") and 64 (Note 16, "Quarterly information (unaudited)") of HEI's Consolidated Financial Statements. Certain restrictions on dividends and other distributions of HEI are described in this report under "Item 1. Business--Regulation and other matters--Restrictions on dividends and other distributions." HEI's common stock is traded on the New York Stock Exchange and the total number of holders of record of HEI common stock as of March 13, 2002, was 16,203. HEI has issued unregistered common stock during 2001, 2000 and 1999 pursuant to the HEI 1990 Nonemployee Director Stock Plan, amended effective April 27, 1999 (the Subsidiary Director Plan), the HEI 1999 Nonemployee Company Director Stock Grant Plan (the HEI Nonemployee Director Plan), the HECO Utility Group Team Incentive Plan and the HECO Utility Group Team Incentive Plan for Bargaining Unit Employees (collectively, the Team Incentive Plan). Under the Subsidiary Director Plan, 60% of the annual retainer payable to nonemployee subsidiary directors is paid in HEI common stock. Under the HEI Nonemployee Director Plan, in addition to an annual cash retainer of $20,000, a stock grant of 300 shares of HEI common stock is granted to each HEI nonemployee director. Under the Team Incentive Plan, eligible employees of HECO, MECO and HELCO receive awards of HEI common stock based on the attainment of performance goals by the respective companies. In 2001, 2000 and 1999, under the Subsidiary Director Plan, HEI issued 1,932, 2,268 and 2,004 shares of HEI common stock, respectively, in exchange for the retention of cash that would otherwise have been paid to 51 subsidiary directors as retainers in the aggregate amounts of $72,000, $84,000 and $72,000, respectively. In 2001, 2000 and 1999, under the HEI Nonemployee Director Plan, HEI issued 2,700, 3,000 and 3,000 shares of HEI common stock, respectively, with market values at the time of grant in the aggregate amounts of $101,000, $111,000 and $108,000, respectively, to HEI directors in addition to the retainer. In 2001, 2000 and 1999, under the Team Incentive Plan, HEI issued 57,693, 73,552 and 51,974 shares of HEI common stock, respectively, in exchange for cash received by HEI from the electric utility subsidiaries in the aggregate amounts of $2.1 million, $2.2 million and $1.9 million, respectively. HEI did not register the shares issued under the director stock plans since they did not involve a "sale" as defined under Section 2(3) of the Securities Act of 1933, as amended. Participation by nonemployee directors of HEI and subsidiaries in the director stock plans is mandatory and thus does not involve an investment decision. HEI did not register the shares issued under the Team Incentive Plan because their initial sales to HECO, MECO and HELCO were exempt as transactions not involving any public offering under Section 4(2) of the Securities Act of 1933, as amended, and because their subsequent award to eligible employees did not involve a "sale," as defined in Section 2(3) of the Securities Act of 1933, as amended. Awards of HEI common stock under the Team Incentive Plan are made to eligible employees on the basis of their attainment of performance goals established by their respective companies and no cash or other tangible or definable consideration is paid by such employees to their respective companies for the shares. In early 2001, the Team Incentive Plan was terminated. HECO: The information required with respect to "Market information" and "holders" is not applicable. Since the corporate restructuring on July 1, 1983, all the common stock of HECO has been held solely by its parent, HEI, and is not publicly traded. The dividends declared and paid on HECO's common stock for the four quarters of 2001 and 2000 were as follows:
Quarters ended 2001 2000 - ---------------------------------------------------------------------------------------------------------- March 31........................................................... $ $13,952,000 - June 30............................................................ - 17,794,000 September 30....................................................... 17,037,000 18,011,000 December 31........................................................ 19,272,000 18,765,000
The discussion of regulatory restrictions on distributions is incorporated herein by reference to page 42 (Note 12 to HECO's Consolidated Financial Statements, "Regulatory restrictions on distributions to parent") of HECO's Annual Report. ITEM 6. SELECTED FINANCIAL DATA HEI: The information required by this item is incorporated herein by reference to page 3 of HEI's Annual Report. HECO: The information required by this item is incorporated herein by reference to page 3 of HECO's Annual Report. ITEM 7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HEI: The information required by this item is set forth in HEI's MD&A, incorporated herein by reference to pages 4 to 25 of HEI's Annual Report. 52 HECO: The information required by this item is set forth in HECO's MD&A, incorporated herein by reference to pages 4 to 18 of HECO's Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK HEI: The information required by this item is incorporated herein by reference to pages 25 to 29 of HEI's Annual Report. HECO: The information required by this item is incorporated herein by reference to pages 19 to 20 of HECO's Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HEI: The information required by this item is incorporated herein by reference to pages 30 to 64 of HEI's Annual Report. HECO: The information required by this item is incorporated herein by reference to pages 21 to 52 of HECO's Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE HEI and HECO: None PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS HEI: Information for this item concerning the executive officers of HEI is set forth on pages 50 and 51 of this report. The list of current directors of HEI is incorporated herein by reference to page 65 of HEI's Annual Report. Information on the current directors' business experience and directorships is incorporated herein by reference to pages 5 to 7 of HEI's 2002 Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 23, 2002 (HEI's 2002 Proxy Statement). Information on the remuneration of HEI Directors is incorporated herein by reference to pages 8 to 9 of HEI's 2002 Proxy Statement. HECO: The following persons are, or may be deemed to be, executive officers of HECO. Their ages are given as of February 13, 2002 and their years of company service are given as of December 31, 2001. Officers are appointed to serve until the meeting of the HECO Board of Directors after the next HECO Annual Meeting (which will occur in April 2002) and/or until their respective successors have been appointed and qualified (or until their earlier resignation or removal). Company service includes service with HECO affiliates. 53
Business experience HECO Executive Officers for past five years - ------------------------------------------------------------------------------------------------------------------ Robert F. Clarke, age 59 Chairman of the Board............................................................ 1/91 to date (Company service: 14 years) T. Michael May, age 55 President, Chief Executive Officer and Director.................................. 9/95 to date Chairman of the Board, MECO and HELCO............................................ 9/95 to date (Company service: 9 years) Robert A. Alm, age 49 Senior Vice President - Public Affairs........................................... 7/01 to date (Company service: 6 months) Robert A. Alm, prior to joining HECO, served as Executive Vice President of Financial Management Group at First Hawaiian Bank from 1/99 to 6/01 and Senior Vice President of Financial Management Group at First Hawaiian Bank from 2/96 to 12/98. Thomas L. Joaquin, age 58 Senior Vice President - Operations............................................... 7/01 to date Vice President - Power Supply.................................................... 7/95 to 06/01 (Company service: 28 years) William A. Bonnet, age 58 Vice President - Government & Community Affairs.................................. 5/01 to date President, Maui Electric Company, Inc............................................ 9/96 to 5/01 (Company service: 16 years) Jackie Mahi Erickson, age 61 Vice President - Customer Operations & General Counsel........................... 10/98 to date Vice President - General Counsel & Government Relations.......................... 9/95 to 9/98 (Company service: 20 years) Charles M. Freedman, age 55 Vice President - Corporate Relations............................................. 3/98 to date Vice President - Corporate Excellence............................................ 7/95 to 2/98 (Company service: 10 years) Chris M. Shirai, age 54 Vice President - Energy Delivery................................................. 12/99 to date Manager, Engineering Department.................................................. 7/96 to 11/99 (Company service: 32 years)
54
Business experience HECO Executive Officers for past five years - ------------------------------------------------------------------------------------------------------------------ (continued) Richard A. von Gnechten, age 38 Financial Vice President......................................................... 12/00 to date Assistant Treasurer and Manager, Financial Services.............................. 5/00 to 11/00 Manager, Customer Service........................................................ 12/96 to 5/00 (Company service: 10 years) Patricia U. Wong, age 45 Vice President - Corporate Excellence............................................ 3/98 to date Manager, Environmental Department................................................ 10/96 to 2/98 Associate General Counsel, Legal Department...................................... 5/90 to 9/96 (Company service: 11 years) Lorie Ann K. Nagata, age 43 Treasurer......................................................................... 12/00 to date Manager, Management Accounting.................................................... 5/98 to date Assistant Treasurer............................................................... 3/97 to 11/00 Director, Management Accounting................................................... 12/94 to 4/98 (Company service: 19 years) Ernest T. Shiraki, age 54 Controller ...................................................................... 5/89 to date (Company service: 32 years) Molly M. Egged, age 51 Secretary........................................................................ 10/89 to date (Company service: 21 years)
HECO's executive officers, with the exception of Robert A. Alm, Jackie Mahi Erickson, Charles M. Freedman, Thomas L. Joaquin, Chris M. Shirai and Patricia U. Wong, are also officers and/or directors of MECO or HELCO. HECO executive officers Robert F. Clarke, T. Michael May and Molly M. Egged are also officers of one or more of the affiliated nonutility HEI companies. There are no family relationships between any executive officer or director of HECO and any other executive officer or director of HECO, or any arrangement or understanding between any director and any person pursuant to which the director was selected. The list of current directors of HECO is incorporated herein by reference to page 54 of HECO's Annual Report. Information on the business experience and directorships of HECO directors who are also directors of HEI is incorporated herein by reference to pages 5 to 7 of HEI's 2002 Proxy Statement. Anne M. Takabuki and Barry K. Taniguchi, ages 45 and 54, as of February 13, 2002, respectively, are the only outside directors of HECO who are not directors of HEI. Ms. Takabuki was elected a director of HECO in April 1997 and is Vice President/Secretary and General Counsel of Wailea Golf Resort, Inc. She also serves on the boards of Wailea Golf Resort, Inc. and its affiliated companies, MAGBA, Inc. and Kapiolani Health Foundation and is a 55 member of the advisory Board of Directors of MECO. Mr. Taniguchi was elected a director of HECO in April 2001 and is President of KTA Super Stores. He also serves on the boards of ASB, Puna Plantation Hawaii, Limited, and K. Taniguchi, Ltd. and is a member of the advisory Board of Directors of HELCO. HECO BOARD OF DIRECTORS - ----------------------- Committees of the HECO Board - ---------------------------- During 2001, the Board of Directors of HECO had only one standing committee, the Audit Committee, which was comprised of three nonemployee directors: Diane J. Plotts, Chairman, Anne M. Takabuki and Barry K. Taniguchi. The Audit Committee holds such meetings as it deems advisable to review the financial operations of HECO. In 2001, the Audit Committee held five meetings to review with management, the internal auditor and HECO's independent auditors the activities of the internal auditor, the results of the annual audit by the independent auditors and the financial statements which are included in HECO's 2000 Annual Report to Stockholder. Remuneration of HECO Directors and attendance at meetings - --------------------------------------------------------- In 2001, Anne M. Takabuki and Barry K. Taniguchi were the only nonemployee HECO directors who were not also directors of HEI. They were each paid a retainer of $20,000, 60% of which was distributed in the common stock of HEI pursuant to the Subsidiary Director Plan and 40% of which was distributed in cash. The number of shares of stock distributed was based on a share price of $37.25, which represents the average high and low sales prices of HEI common stock on April 27, 2001, with a cash payment made in lieu of any fractional share. The nonemployee HECO directors who were also nonemployee HEI directors did not receive a separate retainer from HECO. In addition, a fee of $700 was paid in cash to each nonemployee director (including nonemployee HECO directors who are also nonemployee HEI directors) for each Board and Committee meeting attended by the director. The Chairman of the HECO Audit Committee was paid an additional $100 for each Committee meeting attended. Employee members of the Board of Directors are not compensated for attendance at any meeting of the Board or Committees of the Board. In 2001, there were six regular bi-monthly meetings of the HECO Board of Directors, including one joint meeting with the HEI Board of Directors. All incumbent directors attended at least 75% of the combined total number of meetings of the Board and the Committee on which they served. ITEM 11. EXECUTIVE COMPENSATION HEI: The information required under this item for HEI is incorporated by reference to pages 10 and 13 to 25 of HEI's 2002 Proxy Statement. HECO: SUMMARY COMPENSATION TABLE - -------------------------- The following summary compensation table shows the annual and long-term compensation of the chief executive officer of HECO and the four other most highly compensated executive officers of HECO (collectively, the HECO Named Executive Officers) who served at the end of 2001. All compensation amounts presented for T. Michael May are the same amounts presented in HEI's 2002 Proxy Statement. 56
SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation ------------------------------- -------------------------- Other Awards Payouts All -------------- ------------ Annual Securities Other Compen- Underlying LTIP Compen- Salary Bonus/(1)/ sation Options/(2)/ Payouts/(3)/ sation/(4)/ Name and Principal Position Year ($) ($) ($) (#) ($) ($) - -------------------------------------------------------------------------------------------------------------------------- T. Michael May ................. 2001 $415,000 $163,257$ 0 20,000 $54,540 $18,881 President and Chief 2000 408,000 62,971 0 20,000 0 17,117 Executive Officer 1999 372,000 211,652 0 20,000 41,256 14,400 Thomas L. Joaquin............... 2001 202,000 58,597 0 3,000 na 11,745 Senior Vice President- 2000 189,000 39,880 0 0 na 10,126 Operations 1999 179,000 39,481 0 3,000 na 8,837 Jackie Mahi Erickson............ 2001 181,000 47,844 0 3,000 na 13,503 Vice President-Customer 2000 175,000 44,803 0 0 na 12,012 Operations/General Counsel 1999 163,000 43,666 0 3,000 na 10,298 Chris M. Shirai................. 2001 175,000 43,413 0 3,000 na 7,342 Vice President-Energy 2000 158,000 40,055 0 0 na 6,116 Delivery 1999 110,000 5,081 0 0 na 3,930 William A. Bonnet............... 2001 173,000 35,312 0 3,000 36,968 10,059 Vice President-Government 2000 147,000 44,602 0 3,000 0 7,876 & Community Affairs 1999 140,000 48,760 0 3,000 8,632 6,912
na Not applicable (not participants in the plan). /(1)/ The HECO Named Executive Officers are eligible for an incentive award under the Company's annual Executive Incentive Compensation Plan (EICP). EICP bonus payouts are reflected as compensation for the year earned. /(2)/ Options granted earn dividend equivalents as further described below under "Option grants in last fiscal year." /(3)/ Long-Term Incentive Plan (LTIP) payouts are determined in the first half of each year for the three-year cycle ending on December 31 of the previous calendar year. In April 2000, LTIP payouts were made for the 1997-1999 performance cycle and are reflected as LTIP compensation in the table for 1999. In April 2001, no LTIP payouts were made for the 1998-2000 performance cycle because none of the minimum threshold levels was achieved. In February 2002, LTIP payouts were made for the 1999-2001 performance cycle and are reflected as LTIP compensation in the table for 2001. /(4)/ Represents amounts accrued each year by the Company for certain preretirement death benefits provided to the named executive officers. Additional information concerning these death benefits is incorporated by preference to "Other Compensation Plans" on pages 23 to 24 of HEI's 2002 Proxy Statement. 57 OPTION GRANTS IN LAST FISCAL YEAR - --------------------------------- The following table presents information on the nonqualified stock options to acquire HEI common stock which were granted in 2001 to the executives named in the HECO Summary Compensation Table. The practice of granting stock options, which may include dividend equivalent shares, has been followed each year since 1987.
OPTION GRANTS IN LAST FISCAL YEAR Number of Percent of Securities Total Options Underlying Granted to Exercise Grant Date Options Employees in Price Expiration Present Granted /(1)/(#) Fiscal Year ($/share) Date Value /(2)/($) - ----------------------------------------------------------------------------------------------------------------------------- T. Michael May ................ 20,000 12% $35.92 April 23, 2011 $179,600 Thomas L. Joaquin.............. 3,000 2 35.92 April 23, 2011 26,940 Jackie Mahi Erickson........... 3,000 2 35.92 April 23, 2011 26,940 Chris M. Shirai................ 3,000 2 35.92 April 23, 2011 26,940 William A. Bonnet.............. 3,000 2 35.92 April 23, 2011 26,940
/(1)/ For the 32,000 option shares granted with an exercise price of $35.92 per share, additional dividend equivalent shares are granted at no additional cost throughout the four-year vesting period (vesting in equal installments) which begins on the date of grant. Dividend equivalents are computed, as of each dividend record date, both with respect to the number of shares under the option and with respect to the number of dividend equivalent shares previously credited to the participant and not issued during the period prior to the dividend record date. Accelerated vesting is provided in the event a Change-in-Control occurs. No stock appreciation rights have been granted under the Company's stock option plans. /(2)/ Present value is based on a Binomial Option Pricing Model, which is a variation of the Black-Scholes Option Pricing Model. For the stock options granted on April 23, 2001, with a 10-year option period, an exercise price of $35.92, and with additional dividend equivalent shares granted for the first four years of the option, the Binomial Value adjusted for forfeiture risk is $8.98 per share. The following assumptions were used in the model: Stock Price: $35.92; Exercise Price: $35.92; Term: 10 years; Volatility: 0.1893; Interest Rate: 5.42%; and Dividend Yield: 7.00%. The following were the valuation results: Binomial Option Value: $4.48; Dividend Credit Value: $4.50; and Total Value: $8.98. AGGREGATED OPTION EXERCISES AND FISCAL YEAREND OPTION VALUES - ------------------------------------------------------------ The following table shows the stock options, including dividend equivalents, exercised by the HECO Named Executive Officers in 2001. Also shown is the number of securities underlying unexercised options and the value of unexercised in the money options, including dividend equivalents, at the end of 2001. HEI, under the Stock Option and Incentive Plan, granted dividend equivalents to all HECO Named Executive Officers as part of their 2001, 1999 and 1997 grants, to Mr. Bonnet as part of his 2000 and 1998 grants and to Mr. May as part of his 2000, 1998 and 1996 grants. Dividend equivalents permit a participant who exercises a stock option to obtain at no additional cost, in addition to the option shares, the amount of dividends declared on the number of shares of common stock with respect to which the option is exercised during the period between the grant and the exercise of the option. Dividend equivalents are computed as of each dividend record date throughout the four-year vesting period (vesting in equal installments) which begins on the date of grant, both with respect to the number of shares underlying the option and with respect to the number of dividend equivalent shares previously credited to the HECO Named Executive Officer and not issued during the period prior to the dividend record date. 58
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES Number of Securities Underlying Value of Unexercised Unexercised In the Money Options Value Options (Including (Including Shares Dividend Value Realized On Dividend Dividend Acquired Equivalents Realized Dividend Equivalents) Equivalents) at Fiscal at Fiscal Year-End Year-End /(1)/ -------------------- ---------------------- On Acquired On Equivalents Exercisable/ Exercisable/ Name Exercise Exercise (#) On Options ($) Unexercisable (#) Unexercisable ($) (#) ($) - --------------------------------------------------------------------------------------------------------------------- T. Michael May............ - - $ - $ - 62,068 / 53,939 $753,418 / 536,873 Thomas L. Joaquin......... - - - - 8,780 / 4,972 98,523 / 39,657 Jackie Mahi Erickson...... 1,000 - 4,520 - 7,780 / 4,972 80,193 / 39,657 Chris M. Shirai........... - - - - 500 / 3,150 3,500 / 19,082 William A. Bonnet......... 3,500 958 9,380 35,542 5,584 / 8,480 57,731 / 83,887
/(1)/ Values based on closing price of $40.28 per share on the New York Stock Exchange on December 31, 2001. LONG-TERM INCENTIVE PLAN AWARDS TABLE - ------------------------------------- A Long-Term Incentive Plan award made to Mr. May in 2001 was the only such award made to the HECO Named Executive Officers. Additional information required under this item is incorporated by reference to "Long-Term Incentive Plan (LTIP) Awards" on pages 15 to 17 of HEI's 2002 Proxy Statement. PENSION PLAN - ------------ The Retirement Plan for Employees of Hawaiian Electric Industries, Inc. and Participating Subsidiaries (the Retirement Plan) provides a monthly retirement pension for life. Additional information required under this item is incorporated by reference to "Pension Plans" on pages 17 to 19 of HEI's 2002 Proxy Statement. As of December 31, 2001, the HECO Named Executive Officers had the following number of years of credited service under the Retirement Plan: Mr. May, 9 years; Mr. Bonnet, 16 years; Ms. Erickson, 20 years; Mr. Joaquin, 28 years; and Mr. Shirai, 32 years. CHANGE-IN-CONTROL AGREEMENTS - ---------------------------- Mr. May is the only HECO Named Executive Officer with whom HEI has a currently applicable Change-in-Control Agreement. Additional information required under this item is incorporated by reference to "Change-in-Control Agreements" on pages 19 to 20 of HEI's 2002 Proxy Statement. EXECUTIVE MANAGEMENT COMPENSATION - --------------------------------- The HEI Compensation Committee, composed of six independent nonemployee directors, approves executive compensation for the HECO Named Executive Officers. The information required to be disclosed concerning the Compensation Committee is incorporated herein by reference to page 10 of HEI's 2002 Proxy Statement. The HEI and HECO Boards of Directors review and approve all actions taken by the Committee concerning the HECO Named Executive Officers. 59 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT HEI: The information required under this item is incorporated by reference to page 12 of HEI's 2002 Proxy Statement. HECO: HEI owns all of HECO's common stock, which is HECO's only class of voting securities. HECO has also issued and has outstanding various series of preferred stock, the holders of which, upon certain defaults in dividend payments, have the right to elect a majority of the directors of HECO. The following table shows the shares of HEI common stock beneficially owned by each HECO director (other than those who are also directors of HEI), by each HECO Named Executive Officer (other than Mr. May, who is a named executive officer of HEI) and by all HECO directors and all HECO executive officers as a group, as of February 13, 2002, based on information furnished by the respective individuals.
Amount of Common Stock and Nature of Beneficial Ownership - ---------------------------------------------------------------------------------------------------------------- Sole Voting or Shared Voting Other Name of Individual Investment or Investment Beneficial Stock or Group Power Power /(1)/ Ownership /(2)/ Options /(3)/ Total - ---------------------------------------------------------------------------------------------------------------- Directors - --------- Anne M. Takabuki 2,058 - - - 2,058 Barry K. Taniguchi - 979 - - 979 Other HECO Named - ---------------- Executive Officers - ------------------ Thomas L. Joaquin 5,728 1,427 31 8,806 15,992 Jackie Mahi Erickson 5,644 1,158 2 7,806 14,610 Chris M. Shirai 2,558 61 145 500 3,264 William A. Bonnet 2,065 - - 6,651 8,716 All directors and executive officers as a group (18 persons) 60,785 3,866 2,821 128,791 196,263*
* HECO directors Clarke, May, Plotts, Scott and Watanabe, who also serve on the HEI Board of Directors, are not shown separately, but are included in the total for all HECO directors and executive officers as a group. The information required as to these directors is incorporated by reference to page 12 of HEI's 2002 Proxy Statement. Messrs. Clarke and May are also named executive officers of HEI and are listed in the Summary Compensation Table incorporated by reference to page 13 of HEI's 2002 Proxy Statement. The number of shares of common stock beneficially owned by any HECO director or by all HECO directors and officers as a group does not exceed 1% of the outstanding common stock of HEI. /(1)/ Shares registered in name of the individual and spouse. /(2)/ Shares owned by spouse, children or other relatives sharing the home of the director or officer in which the director or officer disclaims personal interest. /(3)/ Stock options, including accompanying dividend equivalents shares, exercisable within 60 days after February 13, 2002, under the 1987 Stock Option and Incentive Plan (as amended and restated effective June 19, 2001). 60 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS HEI: The information required under this item is incorporated by reference to pages 28 and 29 of HEI's 2002 Proxy Statement. HECO: The information required under this item is incorporated by reference to pages 28 and 29 of HEI's 2002 Proxy Statement. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS The following financial statements contained in HEI's Annual Report and HECO's Annual Report are incorporated by reference in Part II, Item 8, of this Form 10-K:
Pages in HEI's and HECO's Annual Report --------------------------- HEI HECO - ------------------------------------------------------------------------------------------------------------ Independent Auditors' Report................................................. 30 21 Consolidated Statements of Income, Years ended December 31, 2001, 2000 and 1999.............................................................. 31 22 Consolidated Statements of Retained Earnings, Years ended December 31, 2001, 2000 and 1999........................................... na 22 Consolidated Balance Sheets, December 31, 2001 and 2000...................... 32 23 Consolidated Statements of Capitalization, December 31, 2001 and 2000................................................. na 24-25 Consolidated Statements of Changes in Stockholders' Equity, Years ended December 31, 2001, 2000 and 1999..................................... 33 na Consolidated Statements of Cash Flows, Years ended December 31, 2001, 2000 and 1999........................................................ 34 26 Notes to Consolidated Financial Statements................................... 35-64 27-52 na Not applicable.
61 (A)(2) FINANCIAL STATEMENT SCHEDULES The following financial statement schedules for HEI and HECO are included in this report on the pages indicated below:
Page/s in Form 10-K ------------------------------ HEI HECO - --------------------------------------------------------------------------------------------------------------- Independent Auditors' Report................................................. 63 64 Schedule I Condensed Financial Information of Registrant, Hawaiian Electric Industries, Inc. (Parent Company) as of December 31, 2001 and 2000 and Years ended December 31, 2001, 2000 and 1999........................................ 65-67 na Schedule II Valuation and Qualifying Accounts, Years ended December 31, 2001, 2000 and 1999........................... 68 68 na Not applicable.
Certain schedules, other than those listed, are omitted because they are not required, or are not applicable, or the required information is shown in the consolidated financial statements (including the notes) included in HEI's Annual Report and HECO's Annual Report, which financial statements are incorporated herein by reference. (A)(3) EXHIBITS Exhibits for HEI and HECO and their subsidiaries are listed in the "Index to Exhibits" found on pages 69 through 79 of this Form 10-K. The exhibits listed for HEI and HECO are listed in the index under the headings "HEI" and "HECO," respectively, except that the exhibits listed under "HECO" are also considered exhibits for HEI. (B) REPORTS ON FORM 8-K HEI and HECO: On January 18, 2002, HEI and HECO filed a Form 8-K, dated January 17, 2002, under Item 5 (Announcement of HEI's webcast and teleconference call to review yearend earnings on January 24, 2002). On January 24, 2002, HEI and HECO filed a Form 8-K, dated January 23, 2002, under Item 5 (HEI's January 23, 2002 news release reporting 2001 earnings). On January 28, 2002, HEI and HECO filed a Form 8-K, dated January 25, 2002, under Item 5 (Updates to HEI's webcast and teleconference call to review yearend earnings on January 24, 2002). On February 19, 2002, HEI and HECO filed a Form 8-K, dated February 8, 2002, under Item 5, (Provides information about Hawaiian Electric Company, Inc.'s proposed 138 kv Kamoku-Pukele transmission line). On March 6, 2002, HEI and HECO filed a Form 8-K, dated March 5, 2002, under Item 7, (HEI's Annual Report in its entirety and portions of HECO's Annual Report). 62 [KPMG LLP letterhead] Independent Auditors' Report ---------------------------- The Board of Directors and Stockholders Hawaiian Electric Industries, Inc.: Under date of January 23, 2002, we reported on the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001, as contained in the 2001 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the Company's annual report on Form 10-K for the year 2001. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanying index under Item 14.(a)(2). These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in note 1 of notes to consolidated financial statements, effective January 1, 2001, the Company changed its method of accounting for derivative instruments and hedging activities. /s/ KPMG LLP Honolulu, Hawaii January 23, 2002 63 [KPMG LLP letterhead] Independent Auditors' Report ---------------------------- The Board of Directors and Stockholder Hawaiian Electric Company, Inc.: Under date of January 23, 2002, we reported on the consolidated balance sheets and consolidated statements of capitalization of Hawaiian Electric Company, Inc. (a subsidiary of Hawaiian Electric Industries, Inc.) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, retained earnings and cash flows for each of the years in the three-year period ended December 31, 2001, as contained in the 2001 annual report to stockholder. These consolidated financial statements and our report thereon are incorporated by reference in the Company's annual report on Form 10-K for the year 2001. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in the accompanying index under Item 14.(a)(2). The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Honolulu, Hawaii January 23, 2002 64 Hawaiian Electric Industries, Inc. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS
December 31, ------------------------------- (in thousands) 2001 2000 - -------------------------------------------------------------------------------------------------------------- Assets Cash and equivalents....................................................... $ 19,155 $ 677 Advances to and notes receivable from subsidiaries......................... 48,297 8,764 Available-for-sale investment securities................................... 15,610 - Accounts receivable........................................................ 1,832 1,194 Property, plant and equipment, net......................................... 2,600 2,748 Deferred income tax assets................................................. 10,337 - Other assets............................................................... 5,530 3,962 Net assets of discontinued operations...................................... - 73,013 Investments in subsidiaries, at equity..................................... 1,404,904 1,343,989 ------------------------------- $ 1,508,265 $ 1,434,347 =============================== Liabilities and stockholders' equity Liabilities Accounts payable........................................................... $ 8,077 $ 8,423 Notes payable to subsidiaries.............................................. 6,314 23,634 Long-term debt............................................................. 460,500 421,000 Loan from HEI Preferred Funding, LP (8.36% due in 2017).................... 103,000 103,000 Deferred income taxes...................................................... - 519 Other...................................................................... 685 38,712 Net liabilities of discontinued operations................................. 24 - ------------------------------- 578,600 595,288 ------------------------------- Stockholders' equity Preferred stock............................................................ - - Common stock............................................................... 787,374 691,925 Retained earnings.......................................................... 147,837 147,324 Accumulated other comprehensive loss....................................... (5,546) (190) ------------------------------- 929,665 839,059 ------------------------------- $ 1,508,265 $ 1,434,347 =============================== Note to Balance Sheets - ---------------------- Long-term debt consisted of the following: Promissory notes, 6.1 - 7.6%, due in various years through 2014............ $ 360,500 $ 295,500 Promissory notes, 8.5 - 8.7%, paid in 2001................................. - 25,500 Promissory note, 6.2%, due in 2003 ........................................ 100,000 100,000 ------------------------------- $ 460,500 $ 421,000 ===============================
The aggregate payments of principal required subsequent to December 31, 2001 on long-term debt are $60 million in 2002, $136 million in 2003, $1 million in 2004, $37 million in 2005 and $110 million in 2006. 65 Hawaiian Electric Industries, Inc. SCHEDULE I-- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME
Years ended December 31, ---------------------------------------------- (in thousands) 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Revenues /1/................................................... $ (5,338) $ 940 $ 2,345 Equity in income from continuing operations of subsidiaries.... 143,730 136,998 121,899 ---------------------------------------------- 138,392 137,938 124,244 ---------------------------------------------- Expenses: Operating, administrative and general.......................... 10,481 7,322 4,759 Depreciation of property, plant and equipment.................. 1,047 1,347 2,098 Taxes, other than income taxes................................. 472 315 299 ---------------------------------------------- 12,000 8,984 7,156 ---------------------------------------------- Operating income............................................... 126,392 128,954 117,088 Interest expense............................................... 43,539 40,195 34,637 ---------------------------------------------- Income from continuing operations before income tax benefits................................ 82,853 88,759 82,451 Income tax benefits............................................ 24,893 20,577 13,975 ---------------------------------------------- Income from continuing operations.............................. 107,746 109,336 96,426 Gain (loss) from discontinued subsidiary operations............ (24,041) (63,592) 421 ---------------------------------------------- Net income..................................................... $ 83,705 $ 45,744 $ 96,847 ==============================================
/1/ 2001 revenues includes $8.7 million of writedowns of the income class notes that HEI purchased in connection with the termination of ASB's investment in trust certificates in May and July 2001. See "Disposition of certain debt securities" in Note 4 of HEI's Consolidated Financial Statements. The Company's financial reporting policy for income tax allocations is based upon a separate entity concept whereby each subsidiary provides income tax expense (or benefits) as if each were a separate taxable entity. The difference between the aggregate separate tax return income tax provisions and the consolidated financial reporting income tax provision is charged or credited to HEI's separate tax provision. 66 Hawaiian Electric Industries, Inc. SCHEDULE I-- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, ---------------------------------------- (in thousands) 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Income from continuing operations.............................................. $ 107,746 $ 109,336 $ 96,426 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Equity in net income of continuing subsidiaries........................... (143,730) (136,998) (121,899) Common stock dividends/distributions received from subsidiaries........... 62,944 93,661 78,007 Depreciation of property, plant and equipment............................. 1,047 1,347 2,098 Other amortization........................................................ 579 447 364 Deferred income taxes..................................................... (6,778) (1,569) 1,386 Changes in assets and liabilities Decrease (increase) in accounts receivable............................ (638) 131 45 Increase (decrease) in accounts payable............................... (346) 1,905 523 Changes in other assets and liabilities............................... (34,242) 31,030 (38,905) ---------------------------------------- Net cash provided by (used in) operating activities............................ (13,418) 99,290 18,045 ---------------------------------------- Cash flows from investing activities Net decrease (increase) in advances to and notes receivable from subsidiaries.. (39,533) (8,764) 7,000 Purchase of investments........................................................ (27,929) - - Capital expenditures........................................................... (916) (622) (1,123) Additional investments in subsidiaries......................................... (1,424) (485) (3,886) Other.......................................................................... 16 10 - ---------------------------------------- Net cash provided by (used in) investing activities ........................... (69,786) (9,861) 1,991 ---------------------------------------- Cash flows from financing activities Net increase (decrease) in notes payable to subsidiaries with original maturities of three months or less.......................................... 2,675 (2,340) 26,075 Net decrease in commercial paper............................................... - (44,820) (44,164) Proceeds from issuance of long-term debt....................................... 100,000 100,000 100,000 Repayment of long-term debt.................................................... (60,500) (10,500) (40,500) Net proceeds from issuance of common stock..................................... 78,937 14,080 3,449 Common stock dividends......................................................... (67,015) (68,624) (79,848) ---------------------------------------- Net cash provided by (used in) financing activities............................ 54,097 (12,204) (34,988) ---------------------------------------- Net cash provided by (used in) discontinued operations......................... 47,585 (77,304) 15,072 ---------------------------------------- Net increase (decrease) in cash and equivalents................................ 18,478 (79) 120 Cash and equivalents, January 1................................................ 677 756 636 ---------------------------------------- Cash and equivalents, December 31.............................................. $ 19,155 $ 677 $ 756 ========================================
Supplemental disclosures of noncash activities: In 2001, 2000 and 1999, $0.8 million, $0.7 million and $0.8 million, respectively, of HEI advances to HEIDI were converted to equity in noncash transactions. In April 2000, HEI recommenced issuing new common shares under the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP). From March 1998 to March 2000, HEI had acquired for cash its common shares in the open market to satisfy the requirements of the HEI DRIP. Under the HEI DRIP, common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to $16 million in 2001 and $12 million in 2000. 67 Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 2001, 2000 and 1999
==================================================================================================================== Col. A Col. B Col. C Col. D Col. E - -------------------------------------------------------------------------------------------------------------------- (in thousands) Additions ---------------------------- Balance at begin- Charged to Charged Balance at ning of costs and to other end of Description period expenses accounts Deductions period - -------------------------------------------------------------------------------------------------------------------- 2001 ---- Allowance for uncollectible accounts- Hawaiian Electric Company, Inc. and subsidiaries......................... $ 939 $ 1,930 $ 1,246(a) $ 2,855(b) $ 1,260 ======================================================================= Allowance for uncollectible interest (ASB).................................. $ 2,978 - - $ 268 $ 2,710 ======================================================================= Allowance for losses for loans receivable (ASB).................................. $37,449 $12,500 $ 1,898(a) $ 9,623(b) $42,224 ======================================================================= 2000 ---- Allowance for uncollectible accounts- Hawaiian Electric Company, Inc. and subsidiaries......................... $ 1,057 $ 1,403 $ 948 $ 2,469 $ 939 Other companies........................ 61 - - 61 - ----------------------------------------------------------------------- $ 1,118 $ 1,403 $ 948(a) $ 2,530(b) $ 939 ======================================================================= Allowance for uncollectible interest (ASB).................................. $ 5,695 - - $ 2,717 $ 2,978 ======================================================================= Allowance for losses for loans receivable (ASB).................................. $35,348 $13,050 $ 2,389(a) $13,338(b) $37,449 ======================================================================= 1999 ---- Allowance for uncollectible accounts- Hawaiian Electric Company, Inc. and subsidiaries......................... $ 1,293 $ 2,299 $ 1,117 $ 3,652(b) $ 1,057 Other companies........................ 401 42 - 382(c) 61 ----------------------------------------------------------------------- $ 1,694 $ 2,341 $ 1,117(a) $ 4,034 $ 1,118 ======================================================================= Allowance for uncollectible interest (ASB).................................. $ 5,490 $ 205 - - $ 5,695 ======================================================================= Allowance for losses for loans receivable (ASB).................................. $39,779 $16,500 $ 728(a) $21,659(b) $35,348 =======================================================================
(a) Primarily bad debts recovered. (b) Bad debts charged off. (c) Primarily related to the sale of YB. 68 INDEX TO EXHIBITS The exhibits designated by an asterisk (*) are filed herein. The exhibits not so designated are incorporated by reference to the indicated filing. A copy of any exhibit may be obtained upon written request for a $0.20 per page charge from the HEI Shareholder Services Division, P.O. Box 730, Honolulu, Hawaii 96808-0730. Exhibit no. Description - ----------- ----------- HEI: ---- 3(i).1 HEI's Restated Articles of Incorporation (Exhibit 4(b) to Registration No. 33-7895). 3(i).2 Articles of Amendment of HEI filed June 13, 1990 (Exhibit 4(b) to Registration No. 33-40813). 3(i).3 Statement of Issuance of Shares of Preferred or Special Classes in Series for HEI Series A Junior Participating Preferred Stock filed October 28, 1997. (Exhibit 3(i).3 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-8503). *3(ii) HEI's Amended and Restated By-Laws. 4.1 Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HEI and its subsidiaries (Exhibit 4.1 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8503). 4.2 Rights Agreement, dated as of October 28, 1997, between HEI and Continental Stock Transfer & Trust Company, as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificates (Exhibit 1 to HEI's Form 8-A, dated October 28, 1997, File No. 1-8503). 4.3 Indenture, dated as of October 15, 1988, between HEI and Citibank, N.A., as Trustee (Exhibit 4 to Registration No. 33-25216). 4.4 First Supplemental Indenture dated as of June 1, 1993 between HEI and Citibank, N.A., as Trustee, to Indenture dated as of October 15, 1988 between HEI and Citibank, N.A., as Trustee (Exhibit 4(a) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-8503). 4.4(a) Second Supplemental Indenture dated as of April 1, 1999 between HEI and Citibank, N.A., as Trustee, to Indenture dated as of October 15, 1988 between HEI and Citibank, N.A., as Trustee (Exhibit 4.1 to HEI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, File No. 1-8503). 4.5 Pricing Supplements Nos. 1 through 9 to the Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed in connection with the sale of Medium-Term Notes, Series B (Exhibit 4(b) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-8503). 4.5(a) Pricing Supplement No. 11 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on December 1, 1995 in connection with the sale of Medium-Term Notes, Series B (Exhibit 4.8 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-8503). 69 Exhibit no. Description - ----------- ----------- 4.5(b) Pricing Supplement No. 12 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 12, 1996 in connection with the sale of Medium-Term Notes, Series B (Exhibit 4.9 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-8503). 4.5(c) Pricing Supplements Nos. 13 through 14 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on September 26, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(d) Pricing Supplement No. 15 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on September 29, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(e) Pricing Supplement No. 16 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on September 30, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(f) Pricing Supplement No. 17 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on October 2, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(g) Pricing Supplement No. 20 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 6, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(h) Pricing Supplement No. 21 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 12, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(i) Pricing Supplement No. 22 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on June 10, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(j) Pricing Supplement No. 23 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on June 10, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(k) Pricing Supplement No. 24 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on June 10, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(l) Pricing Supplement No. 1 to Registration Statement on Form S-3 of HEI (Registration No. 333-73225) filed on May 3, 1999 in connection with the sale of Medium-Term Notes, Series C. 4.5(m) Pricing Supplement No. 2 to Registration Statement on Form S-3 of HEI (Registration No. 333-73225) filed on April 11, 2000 in connection with the sale of Medium-Term Notes, Series C. 70 Exhibit no. Description - ----------- ----------- 4.5(n) Pricing Supplement No. 3 to Registration Statement on Form S-3 of HEI (Registration No. 333-73225) filed on April 5, 2001 in connection with the sale of Medium-Term Notes, Series C. 4.6 Amended and Restated Agreement of Limited Partnership of HEI Preferred Funding, LP dated as of February 1, 1997 (Exhibit 4(e) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.7 Amended and Restated Trust Agreement of Hawaiian Electric Industries Capital Trust I (HEI Trust I) dated as of February 1, 1997 (Exhibit 4(f) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.8 Junior Indenture between HEI and The Bank of New York, as Trustee, dated as of February 1, 1997 (Exhibit 4(i) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.9 Officers' Certificate in connection with issuance of 8.36% Junior Subordinated Debenture, Series A, Due 2017 under Junior Indenture of HEI (Exhibit 4(l) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.10 8.36% Trust Originated Preferred Security (Liquidation Amount $25 Per Trust Preferred Security) of HEI Trust I (Exhibit 4(m) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.11 8.36% Junior Subordinated Debenture Series A, Due 2017, of HEI (Exhibit 4(n) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.12 Trust Preferred Securities Guarantee Agreement with respect to HEI Trust I dated as of February 1, 1997 (Exhibit 4(o) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.13 Partnership Guarantee Agreement with respect to the Partnership dated as of February 1, 1997 (Exhibit 4(p) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.14 Affiliate Investment Instruments Guarantee Agreement with respect to 8.36% Junior Subordinated Debenture of HEIDI dated as of February 1, 1997 (Exhibit 4(q) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.15 Certificate Evidencing Trust Common Securities of HEI Trust I dated February 4, 1997 (Exhibit 4.12 to the Quarterly Report on Form 10-Q of HEI Trust I and the Partnership, File No. 1-8503-02, for the quarter ended March 31, 1997). 4.16 Certificate Evidencing Partnership Preferred Securities of the Partnership dated February 4, 1997 (Exhibit 4.13 to the Quarterly Report on Form 10-Q of HEI Trust I and the Partnership, File No. 1-8503-02, for the quarter ended March 31, 1997). 10.1 PUC Order Nos. 7070, 7153, 7203 and 7256 in Docket No. 4337, including copy of "Conditions for the Merger and Corporate Restructuring of Hawaiian Electric Company, Inc." dated September 23, 1982 (Exhibit 10 to Amendment No. 1 to Form U-1). 71 Exhibit no. Description - ----------- ----------- 10.2 Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988, between HEI, HEIDI and the Federal Savings and Loan Insurance Corporation (by the Federal Home Loan Bank of Seattle) (Exhibit (28)-2 to HEI's Current Report on Form 8-K dated May 26, 1988, File No. 1-8503). 10.2(a) OTS letter regarding release from Part II.B. of the Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988 (Exhibit 10.3(a) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8503). 10.3 Executive Incentive Compensation Plan (Exhibit 10(a) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, File No. 1-8503). 10.4 HEI Executives' Deferred Compensation Plan (Exhibit 10.5 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 10.5 1987 Stock Option and Incentive Plan of HEI as amended and restated effective June 19, 2001 (Exhibit 4 to HEI's Current Report on Form 8-K, dated June 19, 2001, File No. 1-8503). 10.6 HEI Long-Term Incentive Plan (Exhibit 10.11 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-8503). 10.7 HEI Supplemental Executive Retirement Plan effective January 1, 1990 (Exhibit 10.9 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 10.8 HEI Excess Benefit Plan (Exhibit 10.13 (Exhibit A) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.9 Form of Change-in-Control Agreement (Exhibit 10.14 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.10 Nonemployee Director Retirement Plan, effective as of October 1, 1989 (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.11 HEI 1990 Nonemployee Director Stock Plan, as amended effective April 27, 1999 (Exhibit 10.11 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, File No. 1-8503). 10.12 HEI 1999 Nonemployee Company Director Stock Grant Plan (Exhibit 10.12 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, File No. 1-8503). 10.13 HEI Nonemployee Directors' Deferred Compensation Plan (Exhibit 10.14 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 10.14 Form of HEI and HECO Executives' Deferred Compensation Agreement. The agreement pertains to and is substantially identical for all the HEI and HECO executive officers (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8503). 72 Exhibit no. Description - ----------- ----------- *11 Computation of Earnings per Share of Common Stock. Filed herein as page 80. *12.1 Computation of Ratio of Earnings to Fixed Charges. Filed herein as pages 81 and 82. 13 HEI's Annual Report (Appendix A to the Proxy Statement prepared for the Annual Meeting to Stockholders to be held on April 23, 2002) (HEI Exhibit 13.1 to HEI's Current Report on Form 8-K dated March 5, 2002, File No. 1-8503). 18 KPMG LLP letter re: change in accounting principle (Exhibit 18.1 to HEI's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, File No. 1-8503). *21.1 Subsidiaries of HEI. Filed herein as pages 84 and 85. *23 Accountants' Consent. Filed herein as page 87. *99.1 Fourth Amendment to Trust Agreement, made and entered into December 31, 2001, between Fidelity Management Trust Company and HEI for the Hawaiian Electric Industries Retirement Savings Plan for incorporation by reference in the Registration Statement on Form S-8 (Regis. No. 333-02103) *99.2 Amendment 2002-1 to the Hawaiian Electric Industries Retirement Savings Plan for incorporation by reference in the Registration Statement on Form S-8 (Regis. No. 333-02103) HECO: ----- 3(i).1 HECO's Certificate of Amendment of Articles of Incorporation (filed June 30, 1987) (Exhibit 3.1 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 3(i).2 Statement of Issuance of Preferred or Special Classes in Series for HECO Series R Preferred Stock filed December 15, 1989 (Exhibit 3.1(a) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 3(i).3 Articles of Amendment to HECO's Amended Articles of Incorporation filed December 21, 1989 (Exhibit 3.1(b) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No 1-4955). 3(i).4 Articles of Amendment to HECO's Amended Articles of Incorporation (filed May 24, 1990) (Exhibit 3(i).4 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No 1-4955). 3(ii) HECO's By-Laws (Exhibit 3.2 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 4.1 Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HECO, HELCO and MECO (Exhibit 4 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 4.2 Amended and Restated Trust Agreement of HECO Capital Trust I (HECO Trust I) dated as of March 1, 1997 (Exhibit 4(c) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 73 Exhibit no. Description - ----------- ----------- 4.3 HECO Junior Indenture with The Bank of New York, as Trustee, dated as of March 1, 1997 (Exhibit 4(d) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.4 8.05% Cumulative Quarterly Income Preferred Security (liquidation preference $25 per preferred security) of HECO Trust I (Exhibit 4(e) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.5 8.05% Junior Subordinated Deferrable Interest Debenture, Series 1997 of HECO (Exhibit 4(f) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.6 Trust Guarantee Agreement with respect to HECO Trust I dated as of March 1, 1997 (Exhibit 4(g) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.7 MECO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of March 1, 1997 (with the form of MECO's 8.05% Junior Subordinated Deferrable Interest Debenture, Series 1997 included as Exhibit A) (Exhibit 4(h)-1 to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.8 HELCO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of March 1, 1997 (with the form of HELCO's 8.05% Junior Subordinated Deferrable Interest Debenture, Series 1997 included as Exhibit A) (Exhibit 4(h)-2 to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.9 Agreement as to Expenses and Liabilities among HECO Trust I, HECO, MECO and HELCO (Exhibit 4(i) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.10 Amended and Restated Trust Agreement of HECO Capital Trust II (HECO Trust II) dated as of December 1, 1998 (Exhibit 4(c) to HECO's Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 4.11 HECO Junior Indenture with The Bank of New York, as Trustee, dated as of December 1, 1998 (with the form of HECO's 7.30% Junior Subordinated Deferrable Interest Debenture, Series 1998, included as Exhibit A) (Exhibit 4(d) to HECO's Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 4.12 7.30% Cumulative Quarterly Income Preferred Security (liquidation preference $25 per preferred security) of HECO Trust II (Exhibit 4(e) to HECO's Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 4.13 Trust Guarantee Agreement with respect to HECO Trust II dated as of December 1, 1998 (Exhibit 4(g) to HECO's Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 74 Exhibit no. Description - ----------- ----------- 4.14 MECO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of December 1, 1998 (with the form of MECO's 7.30% Junior Subordinated Deferrable Interest Debenture, Series 1998 included as Exhibit A) (Exhibit 4(h) to HECO's Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 4.15 HELCO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of December 1, 1998 (with the form of HELCO's 7.30% Junior Subordinated Deferrable Interest Debenture, Series 1998) (Substantially the same as the MECO Junior Indenture included as Exhibit 4.14). 4.16 Agreement as to Expenses and Liabilities among HECO Trust II, HECO, MECO and HELCO (Exhibit 4(i) to HECO's Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 10.1 Power Purchase Agreement between Kalaeloa Partners, L.P., and HECO dated October 14, 1988 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, File No. 1-4955). 10.1(a) Amendment No. 1 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated June 15, 1989 (Exhibit 10(c) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.1(b) Lease Agreement between Kalaeloa Partners, L.P., as Lessor, and HECO, as Lessee, dated February 27, 1989 (Exhibit 10(d) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.1(c) Restated and Amended Amendment No. 2 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated February 9, 1990 (Exhibit 10.2(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 10.1(d) Amendment No. 3 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated December 10, 1991 (Exhibit 10.2(e) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-4955). 10.1(e) Amendment No. 4 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated October 1, 1999 (Exhibit 10.1 to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 1-4955). 10.2 Power Purchase Agreement between AES Barbers Point, Inc. and HECO, entered into on March 25, 1988 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1988, File No. 1-4955). 10.2(a) Agreement between HECO and AES Barbers Point, Inc., pursuant to letters dated May 10, 1988 and April 20, 1988 (Exhibit 10.4 to HECO's Annual Report on Form 10-K for fiscal year ended December 31, 1988, File No. 1-4955). 75 Exhibit no. Description - ----------- ----------- 10.2(b) Amendment No. 1, entered into as of August 28, 1988, to Power Purchase Agreement between AES Barbers Point, Inc. and HECO (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, File No. 1-4955). 10.2(c) HECO's Conditional Notice of Acceptance to AES Barbers Point, Inc. dated January 15, 1990 (Exhibit 10.3(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 10.3 Amended and Restated Power Purchase Agreement between Hilo Coast Processing Company and HELCO dated March 24, 1995 (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, File No. 1-4955). 10.3(a) Second Amended and Restated Power Purchase Agreement between Hilo Coast Power Company and HELCO dated October 4, 1999 (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-4955). *10.3(b) Amendment No. 1 to the Second Amended and Restated Power Purchase Agreement between Hilo Coast Power Company and HELCO dated November 5, 1999. 10.4 Agreement between MECO and Hawaiian Commercial & Sugar Company pursuant to letters dated November 29, 1988 and November 1, 1988 (Exhibit 10.8 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 10.4(a) Amended and Restated Power Purchase Agreement by and between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 30, 1989 (Exhibit 10(e) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-4955). 10.4(b) First Amendment to Amended and Restated Power Purchase Agreement by and between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 1, 1990, amending the Amended and Restated Power Purchase Agreement dated November 30, 1989 (Exhibit 10(f) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-4955). 10.4(c) Letter agreement dated December 11, 1997 to Extend Term of Amended and Restated Power Purchase Agreement Between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO dated November 30, 1989, as Amended on November 1, 1990 (Exhibit 10.4(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.4(d) Letter agreement dated October 22, 1998 to Extend Term of Amended and Restated Power Purchase Agreement Between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO dated November 30, 1989, as Amended on November 1, 1990 (Exhibit 10.4(d) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 1-4955). 76 Exhibit no. Description - ----------- ----------- 10.4(e) Termination Notice dated December 27, 1999 for Amended and Restated Power Purchase Agreement by and between A&B Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 30, 1989, as amended (Exhibit 10.2 to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 1-4955). 10.4(f) Rescission dated January 23, 2001 of Termination Notice for Amended and Restated Power Purchase Agreement by and between A&B Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 30, 1989, as amended (Exhibit 10.4(f) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, File No. 1-4955). 10.5 Purchase Power Contract between HELCO and Thermal Power Company dated March 24, 1986 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.5(a) Firm Capacity Amendment between HELCO and Puna Geothermal Venture (assignee of AMOR VIII, who is the assignee of Thermal Power Company) dated July 28, 1989 to Purchase Power Contract between HELCO and Thermal Power Company dated March 24, 1986 (Exhibit 10(b) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.5(b) Amendment made in October 1993 to Purchase Power Contract between HELCO and Puna Geothermal Venture dated March 24, 1986, as amended (Exhibit 10.5(b) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.5(c) Third Amendment dated March 7, 1995 to the Purchase Power Contract between HELCO and Puna Geothermal Venture dated March 24, 1986, as amended (Exhibit 10.5(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.5(d) Performance Agreement and Fourth Amendment dated February 12, 1996 to the Purchase Power Contract between HELCO and Puna Geothermal Venture dated March 24, 1986, as amended (Exhibit 10.5(b) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4955). 10.6 Purchase Power Contract between HECO and the City and County of Honolulu dated March 10, 1986 (Exhibit 10.9 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). *10.6 (a) Amendment No. 1 to Purchase Power Contract between HECO and the City and County of Honolulu dated March 10, 1986. 10.6(b) Firm Capacity Amendment, dated April 8, 1991, to Purchase Power Contract, dated March 10, 1986, by and between HECO and the City & County of Honolulu (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991, File No. 1-4955). 77 Exhibit no. Description - ----------- ----------- 10.6(c) Amendment No. 2 to Purchase Power Contract Between HECO and City and County of Honolulu dated March 10, 1986 (Exhibit 10.6(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.7 Power Purchase Agreement between Encogen Hawaii, L.P. and HELCO dated October 22, 1997 (but with the following attachments omitted: Attachment C, "Selected portions of the North American Electric Reliability Council Generating Availability Data System Data Reporting Instructions dated October 1996" and Attachment E, "Form of the Interconnection Agreement between Encogen Hawaii, L.P. and HELCO," which is provided in final form as Exhibit 10.7(a)) (Exhibit 10.7 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.7(a) Power Purchase Agreement between Encogen Hawaii, L.P. and HELCO dated October 22, 1997 (Exhibit 10.7(a) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.7(b) Amendment No. 1, executed on January 14, 1999, to Power Purchase Agreement between Encogen Hawaii, L.P. and HELCO dated October 22, 1997 (Exhibit 10.7(b) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 1-4955). *10.7(c) Power Purchase Agreement Novation dated November 8, 1999 by and among Encogen Hawaii, L.P., Hamakua Energy Partners and HELCO. *10.7(d) Guarantee Agreement dated November 8, 1999 between TECO Energy, Inc. and HELCO. 10.8 Low Sulfur Fuel Oil Supply Contract by and between Chevron and HECO dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.8 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.9 Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between Chevron and HECO, MECO, HELCO, HTB and YB dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.9 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.10 Facilities and Operating Contract by and between Chevron and HECO dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.10 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.11 Low Sulfur Fuel Oil Supply Contract by and between BHP Petroleum Americas Refining Inc. and HECO dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.11 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 78 Exhibit no. Description - ----------- ----------- 10.12 Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between BHP Petroleum Americas Refining Inc. and HECO, MECO and HELCO dated November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.12 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.13 Contract of private carriage by and between HITI and HELCO dated December 4, 2000 (Exhibit 10.13 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, File No. 1-4955). 10.14 Contract of private carriage by and between HITI and MECO dated December 4, 2000 (Exhibit 10.14 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, File No. 1-4955). 10.15 HECO Nonemployee Directors' Deferred Compensation Plan (Exhibit 10.16 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4955). 10.16 HEI and HECO Executives' Deferred Compensation Agreement. The agreement pertains to and is substantially identical for all the HEI and HECO executive officers (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8503). 11 Computation of Earnings Per Share of Common Stock. See note on page 2 of HECO's Annual Report. *12.2 Computation of Ratio of Earnings to Fixed Charges. Filed herein as page 83. 13 Pages 1, 3 to 52 and 54 of HECO's Annual Report (with the exception of the data incorporated by reference in Part I, Part II, Part III and Part IV, no other data appearing in the 2001 Annual Report to Stockholder is to be deemed filed as part of this Form 10-K Annual Report) (HECO Exhibit 13.2 to HECO's Current Report on Form 8-K dated March 5, 2002, File No. 1-4955). 18 KPMG LLP letter re: change in accounting principle (Exhibit 18.2 to HECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, File No. 1-4955). *21.2 Subsidiaries of HECO. Filed herein as page 86. *99.2 Reconciliation of electric utility operating income per HEI and HECO Consolidated Statements of Income. Filed herein as page 88. 79 HEI Exhibit 11 Hawaiian Electric Industries, Inc. COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK Years ended December 31, 2001, 2000, 1999, 1998 and 1997
(in thousands, except per share amounts) 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Net income (loss) Continuing operations............ $107,746 $109,336 $96,426 $97,262 $93,333 Discontinued operations.......... (24,041) (63,592) 421 (12,451) (6,891) ------------------------------------------------------------------------------ $ 83,705 $ 45,744 $96,847 $84,811 $86,442 ============================================================================== Weighted-average number of common shares outstanding..................... 33,754 32,545 32,188 32,014 31,375 ============================================================================== Adjusted weighted-average number of common shares outstanding..................... 33,942 32,687 32,291 32,129 31,470 ============================================================================== Basic earnings (loss) per common share Continuing operations............ $ 3.19 $ 3.36 $ 3.00 $ 3.04 $ 2.98 Discontinued operations.......... (0.71) (1.95) 0.01 (0.39) (0.22) ------------------------------------------------------------------------------ $ 2.48 $ 1.41 $ 3.01 $ 2.65 $ 2.76 ============================================================================== Diluted earnings (loss) per common share Continuing operations............ $ 3.18 $ 3.35 $ 2.99 $ 3.03 $ 2.97 Discontinued operations.......... (0.71) (1.95) 0.01 (0.39) (0.22) ------------------------------------------------------------------------------ $ 2.47 $ 1.40 $ 3.00 $ 2.64 $ 2.75 ==============================================================================
80 HEI Exhibit 12.1 (page 1 of 2) Hawaiian Electric Industries, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 2001, 2000, 1999, 1998 and 1997
2001 2000 1999 ------------------------------------------------------------------------------ (dollars in thousands) /(1)/ /(2)/ /(1)/ /(2)/ /(1)/ /(2)/ - ---------------------------------------------------------------------------------------------------------------------- Fixed charges Total interest charges /(3)/.......... $175,780 $292,311 $196,980 $316,172 $158,947 $279,285 Interest component of rentals......... 4,268 4,268 4,332 4,332 4,370 4,370 Pretax preferred stock dividend requirements of subsidiaries........ 3,069 3,069 3,109 3,109 3,407 3,407 Preferred securities distributions of trust subsidiaries.................. 16,035 16,035 16,035 16,035 16,025 16,025 ------------------------------------------------------------------------------ Total fixed charges................... $199,152 $315,683 $220,456 $339,648 $182,749 $303,087 ============================================================================== Earnings Pretax income from continuing operations ......................... $165,903 $165,903 $170,495 $170,495 $155,129 $155,129 Fixed charges, as shown............... 199,152 315,683 220,456 339,648 182,749 303,087 Interest capitalized.................. (2,258) (2,258) (2,922) (2,922) (2,576) (2,576) ------------------------------------------------------------------------------ Earnings available for fixed charges............................. $362,797 $479,328 $388,029 $507,221 $335,302 $455,640 ============================================================================== Ratio of earnings to fixed charges ..................... 1.82 1.52 1.76 1.49 1.83 1.50 ==============================================================================
/(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. 81 HEI Exhibit 12.1 (page 2 of 2) Hawaiian Electric Industries, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 2001, 2000, 1999, 1998 and 1997--Continued
1998 1997 -------------------------------------------------------- (dollars in thousands) /(1)/ /(2)/ /(1)/ /(2)/ - -------------------------------------------------------------------------------------------------------- Fixed charges Total interest charges /(3)/................... $144,911 $286,980 $137,458 $226,557 Interest component of rentals.................. 3,559 3,559 2,973 2,973 Pretax preferred stock dividend requirements of subsidiaries................. 9,379 9,379 10,000 10,000 Preferred securities distributions of trust subsidiaries................................. 12,557 12,557 10,600 10,600 --------------------------------------------------------- Total fixed charges............................ $170,406 $312,475 $161,031 $250,130 ========================================================= Earnings Pretax income from continuing operations........................ $155,283 $155,283 $153,009 $153,009 Fixed charges, as shown........................ 170,406 312,475 161,031 250,130 Interest capitalized........................... (5,915) (5,915) (6,190) (6,190) --------------------------------------------------------- Earnings available for fixed charges........... $319,774 $461,843 $307,850 $396,949 ========================================================= Ratio of earnings to fixed charges............. 1.88 1.48 1.91 1.59 ========================================================= /(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.
82 HECO Exhibit 12.2 Hawaiian Electric Company, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 2001, 2000, 1999, 1998 and 1997
(dollars in thousands) 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- Fixed charges Total interest charges.......................... $ 47,056 $ 49,062 $ 48,461 $ 47,921 $ 48,778 Interest component of rentals................... 728 696 784 730 757 Pretax preferred stock dividend requirements of subsidiaries.................................. 1,433 1,438 1,479 4,081 4,150 Preferred securities distributions of trust subsidiaries.................................. 7,675 7,675 7,665 4,197 3,052 ------------------------------------------------------------- Total fixed charges............................. $ 56,892 $ 58,871 $ 58,389 $ 56,929 $ 56,737 ============================================================= Earnings Income before preferred stock dividends of HECO.......................................... $ 89,380 $ 88,366 $ 76,400 $ 84,230 $ 81,849 Fixed charges, as shown......................... 56,892 58,871 58,389 56,929 56,737 Income taxes (see note below)................... 55,416 55,375 48,047 54,572 52,535 Allowance for borrowed funds used during construction.................................. (2,258) (2,922) (2,576) (5,915) (6,190) ------------------------------------------------------------- Earnings available for fixed charges............ $199,430 $199,690 $180,260 $189,816 $184,931 ============================================================= Ratio of earnings to fixed charges.............. 3.51 3.39 3.09 3.33 3.26 ============================================================= Note: Income taxes is comprised of the following: Income tax expense relating to operating income from regulated activities............ $ 55,434 $ 55,213 $ 48,281 $ 54,719 $ 52,795 Income tax expense (benefit) relating to results from nonregulated activities........ (18) 162 (234) (147) (260) ------------------------------------------------------------- $ 55,416 $ 55,375 $ 48,047 $ 54,572 $ 52,535 =============================================================
83 HEI Exhibit 21.1 (Page 1 of 2) Hawaiian Electric Industries, Inc. SUBSIDIARIES OF THE REGISTRANT The following is a list of all direct and indirect subsidiaries of the registrant as of March 13, 2002. The state/place of incorporation or organization is noted in parentheses and subsidiaries of intermediate parent companies are designated by indentations. Hawaiian Electric Company, Inc. (Hawaii) Maui Electric Company, Limited (Hawaii) Hawaii Electric Light Company, Inc. (Hawaii) HECO Capital Trust I (Delaware) HECO Capital Trust II (Delaware) HEI Diversified, Inc. (Hawaii) American Savings Bank, F.S.B. (federally chartered) American Savings Investment Services Corp. (Hawaii) Bishop Insurance Agency of Hawaii, Inc. (Hawaii) ASB Service Corporation (Hawaii) AdCommunications, Inc. (Hawaii) American Savings Mortgage Co., Inc. (Hawaii) ASB Realty Corporation (Hawaii) Pacific Energy Conservation Services, Inc. (Hawaii) HEI District Cooling, Inc. (Hawaii) (inactive) ProVision Technologies, Inc. (Hawaii) HEI Properties, Inc. (Hawaii) HEI Leasing, Inc. (Hawaii) Hycap Management, Inc. (Delaware) HEI Preferred Funding, LP (a limited partnership in which Hycap Management, Inc. is the sole general partner) (Delaware) Hawaiian Electric Industries Capital Trust I (a business trust) (Delaware) Hawaiian Electric Industries Capital Trust II (a business trust) (Delaware) (inactive) Hawaiian Electric Industries Capital Trust III (a business trust) (Delaware) (inactive) The Old Oahu Tug Service, Inc. (Hawaii) 84 HEI Exhibit 21.1 (Page 2 of 2) Hawaiian Electric Industries, Inc. SUBSIDIARIES OF THE REGISTRANT (continued) DISCONTINUED OPERATIONS: HEI Power Corp. (Hawaii) HEI Power Corp. Saipan (Commonwealth of the Northern Mariana Islands) HEI Power Corp. International (Cayman Islands) HEIPC Cambodia Ventures (Cayman Islands) HEIPC Phnom Penh Power (Limited), LLC (Cayman Islands) HEI Power Corp. Philippines (Cayman Islands) HEIPC Philippine Ventures (Cayman Islands) HEIPC Philippine Development, LLC (Cayman Islands) Lake Mainit Power, LLC (Cayman Islands) HEIPC Bulacan I, LLC (Cayman Islands) HEIPC Bulacan II, LLC (Cayman Islands) HEI Power Corp. China (Republic of Mauritius) Dafeng Sanlian Cogeneration Co., Ltd. (People's Republic of China) (76% owned by HEI Power Corp. China) HEI Power Corp. China II (Republic of Mauritius) United Power Pacific Company Limited (Republic of Mauritius) Baotou Tianjiao Power Co., Ltd. (People's Republic of China) (75% owned by United Power Pacific Company Limited) HEI Power Corp. China III (Republic of Mauritius) HEI Power Corp. China IV (Republic of Mauritius) HEI Investments, Inc. (Hawaii) (activity of leverage leases included in continuing operations) HEIPC Philippines Holding Co. (Republic of the Philippines) EPHE Philippines Energy Company, Inc. (Republic of the Philippines) (50% owned by HEIPC Philippines Holding Co.) East Asia Power Resources Corporation (Republic of the Philippines) (approximately 91.7% owned by EPHE Philippines Energy Company, Inc.) East Asia Diesel Power Corporation (Republic of the Philippines) Duracom Mobile Power Company (Republic of the Philippines) (40% owned by East Asia Diesel Power Corporation) Malama Pacific Corp. (Hawaii) Malama Development Corp. (Hawaii) Malama Mohala Corp. (Hawaii) 85 HEI Exhibit 21.2 Hawaiian Electric Company, Inc. SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiaries of the registrant as of March 13, 2002. The state/place of incorporation or organization is noted in parentheses. Maui Electric Company, Limited (Hawaii) Hawaii Electric Light Company, Inc. (Hawaii) HECO Capital Trust I (a business trust) (Delaware) HECO Capital Trust II (a business trust) (Delaware) 86 HEI Exhibit 23 [KPMG LLP letterhead] Accountants' Consent -------------------- The Board of Directors Hawaiian Electric Industries, Inc.: We consent to incorporation by reference in Registration Statement Nos. 333-18809 and 333-56312 on Form S-3 and Registration Statement Nos. 33-65234, 333-05667 and 333-02103 on Form S-8 of Hawaiian Electric Industries, Inc., and Registration Statement Nos. 333-18809-01, 333-18809-02, 333-18809-03 and 333-18809-04 on Form S-3 of Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III and HEI Preferred Funding, LP of our report dated January 23, 2002, relating to the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001, which report is incorporated by reference in the 2001 annual report on Form 10-K of Hawaiian Electric Industries, Inc. We also consent to incorporation by reference of our report dated January 23, 2002 relating to the financial statement schedules of Hawaiian Electric Industries, Inc. in the aforementioned 2001 annual report on Form 10-K, which report is included in said Form 10-K. Our reports refer to a change to the accounting method for derivative instruments and hedging activities. /s/ KPMG LLP Honolulu, Hawaii March 19, 2002 87 HECO Exhibit 99.2 Hawaiian Electric Company, Inc. RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, ---------------------------------------- (in thousands) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------- Operating income from regulated and nonregulated activities before income taxes (per HEI Consolidated Statements of Income)............................................................ $ 193,945 $ 193,091 $ 174,714 Deduct: Income taxes on regulated activities............................... (55,434) (55,213) (48,281) Revenues from nonregulated activities.............................. (4,992) (6,535) (4,881) Add: Expenses from nonregulated activities.............................. 1,813 1,818 1,289 ----------------------------------------- Operating income from regulated activities after income taxes (per HECO Consolidated Statements of Income)....................... $ 135,332 $ 133,161 $ 122,841 ========================================
88 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 signatures of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof. HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC. (Registrant) (Registrant) By /s/ Robert F. Mougeot By /s/ Richard A. von Gnechten --------------------------------------- ----------------------------------- Robert F. Mougeot Richard A. von Gnechten Financial Vice President, Treasurer and Financial Vice President of HECO Chief Financial Officer of HEI (Principal Financial Officer of HEI) (Principal Financial Officer of HECO) Date: March 19, 2002 Date: March 19, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities indicated on March 19, 2002. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named companies and any subsidiaries thereof. Signature Title - --------------------------------- --------------------------------------- /s/ Robert F. Clarke Chairman, President and Director of HEI - --------------------------------- Robert F. Clarke Chairman of the Board of Directors of HECO (Chief Executive Officer of HEI) /s/ T. Michael May Director of HEI and HECO - --------------------------------- T. Michael May President and Director of HECO (Chief Executive Officer of HECO) /s/ Robert F. Mougeot Financial Vice President, Treasurer and - --------------------------------- Robert F. Mougeot Chief Financial Officer of HEI (Principal Financial Officer of HEI) /s/ Curtis Y. Harada Controller of HEI - --------------------------------- Curtis Y. Harada (Principal Accounting Officer of HEI) 89 SIGNATURES (continued) Signature Title - --------------------------------- ------------------------------------- /s/ Richard A. von Gnechten Financial Vice President - --------------------------------- (Principal Financial Officer of HECO) Richard A. von Gnechten /s/ Ernest T. Shiraki Controller of HECO - --------------------------------- (Principal Accounting Officer of HECO) Ernest T. Shiraki /s/ Don E. Carroll Director of HEI - --------------------------------- Don E. Carroll /s/ Constance H. Lau Director of HEI - --------------------------------- Constance H. Lau /s/ Victor Hao Li Director of HEI - --------------------------------- Victor Hao Li /s/ Bill D. Mills Director of HEI - --------------------------------- Bill D. Mills /s/ A. Maurice Myers Director of HEI - --------------------------------- A. Maurice Myers 90 SIGNATURES (continued) Signature Title - ----------------------------------- ---------------------------------------- /s/ Diane J. Plotts Director of HEI and HECO - ----------------------------------- Diane J. Plotts /s/ James K. Scott Director of HEI and HECO - ----------------------------------- James K. Scott /s/ Oswald K. Stender Director of HEI - ----------------------------------- Oswald K. Stender /s/ Anne M. Takabuki Director of HECO - ----------------------------------- Anne M. Takabuki /s/ Barry K. Taniguchi Director of HECO - ----------------------------------- Barry K. Taniguchi /s/ Kelvin H. Taketa Director of HEI - ----------------------------------- Kelvin H. Taketa /s/ Jeffrey N. Watanabe Director of HEI and HECO - ----------------------------------- Jeffrey N. Watanabe 91 EX-3.II 3 dex3ii.txt HEI - AMENDED & RESTATED BY-LAWS HEI Exhibit 3(ii) ----------------- AMENDED AND RESTATED BY-LAWS OF HAWAIIAN ELECTRIC INDUSTRIES, INC. March 19, 2002 ARTICLE I NAME AND SEAL ------------- Section 1. The name of the corporation shall be HAWAIIAN ELECTRIC INDUSTRIES, INC. Section 2. The seal of the corporation shall be in such form as the board of directors shall determine from time to time. ARTICLE II STOCKHOLDERS ------------ Section 1. Each meeting of the stockholders shall be held at the principal office of the corporation in Honolulu, Hawaii, unless some other place in Honolulu is stated in the notice of meeting. Section 2. The annual meeting of the stockholders shall be held on such date and time in the months of March, April, May or June as the chairman of the board of directors, or in the chairman's absence or disability, the president may designate in each year, and if the chairman of the board of directors, or the president, as the case may be, shall fail to designate such date before the 1st day of April in any year then the annual meeting for that year shall be held on the fourth Tuesday in April at 10 o'clock a.m. At the annual meeting the stockholders shall elect the directors and auditor to hold office until the next annual meeting at which they are to be elected or until their successors shall be duly elected and qualified, and may transact any general business as is properly brought before the meeting in accordance with these By-laws. No business may be transacted at the annual meeting of stockholders, other than business that is either (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors (or any duly authorized committee thereof), (ii) otherwise properly brought before the annual meeting by or at the direction of the board of directors (or any duly authorized committee thereof) or (iii) otherwise properly brought before the annual meeting by any stockholder of the corporation (a) who is a stockholder of record on the date of the giving of the notice provided for in this Section 2 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (b) who complies with the notice procedures set forth in this Section 2. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the secretary of the corporation, which notice is not withdrawn by such stockholder at or prior to such annual meeting. To be timely, a stockholder's notice to the secretary must be delivered to or mailed and received at the principal executive offices of the corporation not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class and number of shares of capital stock of the corporation which are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. 2 No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 2; provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 2 shall be deemed to preclude discussion by any stockholder of any such business. If the chairman of the board of directors, or the president, as the case may be, of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the chairman or president shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. Section 3. Special meetings of stockholders shall be called by the secretary at any time upon request of the chairman of the board of directors, the president, any two directors of the corporation or the holders of not less than fifty-one percent of the issued and outstanding common stock of the corporation. A request must contain a brief description of the business to be brought before the special meeting by the person making the request, the reasons for conducting such business at such meeting and any material interest of the person making the request in such business. At any special meeting such business shall be brought before the stockholders and may be transacted as is specified in the notice for such meeting, except as provided in Section 9 of Article III of these By-laws. Section 4. Notices of all stockholders' meetings shall specify the class or classes of stock entitled to vote at such meeting, the place, day and hour of the meeting, and whether annual or special. Notice of each meeting of stockholders shall be given by mailing the same at least ten or fifteen (as hereinafter prescribed) days before the date set for such meeting, postage prepaid, and addressed to each common stockholder at the stockholder's address as it appears upon the books of the corporation, in which case such mailing shall constitute sufficient notice to stockholders; provided, however, that whenever the holders of preferred stock have a right to vote at a stockholders' meeting the notice of such meeting shall be given by mailing the same at least ten or fifteen (as hereinafter prescribed) days before the date set for such meeting, postage prepaid, and addressed to each common and preferred stockholder at the stockholder's address as it appears upon the books of the corporation, in which case such mailing shall constitute sufficient notice to stockholders. All notices of stockholders' meetings mailed to stockholders whose addresses as they appear upon the books of the corporation are in said Honolulu shall be mailed at least ten days before the date set for the related meeting. All notices of stockholders' meetings mailed to stockholders whose addresses as they appear upon the books of the corporation are not in said Honolulu shall be mailed at least ten days before the date set for the related meeting if the same are mailed air mail, postage 3 prepaid, and at least fifteen days before the date set for the related meeting if the same are mailed ordinary first class mail, postage prepaid. Non-receipt of any mailed notice shall not invalidate any business done at any meeting at which a quorum shall be present. Section 5. Subject to the provisions set forth below, the holders of a majority of the shares of capital stock of the corporation outstanding and entitled to vote, present in person or by proxy at any meeting of stockholders, shall constitute a quorum for the transaction of business, and, if a quorum is present, directors shall be elected by a plurality of the votes cast by the shares entitled to vote in the election at the meeting and action of matters other than the election of directors shall be taken if the votes cast favoring the action exceed the votes cast opposing the action. Each share of common stock shall be entitled to one vote, subject, however, to such limitation or loss of right as may be provided in resolutions which may be adopted from time to time creating issues of preferred stock or otherwise. Whenever shares of preferred stock shall be outstanding and the holders of such shares shall be entitled to vote, each share of preferred stock shall be entitled to one vote unless the resolution creating the issue of preferred stock shall otherwise provide. Where shares of preferred stock shall be outstanding and shall be entitled to vote and the holders of common stock likewise entitled to vote, each share of common stock outstanding shall count as one vote (unless the resolution creating the issue of preferred stock shall otherwise provide) and each share of preferred stock outstanding shall count as one vote in determining the presence or absence at any meeting of a majority of outstanding shares and in determining whether the holders of a specific proportion of the capital stock outstanding have approved or disapproved of any action. If any class of stock of the corporation shall by the terms of its issuance be not entitled to vote or if any class of stock by virtue of any resolution authorizing the issuance of preferred stock loses its right to vote, then such stock shall not be counted as a part of the issued and outstanding stock of the corporation for the purpose of determining the presence or absence of a quorum at any meeting or whether or not the holders of a specified proportion of the capital stock outstanding have approved or disapproved of any action. Whenever pursuant to the provisions of the resolutions authorizing the issuance of shares of preferred stock the holders of the preferred stock shall vote as a class and the holders of the common stock shall vote as a class, the holders of a majority of the shares of each class outstanding shall constitute a quorum with respect 4 to the voting of such class. Subject to the other provisions of this Section 5, if a quorum of the class is present, action on matters other than the election of directors is taken by the class if the votes cast within the class favoring the action exceed the votes cast opposing the action. If there is no quorum at any meeting the stockholders present in person or by proxy at such meeting may adjourn from time to time to obtain the attendance of a quorum and no notice of any such adjournment need be given. The provisions of this Section 5 of Article II are subject to any provisions of law or of the Articles of Incorporation or any resolution authorizing the issuance of shares of preferred stock or of these By-laws requiring with respect to any matters the approval or consent of designated percentages of the outstanding shares of stock or of the outstanding shares of any class thereof, or limiting or restricting the right of any class or classes of stock to vote with respect to any matters. Section 6. Any stockholder may in writing authorize any person or corporation, one or more, to vote as the proxy or proxies of such stockholder at any meeting or meetings of the corporation, provided, however, that such authorization in writing must be filed with or presented to the corporation prior to or at any meeting or meetings at which such proxy or proxies may act pursuant thereto; provided, further, that, if two or more persons are named as proxies by or on behalf of the same stockholder, then at the sole discretion of the presiding officer of the meeting, the presiding officer may limit attendance at the meeting to one person so named. Any proxy authorization given pursuant to this section shall be valid and effective until written revocation thereof is filed with the corporation and the presence of a stockholder at any meeting with respect to which the stockholder has submitted a written proxy shall not of itself nullify such proxy. If any stockholder who has given a proxy is present at a meeting of stockholders, such proxy, unless the stockholder declares otherwise, shall be suspended during the time the stockholder is in attendance at the meeting. Before any person is entitled to vote, either as a stockholder or as the representative of a stockholder, any stock of the corporation, at the secretary's discretion, the secretary may require such reasonable evidence as to the identity or the authority of such person to vote the stock of the corporation as the secretary may deem advisable. Without limiting the manner in which a stockholder may authorize another person or persons to act for him or her as proxy, either of the following shall constitute a valid means by which a stockholder may grant such authority: (a) a stockholder may execute a writing authorizing another person or persons to act for him or her as proxy which may be accomplished by the stockholder or his or her authorized attorney-in- 5 fact, officer, director, employee or agent signing such writing or causing the stockholder's signature to be affixed to such writing by any reasonable means, including without limitation by facsimile signature, or (b) a stockholder may authorize another person or persons to act for him or her as proxy by transmitting or authorizing the transmission of a telegram, cablegram, facsimile, or other means of electronic transmission to the person or persons who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or similar agent duly authorized by the person or persons who will be the holder of the proxy to receive such transmission, provided that any such transmission shall specify that the transmission was authorized by the stockholder. Section 7. An executor, administrator, guardian or trustee may vote in person or by proxy at any meeting of the corporation the stock of the corporation held by that person in such capacity, whether or not such stock shall have been transferred to that person's name on the books of the corporation. In case the stock shall not have been so transferred to that person's name on the books of the corporation that person shall, as a prerequisite to so voting, file with or present to the corporation a certified copy of that person's letters as such executor, administrator or guardian, or that person's appointment or authority as trustee. In case there are two or more executors, administrators, guardians or trustees, all or a majority of them may vote the stock in person or by proxy at any meeting of the corporation. Section 8. The duly authorized representative of another corporation owning stock in the corporation or having authority to vote stock of another stockholder of the corporation shall be entitled to vote the stock so owned or represented. Section 9. The stockholders having voting rights who shall be entitled to vote at any meeting of stockholders may be determined by Section 2 of Article XIV of these By-laws. Section 10. Whenever the corporation shall have a class of equity securities registered pursuant to the Securities Exchange Act of 1934 which are listed on a national securities exchange or traded over-the-counter on a national securities market of the National Association of Securities Dealers, Inc. Automated Quotation System, no holder of shares of any class of capital stock of the corporation shall be entitled to cumulate votes in the election of directors. 6 Section 11. The officer or agent having charge of the corporation's stock transfer books shall make a complete record of the shareholders entitled to vote at any meeting of shareholders or adjournment thereof, in accordance with the provisions of Section 415-31 of the Hawaii Business Corporation Act as in effect on June 19, 2001. Such record shall be produced and kept open at the time and place of the shareholders' meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof, and such record shall not be produced and kept open for such inspection or copying at any other time and place except as may be required pursuant to Section 415-52 of the Hawaii Business Corporation Act as in effect on June 19, 2001. Failure to comply with the requirements of this Section 11 shall not affect the validity of any action taken at the meeting. ARTICLE III BOARD OF DIRECTORS ------------------ Section 1. There shall be a board of directors to consist of not less than five (5) nor more than eighteen (18) members, who need not be stockholders, the exact number of directors to be determined from time to time by resolution adopted by the affirmative vote of a majority of the entire board. The directors, other than directors elected by the holders of preferred stock or any series of preferred stock voting separately as a class, shall be divided into three classes, designated Class I, Class II and Class III. Each class of such directors shall consist, as nearly as may be possible, of one-third of the total number of such directors constituting the entire board. Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the director was elected; provided, however, that each initial director in Class I shall hold office until the annual meeting of stockholders in 1988; each initial director in Class II shall hold office until the annual meeting of stockholders in 1989; and each initial director in Class III shall hold office until the annual meeting of stockholders in 1990. Notwithstanding the foregoing, each director shall serve until his successor is duly elected and qualified, or until his retirement, death, resignation or removal. If the number of directors is changed, other than to change the number of directors to be elected by the holders of preferred stock or any series of preferred stock, voting separately as a class, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors of any class of directors shorten the term of any incumbent director of any class of directors. 7 In the event holders of any preferred stock or any series of preferred stock are entitled to elect directors voting separately as a class, such holders shall be entitled to elect the number of directors provided for in the resolution authorizing the issuance of such stock subject to and upon the terms and conditions of such resolution, notwithstanding the number of directors fixed by the board of directors as provided for in this section of Article III. Section 2. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the corporation, except as may be otherwise provided in the corporation's Articles of Incorporation with respect to the rights of holders of preferred stock to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the board of directors may be made at any annual meeting of stockholders, or at any special meeting of stockholders called for the purpose of electing directors, (i) by or at the direction of the board of directors (or any duly authorized committee thereof) or (ii) by any stockholder of the corporation (a) who is a stockholder of record on the date of the giving of the notice provided for in this Section 2 and on the record date for the determination of stockholders entitled to vote at such meeting and (b) who complies with the notice procedures set forth in this Section 2. In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the secretary of the corporation, which notice is not withdrawn by such stockholder at or prior to the meeting of stockholders. To be timely, a stockholder's notice to the secretary must be delivered to or mailed and received at the principal executive offices of the corporation (a) in the case of the annual meeting, not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. 8 To be in proper written form, a stockholder's notice to the secretary must set forth (i) as to each person whom the stockholder proposes to nominate for election as a director (a) the name, age, business address and residence address of the person, (b) the principal occupation or employment of the person, (c) the number of shares of capital stock of the corporation which are owned beneficially or of record by the person and (d) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (ii) as to the stockholder giving the notice (a) the name and record address of such stockholder, (b) the number of shares of Capital Stock of the corporation which are owned beneficially or of record by such stockholder, (c) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (d) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (e) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 2. If the chairman of the board of directors, or the president, as the case may be, of the annual meeting determines that a nomination was not made in accordance with the foregoing procedures, the chairman or president shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. Section 3. Each meeting of the board of directors shall be held at the principal office of the corporation in Honolulu, Hawaii, unless some other place is stated in the notice of meeting. A meeting of the board of directors elected at an annual meeting of stockholders shall be held at the place of such annual meeting and immediately or as soon as practicable thereafter, and no notice thereof shall be necessary. 9 Section 4. The board of directors may establish regular meetings which shall be held in such places and at such times as it may from time to time by vote determine, and when any such meeting or meetings shall be so determined no further notice thereof shall be required. Section 5. Special meetings of the board of directors may be called at any time by the chairman of the board of directors, or by the president or by any two directors. Section 6. Except as otherwise expressly provided, notice of any meeting of the board of directors shall be given to each director by the secretary or by the person calling the meeting, by advising the director by telephone, by word of mouth or by leaving written notice of such meeting with the director or at the director's residence or usual place of business not later than the day before the meeting. Non-receipt of any such notice shall not invalidate any business done at any meeting at which a quorum is present. No notice of a meeting need be given to any director who is at the time absent from the State of Hawaii. The presence of any director at any meeting shall be the equivalent of a waiver of the requirement of the giving of notice of said meeting to such director. Section 7. A majority of the board of directors shall constitute a quorum for the transaction of business, except that a minority of the board may fill vacancies in the board as provided in Section 8 of this Article III. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. Section 8. In case of any vacancies due to death, incapacity, resignation or otherwise in the board of directors, the remaining members of the board of directors (although less than a majority thereof) may fill the same by the affirmative vote of a majority of such remaining members, subject, however, to the provisions of Section 9 of this Article III. Section 9. The stockholders of the corporation may at any special meeting of the stockholders remove from office any director or directors, for cause, and in the case of any such removal any vacancies on the board of directors arising from such removal which are not filled by the stockholders at such special meeting shall be filled by the remaining directors in accordance with the provisions of Section 8 of this Article III. In addition, the board of directors of the corporation, by the affirmative vote of a majority of the whole board, may remove from office any director or directors, for cause, and may fill the vacancies arising from such removal in accordance with the provisions of Section 8 of this Article III. Directors may not be 10 removed except for cause as provided in this Section 9. "Cause" shall mean malfeasance in office, harassment of other directors or the officers or employees of the corporation, or other conduct which, in the opinion of the stockholders or the majority of the whole board of directors, is inimical or prejudicial to the interest of the corporation. Section 10. The board of directors may create and appoint from its own membership such committees as it deems desirable, which shall have such functions and authority as the board of directors shall determine. Section 11. Members of the board of directors or of a committee of the board of directors may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time, and participating in a meeting pursuant to this provision shall constitute presence in person at such meeting. Section 12. Unless otherwise provided by law, any action required or permitted to be taken at any meeting of the board of directors, or of a committee of the board of directors, may be taken without a meeting, if all of the directors or all of the members of the committee, as the case may be, sign a written consent or written consents setting forth the action taken or to be taken, at any time before or after the intended effective date of such action. Such consent or consents shall be filed with the minutes of directors' meetings or committee meetings, as the case may be, and shall have the same effect as a unanimous vote. Section 13. The only limitation on the power and authority of the board of directors to determine the number of directors is that there shall be not less than five (5) nor more than eighteen (18) members. There shall be no other limitations, whether numerical, based on percentage increase or decrease in the number of directors, or otherwise, on the power and authority of the board of directors to determine the number of directors. 11 ARTICLE IV OFFICERS -------- The officers of the corporation shall be a president, one or more vice presidents, a treasurer, a controller, and a secretary. There may also be a chairman of the board of directors appointed from time to time by the board of directors from its own members. The offices of chairman and President may be held by the same person and any two of the offices of vice president, treasurer, controller and secretary may be held by the same person. The officers shall be appointed annually by the board of directors at the first meeting thereof after the annual or special meeting of the stockholders at which the board of directors is elected, and shall hold office for one year and thereafter until their successors shall be duly appointed and qualified; provided, that the number of vice presidents may be changed from time to time by the board of directors at any meeting or meetings thereof and if increased at any time the additional vice president or vice presidents shall be appointed by the board of directors. There may also be such subordinate officers as the board of directors shall appoint. No officer or subordinate officer need be a stockholder and no officer or subordinate officer other than the chairman of the board of directors need be a director of the corporation. ARTICLE V CHAIRMAN OF THE BOARD --------------------- Whenever there shall be a chairman of the board of directors, the chairman shall be an officer of the corporation, the chairman shall preside at all meetings of the stockholders and of the board of directors, and shall have such powers and perform such duties as may be assigned to the chairman of the board from time to time by the board of directors. 12 ARTICLE VI PRESIDENT --------- If there shall be no chairman of the board of directors, or in the absence of the chairman of the board of directors, the president shall preside at meetings of the stockholders and of the board of directors. The president shall exercise general supervision and direction of the business and affairs of the corporation. The president shall, except as may otherwise be provided by resolution of the board of directors, have full authority to vote the shares of stock owned by the corporation at all meetings of other corporations in which the corporation may be a stockholder. The president shall have the powers and perform the duties customarily incidental to the office, and such other duties as may be given to the president elsewhere in these By-laws or as may be assigned to the president from time to time by the board of directors. ARTICLE VII VICE PRESIDENTS --------------- The vice presidents, in such order or according to such system as the board of directors shall determine or adopt, shall assume and perform the duties of the president when the office of president is vacant or whenever the president, for any reason, cannot discharge the duties of the office. The vice presidents of the corporation shall have such other powers and duties as may be given to them elsewhere in these By-laws or as may be assigned to them from time to time by the board of directors or by the president. ARTICLE VIII TREASURER --------- The treasurer shall have the powers and perform the duties customarily incidental to the office and such other powers and duties as may be given to the treasurer elsewhere in these By-laws or as may be assigned to the treasurer from time to time. In the absence or disability of the treasurer, or if that office is vacant, the treasurer's duties may be performed by the controller, the secretary or by an assistant treasurer. The directors may by resolution authorize the controller, the secretary or an assistant treasurer equally with the treasurer to have any or all of the powers and to perform any or all of the duties given to the treasurer in these By-laws. 13 ARTICLE IX CONTROLLER ---------- The controller shall have the powers and perform the duties customarily incidental to the office and such other powers and duties as may be given to the controller elsewhere in these By-laws or as may be assigned to the controller from time to time. In the absence or disability of the controller, or if that office is vacant, the controller's duties may be performed by the treasurer, secretary or by an assistant controller. The directors may by resolution authorize the treasurer, the secretary or an assistant controller equally with the controller to have any or all of the powers and to perform any or all of the duties given to the controller in these By-laws. ARTICLE X SECRETARY --------- The secretary shall have the powers and perform the duties customarily incidental to the office; the secretary shall give notice of all meetings of the stockholders whenever requested to do so by the person thereunto duly authorized, and shall have such other powers and duties as may be given elsewhere in these By-laws or as may be assigned to the secretary from time to time. In the absence or disability of the secretary, or if that office is vacant, the secretary's duties may be performed by the treasurer, the controller or by an assistant secretary. The directors may by resolution authorize the treasurer, the controller or an assistant secretary equally with the secretary to have any or all of the powers and to perform any or all of the duties given to the secretary in these By-laws. ARTICLE XI SUBORDINATE OFFICERS, AGENTS AND EMPLOYEES ------------------------------------------ Section 1. The board of directors may appoint assistant vice presidents, assistant treasurers, assistant controllers, and assistant secretaries and such other subordinate officers and such agents as may be deemed proper, who shall hold their positions at the pleasure of the board of directors and who shall have such powers and duties as may be determined by the board of directors. The authority to appoint or employ and to discharge subordinate officers and agents and to fix their powers and duties may be delegated by the board of directors to the president or any officer or officers of the corporation. The officer to whom the power to appoint subordinate officers is delegated by the board of directors shall report to the board the names and titles of all subordinate officers appointed by such officer. Any officer of the corporation may also be a subordinate officer, agent or employee. 14 Section 2. The salaries and compensation of all officers, subordinate officers and agents shall be determined by the board of directors. The authority to fix the salaries and compensation of subordinate officers and agents may be delegated by the board of directors to the president. Section 3. The president shall have the control of all employees and shall determine the compensation of all employees other than that of the officers, subordinate officers and agents. ARTICLE XII REMOVALS AND VACANCIES ---------------------- Section 1. The board of directors of the corporation may at any time remove from office or discharge from employment any officer, or subordinate officer, appointed by it or by any person under authority delegated by it, except insofar as such removal would be contrary to law. Section 2. If the office of any officer, or subordinate officer, shall become vacant for any reason, the board of directors may appoint a successor to serve at its pleasure; provided, however, that if the board of directors shall have delegated to any officer the authority to employ or discharge such subordinate officer, then the officer to whom such authority shall have been delegated shall appoint a successor to the office of such subordinate officer, which shall so have become vacant, to serve during the pleasure of such appointing officer. ARTICLE XIII CERTIFICATES OF CAPITAL STOCK ----------------------------- Section 1. Certificates for shares of the stock of the corporation shall be of such form and device as the board of directors shall from time to time determine but each such certificate shall plainly show its number, the date of issuance, the name of the person to whom it is issued, the number and class of shares, the designation of the series, if any, which such certificate represents, and the par value of each share represented by such certificate, or a statement that the shares are without par value. Section 2. Each certificate of stock shall be sealed with the corporate seal and signed by the president or by a vice president and also by the secretary or an assistant secretary or by the treasurer or an assistant treasurer; provided, however, that the board of directors may provide that stock certificates which are signed by a transfer agent or by a registrar may be sealed with only the facsimile seal of the corporation and signed on behalf of the corporation with only the facsimile signatures 15 of its officers and subordinate officers as above designated. In case any such officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if such officer had not ceased to be such at the date of its issue. ARTICLE XIV TRANSFER OF STOCK ----------------- Section 1. Transfer of shares of stock may be made by endorsement and delivery of the certificate. No such transaction shall be valid, except between the parties thereto, until such new certificate shall have been obtained or the transfer shall have been recorded on the books of the corporation so as to show the date of the transfer, the names of the parties thereto, their addresses, and the number and description of the shares transferred. Upon such surrender of any certificate the same shall be cancelled. Section 2. The books for the transfer of stock may be closed as the board of directors may from time to time determine for a period not exceeding twenty days before the annual or any special meeting of stockholders or before the day appointed for the payment of any dividend, or before any date on which rights of any kind in or in connection with the stock are to be determined or exercised; provided, however, that in lieu of closing the books for the transfer of stock the board of directors may fix in advance a day as the record date for the determination of stockholders to be entitled to have or exercise the right to receive notice, to vote, to receive dividends, or to receive or exercise any such rights. In the event that the books for the transfer of stock are to be closed the secretary may be directed by the board of directors to give such notice of such closing as the board of directors may deem advisable. Section 3. In case of the loss, mutilation or destruction of any certificate for any share or shares of stock of the corporation, a duplicate certificate may be issued upon such terms as the board of directors may prescribe. Section 4. The corporation shall be entitled to treat the holder of record of any share or shares of its capital stock as the holder in fact thereof for any purpose whatsoever and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other claimant thereto. 16 Section 5. The board of directors shall have power and authority to make all such rules and regulations as they deem expedient, concerning the issue, transfer and registration of certificates for shares of the capital stock of the corporation. ARTICLE XV EXECUTION OF INSTRUMENTS ------------------------ All checks, dividend warrants and other orders for the payment of money, drafts, notes, bonds, acceptances, contracts, and all other instruments, except as otherwise provided in these By-laws, shall be signed by such person or persons as shall be provided by general or special resolution of the board of directors, and in the absence of any provision in these By-laws or any such general or special resolution applicable to any such instrument then such instrument shall be signed by any two of the following: the president, any vice president, the treasurer, the controller or the secretary. The board of directors may delegate to any officer or officers of the corporation the power to designate the person or persons to execute any such instrument on behalf of the corporation. The board of directors may provide that any such instrument may be executed on behalf of the corporation by the facsimile signature or signatures of such person or persons as may be designated by the board of directors or by any officer or officers to whom such power of designation may have been delegated by the board of directors; and the board of directors may provide that any such instrument may be sealed with the facsimile seal of the corporation. ARTICLE XVI IMMUNITY AND INDEMNIFICATION ---------------------------- Immunity of directors and officers of the corporation and indemnification by the corporation of directors and officers of the corporation from costs and expenses and liabilities shall be governed by the provisions relating thereto included in the Articles of Incorporation of the corporation and in any indemnity agreements between the corporation and any such director or officer. ARTICLE XVII FISCAL YEAR ----------- The fiscal year of the corporation shall be the calendar year. 17 ARTICLE XVIII AMENDMENT TO BY-LAWS -------------------- Section 1. These By-laws may be altered, amended or repealed or new By-laws enacted by the affirmative vote of a majority of the entire board of directors or at any regular meeting of the shareholders (or at any special meeting duly called for that purpose) by the affirmative vote of a majority of the shares represented and entitled to vote at such meeting (if notice of the proposed alteration or amendment or any new By-law provision or provisions is contained in the notice of such meeting). Section 2. Notwithstanding anything contained in Section 1 of this Article XVIII to the contrary, either (i) the affirmative vote of the holders of at least 80 percent of the votes entitled to be cast by the holders of all shares of the corporation entitled to vote generally in the election of directors, voting together as a single class, or (ii) the affirmative vote of a majority of the entire board of directors with the concurring vote of a majority of the continuing directors, voting separately and as a subclass of directors, shall be required to alter, amend or repeal, or adopt any provision inconsistent with (a) the second paragraph of Section 2 of Article II relating to business properly brought before an annual meeting, (b) Section 3 of Article II, (c) Section 10 of Article II, (d) Section 1 of Article III, (e) Section 9 of Article III and (f) this Article XVIII. For purposes of this Article XVIII, the term "continuing director" shall mean any member of the board of directors who was a member of the board of directors on April 21, 1987 or who is elected to the board of directors after April 21, 1987, upon the recommendation of a majority of the continuing directors, voting separately and as a subclass of directors on such recommendation. ARTICLE XIX The corporation may issue, whether or not in connection with the issuance and sale of any of its stock or other securities, rights, options or warrants entitling the holders thereof to purchase from the corporation shares of any class or classes of stock. The board of directors shall determine the terms upon which the rights, options, or warrants are issued, their form and content, and the consideration for which the shares are to be issued. The documents evidencing such rights, options or warrants, may include conditions on the exercise of such rights, options or warrants, including conditions that preclude the holder or holders, including any subsequent transferees, of at least a specified percentage of the common shares of the corporation from exercising such rights, options or warrants. 18 EX-10.3B 4 dex103b.txt AMENDMENT NO. 1 TO THE SECOND AMENDED AND RESTATED POWER PURCHASE AGREEMENT DATED 11/5/99 HECO Exhibit 10.3(b) -------------------- AMENDMENT NO. 1 TO THE SECOND AMENDED AND RESTATED POWER PURCHASE AGREEMENT BETWEEN HILO COAST POWER COMPANY AND HAWAII ELECTRIC LIGHT COMPANY, INC. THIS AMENDMENT NO. 1 ("Amendment") is entered as of this 5/th/ day of November, 1999, by and between HILO COAST POWER COMPANY, a Division of Brewer Environmental Industries, LLC ("HCPC") and HAWAII ELECTRIC LIGHT COMPANY, INC., a Hawaii corporation ("HELCO"). WITNESSETH: WHEREAS, HCPC and HELCO are parties to a Second Amended And Restated Power Purchase Agreement dated as of October 4, 1999 ("Amended PPA"), under which HCPC shall sell and HELCO shall purchase capacity and energy from a twenty-two megawatt (22 MW) facility located in Pepeekeo, Hawaii; and WHEREAS, HCPC and HELCO desire to amend portions of Section XVIII of the Amended PPA by this Amendment. NOW THEREFORE, in consideration of the premises and mutual agreements and covenants contained herein, the parties hereby agree as follows: 1. Amendment to Section XVIII "PUC Approval". Paragraph two of Section ----------------------------------------- XVIII is amended by replacing "November 30, 1999" in the second and fourth lines with "December 10, 1999", and by replacing "December 15, 1999" in the eighth line with "December 27, 1999". Paragraph three of Section XVIII is amended by replacing "November 30, 1999" in the second line with "December 10, 1999". 2. Other Terms Not Changed. Except as expressly amended by this ----------------------- Amendment, the Amended PPA shall remain in full force and effect. In the event that a conflict arises between the Amended PPA and this Amendment, this Amendment shall prevail, but the respective documents shall be interpreted to be in harmony with each other where possible. 3. Effective Date. This Amendment shall become effective as of the date -------------- first above written. 4. Counterparts. This Amendment may be executed in counterparts and all ------------ so executed shall constitute one Amendment, binding on both parties thereto, notwithstanding that both parties may not be signatories to the original or the same counterpart. IN WITNESS WHEREOF, HELCO and HCPC have caused this Amendment to be executed by their respective duly authorized officers as of the date first above written. HELCO: HAWAII ELECTRIC LIGHT COMPANY, INC. By: /S/ Edward Y. Hirata Its: Vice President By: /S/ Warren H. W. Lee Its: President 2 HCPC: HILO COAST POWER COMPANY, a Division of Brewer Environmental Industries, LLC, a Hawaii Limited Liability Company By Brewer Environmental Industries Holdings, Inc. By: /S/ Richard T. Hill Its: Vice President 3 EX-10.6A 5 dex106a.txt AMENDMENT NO. 1 TO POWER PURCHASE CONTRACT HECO Exhibit 10.6(a) -------------------- Amendment No. 1 to "Power Purchase Contract Between Hawaiian Electric Co., Inc. and the City & County of Honolulu Dated March 10, 1986 By mutual agreement, Appendix D of the subject Contract is hereby amended to reflect that energy furnished by the Seller to the Company shall be in accordance with the following revised limitations: 1. Except as limited in accordance with Section 8, Appendix A, during the months of June through November, there shall be no off-peak maximum rate of energy delivery, except for circumstances wherein the Company experiences a specific equipment problem which makes it technically impossible for the Company to take the level of output desired by the Seller. In any such circumstances, the Company shall promptly notify the Seller of the specific problem and use its best efforts to allow restoration of the level of output desired by the Seller in a timely manner. 2. During off-peak hours, the Company shall accept from the Seller during the months of December through May, on Monday through Friday up to 40 MW and on Saturday, Sunday, and holidays up to 25 MW. The maximum off-leak dispatch levels noted in this subparagraph 2 shall also be subject to the same exception for equipment problems of the Company noted in subparagraph 1 above, but may also be raised if the Company has a normally base-loaded unit off-line for overhaul. 3. To enhance the Company's ability to accept energy from the Seller, Seller agrees to notify the Company by noon on Wednesday of each week of the expected hourly dispatch level of the Seller's facility for the coming week. If the Seller so desires it and the circumstances permit it, the Company may waive the limitations noted above on a week-to-week basis. This Amendment covers dispatch levels only and is in no way intended to affect the pricing mechanisms established in the Contract. HAWAIIAN ELECTRIC COMPANY, INC. CITY AND COUNTY OF HONOLULU By /s/ Richard K. McQuain 3/7/90 By /s/ Theodore Jung 3-9-90 -------------------------------- -------------------------------- Its Vice President Date Its Director of Finance Date By /s/ Vern E. Cronkhite 3/7/90 By /s/ Sam Callejo 3-12-90 -------------------------------- -------------------------------- Its Vice President Date Its Director & Chief Date Engineer, Department of Public Works EX-10.7C 6 dex107c.txt POWER PURCHASE AGREEMENT NOVATION DATED 11/8/99 HECO Exhibit 10.7(c) -------------------- EXECUTION COPY POWER PURCHASE AGREEMENT NOVATION --------------------------------- This POWER PURCHASE AGREEMENT NOVATION is made and entered into as of the 8/th/ day of November, 1999, by and among Encogen Hawaii, L.P., a Hawaii limited partnership (the "Transferor"), Hamakua Energy Partners, L.P., a Hawaii limited partnership (the "Transferee") and Hawaii Electric Light Company, Inc., a Hawaii corporation (the "Counterparty") with reference to the following: RECITALS -------- WHEREAS, the Transferor and the Counterparty are parties to the Power Purchase Agreement dated as of October 22, 1997 between the Counterparty and the Transferor, as amended by Amendment No. 1 to the Power Purchase Agreement dated as of January 14, 1999 (collectively, the "Power Purchase Agreement") and the Interconnection Agreement dated as of October 22, 1997 between the Counterparty and the Transferor (together with the Power Purchase Agreement, the "Contracts"); WHEREAS, the parties agree to the novation of the Contracts and to the substitution of the Transferee in place of the Transferor as a party to the Contracts upon the terms and conditions of this Agreement; and WHEREAS, the Counterparty consents to the substitution of the Guarantee Agreement dated the same date hereof between the Counterparty and TECO Energy Inc. (the "Replacement Guarantee") in place of the Guarantee Agreement dated October 22, 1997 between the Counterparty and Enserch Corporation (the "Released Guarantee"), upon the terms and conditions of this Agreement. NOW THEREFORE, in consideration of the mutual promises made herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and subject to the terms and conditions set forth herein, the parties agree as follows: ATTACHMENT 1 PAGE 2 OF 9 ARTICLE 1 --------- NOVATION -------- Effective as of November 8, 1999 (the "Closing Date"): (a) the Transferee hereby agrees to accept, observe, perform and discharge all liabilities and obligations of the Transferor howsoever and whensoever arising under the Contracts (prior to or after the date hereof) and to be bound by the terms of the Contracts in every way in place of the Transferor, and Transferee shall be liable for any default or breach of the Contracts whether such default or breach occurs prior to or after the date hereof; (b) the Counterparty releases and discharges the Transferor from further performance under the Contracts and all liabilities, claims and demands howsoever arising under the Contracts (other than in respect of any third party claim relating to any event or circumstance arising prior to the date hereof), and agrees that the Transferee will perform and accept all the obligations and liabilities howsoever and whensoever arising under the Contracts and enjoy all the rights and benefits of the Transferor under the Contracts in place of the Transferor; and (c) the Counterparty hereby agrees with the Transferee, in place of the Transferor, to accept, observe, perform and discharge all of its liabilities and obligations under the Contracts and be bound by the terms of the Contracts in every way. The foregoing agreements of the Counterparty (a) shall not authorize, nor be deemed to authorize, any other or further transfer, assignment or novation of the Contracts, (b) shall not waive nor be deemed to waive any term, covenant, condition or provision of the Contracts, any other instrument in favor of the Counterparty or with respect to the Facility (as defined in the Contracts) and (c) shall not limit or restrict in any way the rights of the Transferee under the Contracts, including its rights to assign the Contracts as required by any Financing Parties (as defined in the Contracts) or in connection with any Financing Documents (as defined in the Contracts). All rights of the Counterparty under the Contracts and any other such instrument or with respect to the Facility (as defined in the Conracts) are expressly reserved. ARTICLE 2 --------- REPLACEMENT OF GUARANTEE ------------------------ Effective as of the Closing Date, the Counterparty hereby consents to the release of the Released Guarantee and consents to the Released Guarantee being replaced by the Replacement Guarantee in satisfaction of the obligations of the Seller (as defined in the Power Purchase Agreement) under Section 21 of the Power Purchase Agreement. ATTACHMENT 1 PAGE 3 OF 9 ARTICLE 3 --------- REPRESENTATIONS AND WARRANTIES ------------------------------ 3.1 Transferor. The Transferor hereby represents and warrants (only ---------- for and as to itself, unless otherwise stated) to the Counterparty that this Power Purchase Agreement Novation has been duly and validly authorized, executed and delivered by it, and, assuming due authorization, execution and delivery thereof by each other party hereto, constitutes its legal, valid and binding obligation, enforceable against it in accordance with the terms hereof subject, as to enforceability of remedies, to limitations imposed by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the enforcement of creditors' rights generally and to general principles of equity, whether the issue of enforceability is considered in a proceeding at law or in equity. 3.2 Transferee. The Transferee hereby represents and warrants (only ---------- for and as to itself, unless otherwise stated) to the Counterparty that this Power Purchase Agreement Novation has been duly and validly authorized, executed and delivered by it, and, assuming due authorization, execution and delivery thereof by each other party hereto, constitutes its legal, valid and binding obligation, enforceable against it in accordance with the terms hereof subject, as to enforceability of remedies, to limitations imposed by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the enforcement of creditors' rights generally and to general principles of equity, whether the issue of enforceability is considered in a proceeding at law or in equity. 3.3 QF Requirements. The Transferee hereby represent and warrant --------------- that the transactions contemplated by this Power Purchase Agreement Novation, including the transfer of the Contracts, shall not affect compliance with the criteria for qualifying cogeneration facilities as set forth in HAR Sections 6- 74-6 and 6-74-7 and 18 CFR Sections 292.205 and 292.206. ARTICLE 4 --------- MISCELLANEOUS ------------- 4.1 No Default. The parties hereto agree that no default or breach ---------- will occur in the performance of the Contracts as a result of the execution of this Power Purchase Agreement Novation. 4.2 Amendments and Waivers. This Power Purchase Agreement Novation ---------------------- may be amended, and the observance of any provision of this Power Purchase Agreement Novation may be waived, only by an instrument in writing specifically stating an intent to amend this Power Purchase Agreement Novation in a specific respect or to waive a specific provision, duly executed by or on behalf of each of the parties hereto. ATTACHMENT 1 PAGE 4 OF 9 4.3 Assignment. No party hereto shall assign any of its rights or ---------- delegate any of its obligations hereunder to any other Person without the prior written consent of each of the other parties hereto. Subject to the foregoing, this Power Purchase Agreement Novation shall be binding upon the parties hereto and their respective successors and assigns. 4.4 Further Assurances. Each party hereto agrees to cooperate in all ------------------ reasonable respects necessary to consummate the transactions contemplated by this Power Purchase Agreement Novation and from time to time to do such acts and things and execute and deliver such documents and instruments as may reasonably be required in order to implement the transactions contemplated hereby. 4.5 Governing Law. THIS POWER PURCHASE AGREEMENT NOVATION SHALL BE ------------- GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF HAWAII, EXCLUDING ANY CONFLICT-OF-LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE GOVERNANCE OR THE CONSTRUCTION OF THIS ACQUISITION AGREEMENT TO THE LAW OF ANOTHER JURISDICTION. 4.6 Entire Agreement. This Power Purchase Agreement Novation ---------------- contains the entire understanding of the parties hereto with respect to the novation of the Contracts, matters herein and supersedes all prior agreements and understandings among the parties hereto with respect to the novation of the Contracts. 4.7 Captions. Titles or captions are inserted in this Power Purchase -------- Agreement Novation only for convenience, and do not define, limit, extend or describe the scope of this Power Purchase Agreement Novation or the intent of any provision hereof. 4.8 Counterparts. This Power Purchase Agreement Novation may be ------------ executed in any number of counterparts and by different parties hereto on separate counterparts, but all of such counterparts together shall constitute one and the same instrument. ATTACHMENT 1 PAGE 5 OF 9 IN WITNESS WHEREOF, the parties hereto have caused this Power Purchase Agreement Novation to be signed by their respective duly authorized officers. TRANSFEROR: ENCOGEN HAWAII, L.P., as Transferor By: Enserch Development Corporation Hawaii, Inc., a Texas Corporation its partner By: /s/ Allan V. Smith --------------------------------------------- Name: Allan V. Smith Title: Vice President By: Jones Hamakua, Inc., a Hawaii Corporation its partner By:_____________________________________________ Name: Title: ATTACHMENT 1 PAGE 6 OF 9 IN WITNESS WHEREOF, the parties hereto have caused this Power Purchase Agreement Novation to be signed by their respective duly authorized officers. TRANSFEROR: ENCOGEN HAWAII, L.P., as Transferor By: Enserch Development Corporation Hawaii, Inc., a Texas Corporation its partner By:_____________________________________________ Name: Title: By: Jones Hamakua, Inc., a Hawaii Corporation its partner By: /s/ William A. Garnett --------------------------------------------- Name: William A. Garnett Title: President ATTACHMENT 1 PAGE 7 OF 9 TRANSFEREE: HAMAKUA ENERGY PARTNERS, L.P., as Transferee By: TPS Hamakua, Inc., a Florida Corporation its partner By: /s/ Richard E. Ludwig -------------------------------------------- Name: Richard E. Ludwig Title: President By: Jones Hamakua, Inc., a Hawaii Corporation its partner By:____________________________________________ Name: Title: ATTACHMENT 1 PAGE 8 OF 9 TRANSFEREE: HAMAKUA ENERGY PARTNERS, L.P., as Transferee By: TPS Hamakua, Inc., a Florida Corporation its partner By:___________________________________________ Name: Title: By: Jones Hamakua, Inc., a Hawaii Corporation its partner By: /s/ William A. Garnett ------------------------------------------- Name: William A. Garnett Title: President ATTACHMENT 1 PAGE 9 OF 9 COUNTERPARTY: HAWAII ELECTRIC LIGHT COMPANY, INC. a Hawaii corporation By: /s/ Warren H. W. Lee ------------------------------------- Name: Warren H. W. Lee Title: President By: /s/ M. M. Egged ------------------------------------- Name: Molly M. Egged Title: Secretary EX-10.7D 7 dex107d.txt GUARANTEE AGREEMENT DATED 11/8/99 HECO Exhibit 10.7(d) -------------------- EXECUTION COPY GUARANTEE AGREEMENT between TECO ENERGY, INC. and HAWAII ELECTRIC LIGHT COMPANY, INC. THIS GUARANTEE AGREEMENT ("Guarantee") is made as of this 8/th/ day of ----- November, 1999 by and between HAWAII ELECTRIC LIGHT COMPANY, INC. ("HELCO"), a Hawaii corporation, with principal offices in Hilo, Hawaii, and TECO Energy, Inc. ("Guarantor"), a Florida corporation, with principal offices in Tampa, Florida. W I T N E S S E T H: - - - - - - - - - - WHEREAS, HELCO is a regulated public utility engaged in the business of generation, transmission and distribution of electric power to customers on the island of Hawaii, Hawaii; and WHEREAS, Hamakua Energy Partners, L.P., a Hawaii limited partnership, with principal offices in Charlotte, North Carolina doing business in Hawaii ("SELLER"), is an affiliate of Guarantor; and WHEREAS, Encogen Hawaii, L.P., a Delaware limited partnership ("ENCOGEN") and HELCO entered into a Power Purchase Agreement, dated as of October 22, 1997 (the "Agreement"), whereby ENCOGEN was obligated to construct, operate and maintain a 60 MW (net) cogeneration facility (the "Facility") at Haina, Hawaii and HELCO was obligated to purchase the electric output from the Facility over a period of thirty (30) years; and WHEREAS, HELCO was willing to enter into the assignment of the Agreement only if the Guarantor enters into this Guarantee with HELCO; and WHEREAS, to induce HELCO to enter into the assignment of the Agreement, Guarantor is willing to enter in this Guarantee with HELCO. NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby represents, warrants, covenants and agrees with HELCO as follows: 1. Definitions. All capitalized terms used herein and not defined ----------- herein, and which are defined in, or by reference in, the Agreement, as the Agreement may be amended from time to time in accordance with its terms, shall have the meanings specified in the Agreement. 2. Guarantee. --------- a. Subject to the limitations contained in Section 3, Guarantor hereby guarantees to HELCO the due and punctual payment, as and when due, of fifty percent (50%) (the "Proportionate Share") of all sums payable by SELLER to HELCO as the result of the nonperformance of obligations under the Agreement or other events or circumstances during the term of the Agreement. This Guarantee is one of two identical Guarantees being provided by Guarantor and J.A. Jones, Inc. in accordance with Section 21.1 of the Agreement, each of which constitutes a several, not joint, obligation of Guarantor and J.A. Jones, Inc., respectively, with respect to any sums payable by SELLER to HELCO under the Agreement. In no event shall HELCO have recourse against Guarantor in excess of the lesser of its Proportionate Share of SELLER's payment obligations or the limits set forth in Section 3 below. b. The Guarantee is a primary and original obligation of Guarantor and is an absolute, unconditional, continuing and irrevocable guarantee and is in no way conditioned or contingent upon any attempt to collect payment from or proceed against SELLER except as stated otherwise herein. This Guarantee shall remain in full force and effect until the earlier to occur of the following events: (i) all of SELLER's obligations under the Agreement including, without limitation, any obligations for breach thereof, have been fulfilled; (ii) this Guarantee has been substituted for in accordance with Section 21.1 of the Agreement, or (iii) the termination of the Agreement; provided, that obligations arising prior to such termination date shall survive - -------- such termination. Any notice required to be given by HELCO to SELLER under the Agreement shall also be given by HELCO to Guarantor at: TECO Energy, Inc. 702 N. Franklin Street Tampa, Florida 33602 (813) 228-1804 (telephone) (813) 228-1328 (facsimile) (or such other address as Guarantor may designate in writing to HELCO). Guarantor shall have the same opportunity to cure defaults by SELLER under the Agreement as SELLER shall have; provided, however, that no time period provided in the Agreement for cure shall be extended or start anew by virtue of this sentence. In the event that the Agreement shall be terminated as a result of the rejection or disaffirmance thereof by any trustee, receiver or liquidating agency of SELLER or any of its properties, in any assignment for the benefit of creditors or any bankruptcy, insolvency, reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar proceeding. Guarantor's obligations hereunder shall continue to the same extent as if such Agreement had not been so rejected or disaffirmed. Guarantor shall, and does hereby waive all rights and benefits which might relieve, in whole or in part, Guarantor from the performance of 2 its duties and obligations hereunder by reason of any such proceeding, and Guarantor agrees that it shall be liable for all sums and obligations guaranteed by this Guarantee without regard to any modification, limitation or discharge of the liability of SELLER that may result from any such proceeding. 3. Guarantee Limits. Guarantor's obligations under Section 2(a) ---------------- hereof in the aggregate shall be limited to the amounts shown below with respect to sums as payable by SELLER to HELCO pursuant to the Agreement as the result of events or circumstances during the period shown opposite such amounts: Period Amount* ------ ------ Until PUC Approval $ -0- From PUC Approval through Closing Date $ 100,000 From the Closing Date through the Phase 2 $ 500,000 In-Service Date From Phase 2 In-Service Date to end of Term $1,500,000 *Guarantor's obligations in any given period shall be reduced by any amounts paid by Guarantor with respect to such obligations in all preceding periods. As used above, "PUC Approval" shall mean the date that the PUC order referred to in Section 23.14 of the Agreement becomes final and non-applicable. 4. Generally. Guarantor shall not be liable under Section 2 of this --------- Guarantee to any extent greater than if it had been the contracting party (in place of SELLER) under the Agreement, and all the representations and warranties made by Guarantor in Section 5 hereof in respect of this Guarantee were true in respect of the Agreement as well as the Guarantee and notwithstanding any bankruptcy or insolvency of SELLER. In addition, Guarantor shall have no obligation under Section 2(a) of this Guarantee for any claim for payment, performance or otherwise attributable to events or circumstances during the period prior to the Phase 2 In-Service Date, not asserted by HELCO in writing within one hundred eighty (180) days after the Phase 2 In-Service Date. 5. Representations and Warranties. Guarantor represents and warrants ------------------------------ as follows: a. Guarantor has full power, authority and legal right to execute and deliver and perform its obligations under this Guarantee. This Guarantee has been duly executed and delivered by Guarantor and constitutes a legal, valid and binding obligation of Guarantor, enforceable in accordance with its terms, except to the extent that such enforcement may be limited by any bankruptcy, reorganization, insolvency, moratorium or similar laws affecting generally the enforcement of creditors" rights from time to time in effect and general principles of equity. 3 b. No consent, authorization or approval of, or filing with, any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or has been required in respect of Guarantor in connection with the execution, delivery or performance by Guarantor of this Guarantee, or the compliance by Guarantor with any of the terms and provisions hereof. c. The execution and delivery of, and performance by Guarantor of its obligations under this Guarantee will not result in a violation of, or be in conflict with, any provision of the articles of incorporation or bylaws of Guarantor, or result in a violation of, or be in conflict with, or constitute a default or an event which would, with notice or lapse of time, or both, become a default under, any mortgage, indenture, contract, agreement or other instrument to which Guarantor is a party or by which it or its property is bound, or result in a violation of, or be in conflict with, or result in a breach of, any term or provision of any judgment, order, decree or aware of any court, arbitration or governmental or public instrumentality binding upon Guarantor or its property, which individually or in the aggregate would materially adversely affect Guarantor's ability to perform its obligations under this Guarantee. d. Guarantor is not in default, and no condition exists which, with notice of lapse of time, or both, would constitute a default by Guarantor under any mortgage, loan agreement, deed or trust, indenture or other agreement with respect thereto, evidence of indebtedness or other instrument of a material nature, to which it is party or by which it is bound, or in violation of, or in default under, any rule, regulation, order, writ, judgment, injunction or decree of any court, arbitration or federal, state, municipal or other governmental authority, commission, board, bureau, agency, or instrumentality, domestic or foreign, which individually or in the aggregate would materially adversely affect Guarantor's ability to perform its obligations under this Guarantee. e. There is no action, suit, proceeding, inquiry or investigation, at law or in equity, or before or by any court, public board or body, pending against Guarantor, or of which Guarantor has otherwise received official notice, or which to the knowledge of Guarantor is threatened against Guarantor, wherein an adverse decision, ruling or finding would have a material adverse effect on the Guarantor's financial position or its ability to perform its obligations under this Guarantee. f. All agreements, representations and warranties contained herein or made in writing by or on behalf of Guarantor in connection with the transaction contemplated hereby shall survive the execution and delivery of this Guarantee. 6. Notice. Guarantor shall give written notice to HELCO and SELLER within ------ ten (10) days after (i) the occurrence of any event or circumstance that results in any of the representations and warranties made by Guarantor in Section 5 ceasing to be accurate, or (ii) the occurrence, with respect to Guarantor, of any of the events specified in paragraphs (10) or (11) of Section 7.1A of the Agreement as constituting an Event of Default upon the occurrence thereof with respect to SELLER. Such notice shall describe, with reasonable particularity, the event or circumstance that has caused such result and shall specify the effect thereof on all representations and warranties of Guarantor that are affected thereby. 4 7. Miscellaneous. ------------- a. Severability. If any term or provision of this Guarantee or the ------------ application thereof to any person, entity or circumstance shall to any extent be invalid or unenforceable, the remainder of this Guarantee, or the application of such term or provision to persons, entities or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term and provision of this Guarantee shall be valid and enforceable to the fullest extent permitted by law. b. No Waiver. Except as specifically provided otherwise herein, the --------- failure of either parry to enforce at any time any of the provisions of this Guarantee, or to require at any time performance by the other party of any of the provisions thereof, shall in no way be construed to be a waiver of such provisions, nor in any way to affect the validity of this Guarantee or any part hereof, or the right of such party thereafter to enforce every such provision. c. Modification. No modification or waiver of all or any part of ------------ this Guarantee shall be valid unless it is reduced to writing and signed by both parties. d. Governing Law and Interpretation. Interpretation and performance -------------------------------- of this Guarantee shall be in accordance with, and shall be controlled by, the laws of the State of Hawaii, other than the laws thereof that would require reference to the laws of any other jurisdiction. e. Counterparts. this Guarantee may be executed in several ------------ counterparts and all such executed counterparts shall constitute one agreement, binding on both parties thereto, notwithstanding that both parties may not be signatories to the original or the same counterpart. f. Successors and Assigns. This Guarantee shall be binding upon ---------------------- Guarantor and its successors and assigns and all persons claiming under or though Guarantor or any such successor or assign, and shall inure to the benefit of, and be enforceable by, HELCO. g. Consolidation. In the event that HELCO brings an action to ------------- enforce this Guarantee during the pendency of any proceeding (arbitration or otherwise) between HELCO and SELLER, Guarantor shall have the option to join such enforcement action with any such pending proceeding. Moreover, Guarantor shall have the option to join any such proceeding first brought against Guarantor with any subsequent proceeding brought against SELLER. In each of the cases described above, such joinder option shall extend until such time as a final judgment is rendered in the relevant proceeding. 5 IN WITNESS WHEREOF, HELCO and Guarantor have caused this Guarantee to be executed by their respective duly authorized officers as of the date first above written. HELCO HAWAII ELECTRIC LIGHT COMPANY, INC. By /s/ Warren H. W. Lee -------------------------------------- Its President -------------------------------------- By /s/ Edward Y. Hirata -------------------------------------- Its Vice President -------------------------------------- Guarantor TECO ENERGY, INC. By /s/ Gordon L. Gillette -------------------------------------- Gordon L. Gillette Vice President-Finance and Chief Financial Officer 6 EX-99.1 8 dex991.txt FOURTH AMENDMENT TO TRUST AGREEMENT HEI Exhibit 99.1 ---------------- FOURTH AMENDMENT TO TRUST AGREEMENT BETWEEN HAWAIIAN ELECTRIC INDUSTRIES, INC. AND FIDELITY MANAGEMENT TRUST COMPANY THIS FOURTH AMENDMENT TO TRUST AGREEMENT, is made and entered into December 31, 2001, by and between Fidelity Management Trust Company (the "Trustee") and Hawaiian Electric Industries, Inc. (the "Sponsor"); WITNESSETH: WHEREAS, the Trustee and the Sponsor heretofore entered into a Trust Agreement dated February 1, 2000, and amended August 1, 2000, November 1, 2000, and April 1, 2001 (the "Trust Agreement") for the Hawaiian Electric Industries Retirement Savings Plan (the "Plan"); and WHEREAS, the Trustee wishes to update the existing stock unitization procedures; and WHEREAS, the Trustee wishes to clarify the fees it receives for certain non-Fidelity mutual funds; and WHEREAS, in furtherance of the foregoing, the Sponsor and the Trustee desire to amend said Trust Agreement as provided for in Section 13 thereunder; NOW THEREFORE, in consideration of the above premises, the Sponsor and the Trustee hereby amend the Trust Agreement by: (1) Amending and restating Section 4 (d) in its entirety, as follows: (d) Sponsor Stock. Trust investments in HEI common stock shall ------------- be made via the HEI Common Stock Fund (the "Stock Fund"). Investments in the Stock Fund shall consist primarily of shares of HEI common stock. The Stock Fund shall also include cash or short-term liquid investments, in accordance with this paragraph, in amounts designed to satisfy daily participant exchange or withdrawal requests. Such holdings will include Colchester Street Trust: Money Market Portfolio: Class I or such other Mutual Fund or commingled money market pool as agreed to in writing by the Sponsor or the PIC and Trustee. To satisfy the Stock Fund's cash needs for participant-directed distributions and exchanges, a target range for cash shall be maintained in the Stock Fund. Such target range is currently 2%, +/-0.2%, and may be changed as agreed to in writing by the Sponsor or the PIC and the Trustee via letter of direction. Subject to its ability to execute open-market trades in HEI common stock or to otherwise trade with the Sponsor, the Trustee shall be responsible for ensuring that the short-term investments held in the Stock Fund falls within the agreed-upon range over time. Each participant's proportional interest in the Stock Fund shall be measured in units of Hawaiian Electric Industries, Inc. Unitized Stock Amendment - 4/th/ Amendment Core/Trust participation, rather than shares of HEI common stock. Such units shall represent a proportionate interest in all of the assets of the Stock Fund, which includes shares of HEI common stock, short-term investments and at times, receivables and payables (such as receivables and payables arising out of unsettled stock trades). The Trustee shall determine a daily net asset value ("NAV") for each unit outstanding of the Stock Fund. Valuation of the Stock Fund shall be based upon: (a) the closing price of the stock on the principal national securities exchange on which the HEI common stock is traded; (b) if such price is unavailable, the latest available price as reported by the principal national securities exchange on which the HEI common stock is traded (the "Closing Price"); or (c) if neither is available, the price determined in good faith by the Trustee. The NAV shall be adjusted for gains or losses realized on sales of HEI common stock, appreciation or depreciation in the value of those shares owned, dividends paid on HEI common stock to the extent not used to purchase additional units of the Stock Fund for affected participants, and interest on the short-term investments held by the Stock Fund, payables and receivables for pending stock trades, receivables for dividends not yet distributed, and payables for other expenses of the Stock Fund, including principal obligations, if any, and expenses that, pursuant to Sponsor direction, the Trustee accrues or pays from the Stock Fund. (i) Acquisition Limit. The Trust will be invested in HEI ----------------- common stock to the extent necessary to comply with investment directions of participants and beneficiaries in accordance with this Agreement. The Sponsor shall be responsible for providing specific direction on any acquisition limits required by the Plan or for Sponsor's compliance with applicable law. (ii) Responsibility of PIC. The PIC is responsible for --------------------- offering the Stock Fund as an investment option under the Plan. The Trustee shall not be liable for any loss, or by reason of any breach of fiduciary responsibility, which arises from the directions of the PIC with respect to the acquisition and holding of HEI common stock, unless the Trustee knew or should have known that the actions to be taken under those directions would be prohibited by ERISA or would be contrary to the terms of this Agreement. (iii) Purchases and Sales of HEI common stock. Unless --------------------------------------- otherwise directed by the Sponsor in writing pursuant to directions that the Trustee can administratively implement, the following provisions shall govern purchases and sales of HEI common stock. 2 (A) Open Market Purchases and Sales. Purchase and ------------------------------- sales of HEI common stock shall be made on the open market in accordance with the Trustee's standard trading guidelines, as they may be amended by the Trustee from time to time, as necessary to honor exchange and withdrawal activity and to maintain the target cash percentage and drift allowance for the Stock Fund, provided that: (1) If the Trustee is unable to purchase or sell the total number of shares required to be purchased or sold on such day as a result of market conditions; or (2) If the Trustee is prohibited by the Securities and Exchange Commission, the New York Stock Exchange or principal exchange on which the HEI common stock is traded, or any other judicial or regulatory body from purchasing or selling any or all of the shares required to be purchased or sold on such day, then the Trustee shall purchase or sell such shares as soon thereafter as administratively feasible. (B) Purchases and Sales from or to Sponsor. If -------------------------------------- directed by the Sponsor or PIC in writing prior to the trading date, the Trustee may purchase or sell HEI common stock from or to the Sponsor if the purchase or sale is for adequate consideration (within the meaning of section 3(18) of ERISA) and no commission is charged. If Sponsor contributions or contributions made by the Sponsor on behalf of the participants under the Plan are to be invested in the Stock Fund, the Sponsor may transfer HEI common stock in lieu of cash to the Trust. In either case, the number of shares to be transferred will be determined by dividing the total amount of HEI common stock to be purchased or sold by the Closing Price of the HEI common stock on the trading date, rounded up to the nearest whole share. (C) Use of an Affiliated Broker. The Sponsor --------------------------- hereby authorizes the Trustee to use Fidelity Capital Markets, a division of National Financial Services LLC ("Capital Markets") to provide brokerage services in connection with any purchase or sale of HEI common stock on the open market, in accordance with directions from Plan participants. Capital Markets shall execute such directions directly or through its affiliates. The provision of brokerage services shall be subject to the following: 3 (1) As consideration for such brokerage services, the Sponsor agrees that Capital Markets shall be entitled to remuneration under this authorization provision in an amount of no more than three and one-fifth cents ($.032) commission on each share of HEI common stock purchased or sold. Any change in such remuneration may be made only by written agreement between Sponsor and Trustee. (2) The Trustee will provide the Sponsor with periodic reports which summarize all securities transaction-related charges incurred with respect to trades of HEI common stock for the Plan. (3) Any successor organization of Capital Markets, through reorganization, consolidation, merger or similar transactions, shall, upon consummation of such transaction, become the successor broker in accordance with the terms of this authorization provision, provided Capital Markets provides advance written notice of such transfer to the Sponsor. (4) The authorization by the Sponsor to use Capital Markets for brokerage services as provided in this Section is terminable at will by the Sponsor, without penalty to the Plan, upon receipt by the Trustee of a written notice of termination, in accordance with Section 11 of this Agreement. (iv) Execution of Purchases and Sales of Units. Unless ----------------------------------------- otherwise directed in writing pursuant to directions that the Trustee can administratively implement, purchases and sales of units shall be made as follows: (A) Subject to subparagraphs (B) and (C) below, purchases and sales of units in the Stock Fund (other than for exchanges) shall be made on the date on which the Trustee receives from the Sponsor or PIC in good order all information, documentation, and wire transfers of funds (if applicable), necessary to accurately effect such transactions. Exchanges of units in the Stock Fund shall be made in accordance with the Exchange Guidelines attached hereto as Schedule "F". (B) Aggregate sales of units in the Stock Fund on any day shall be limited to the Stock Fund's Available Liquidity for that day. For these purposes, Available Liquidity shall mean the amount of short-term investments held in the fund decreased by any outgoing cash for 4 expenses then due, payables for loan principal, and obligations for pending stock purchases, and increased by incoming cash (such as contributions, exchanges in, loan repayments) and to the extent credit is available and allocable to the Stock Fund, receivables for pending stock sales. In the event that the requested sales exceed the Available Liquidity, then transactions shall be processed giving precedence to distributions, loans and withdrawals, and otherwise on a first-in first-out (FIFO) basis, as provided in Schedule "F-1" (the "Specified Hierarchy"). So long as the Stock Fund is open for such transactions, sales of units that are requested but not processed on a given day due to insufficient Available Liquidity shall be suspended until Available Liquidity is sufficient to honor such transactions in accordance with the Specified Hierarchy. (C) The Trustee shall close the Stock Fund to sales or purchases of units, as applicable, on any date on which trading in the HEI common stock has been suspended or substantial purchase or sale orders are outstanding and cannot be executed. (v) Securities Law Reports. The Sponsor or PIC shall be ---------------------- responsible for filing all reports required under Federal or state securities laws with respect to the Trust's ownership of HEI common stock, including, without limitation, any reports required under section 13 or 16 of the Securities Exchange Act of 1934, and shall immediately notify the Trustee in writing of any requirement to stop purchases or sales of HEI common stock pending the filing of any report. The Trustee shall provide to the Sponsor or PIC such information on the Trust's ownership of HEI common stock as the Sponsor or PIC may reasonably request in order to comply with Federal or state securities laws. (vi) Voting and Tender Offers. Notwithstanding any other ------------------------ provision of this Agreement, the provisions of this Section shall govern the voting and tendering of HEI common stock. The Sponsor shall provide and pay for all printing, mailing, tabulation and other costs associated with the voting and tendering of HEI common stock. The Trustee, after consultation with the Sponsor, shall prepare the necessary documents associated with the voting and tendering of HEI common stock. (A) Voting. ------ (1) When the issuer of HEI common stock prepares for 5 any annual or special meeting, the Sponsor shall notify the Trustee at least thirty (30) days in advance of the intended record date (or as soon as administratively feasible) and the Trustee shall furnish to the Sponsor's transfer agent the name, address and social security number of the participants holding units in the Stock Fund, and each participant's interest (in number of shares) as of the record date. The Sponsor shall prepare proxy materials and voting instruction forms to be distributed to participants holding an interest in the Stock Fund. The Sponsor shall provide the Trustee with a copy of any materials provided to the participants and shall certify to the Trustee that the materials have been mailed or otherwise sent to participants. (2) Each participant with an interest in the Stock Fund shall have the right to direct the Trustee as to the manner in which the Trustee is to vote (including not to vote) that number of shares of HEI common stock reflecting such participant's proportional interest in the Stock Fund (both vested and unvested). Directions from a participant to the Trustee concerning the voting of HEI common stock shall be communicated in writing, or by such other means as is agreed upon by the Trustee and the Sponsor. These directions shall be tabulated by an affiliate of the Sponsor or any other organization deemed appropriate by the Sponsor, held in confidence, in accordance with confidentiality procedures established by the Sponsor or PIC. Upon its receipt of the directions, the Sponsor or PIC shall provide the Trustee with an omnibus proxy form and the Trustee shall vote the shares of HEI common stock reflecting the participant's proportional interest in the Stock Fund as directed by the HEIRS participant. The Trustee shall vote shares of HEI common stock reflecting the participant's proportional interest in the Stock Fund for which it received no direction from participants in the same proportion on each issue as it votes those shares reflecting a participant's proportional interest in the Stock Fund for which it received voting directions from participants. The Sponsor or PIC shall notify the Trustee of any situation regarding undue influence including, but not limited to the following: tender offers, exchange offers, contested board elections, mergers and the disposition of corporate assets. In the event of any of the above mentioned actions, directions from a participant concerning the voting of HEI common stock shall be communicated to the Trustee. Directions from a participant to the Trustee concerning the voting of HEI common stock shall be communicated in writing, or by such other means as is agreed upon by the Trustee and Sponsor. These directions shall be held in confidence by the Trustee and shall not be divulged to the Sponsor, or any officer or employee thereof, or any person except (i) as necessary to meet applicable legal requirements, (ii) in the case of any contested proxy solicitation, as may be 6 necessary to permit proper parties to verify the propriety of proxies presented by any person and the results of the voting, and (iii) in the event a shareholder has made a written comment on the proxy form. In addition, the Trustee will provide the Sponsor as reasonably requested by the Sponsor, periodic reports indicating the number of shares voted and not voted. Upon its receipt of the directions, the Trustee shall vote the shares of HEI common stock reflecting the participant's proportional interest in the Stock Fund as directed by the participant. Except as otherwise required by law, the Trustee shall vote shares of HEI common stock reflecting the participant's proportional interest in the Stock Fund for which it has received no direction from the participant in the same proportion on each issue as it votes those shares reflecting the participant's proportional interest in the Stock Fund for which it has received voting directions from participants. (3) Except as otherwise required by law, the Trustee shall vote that number of shares of HEI common stock not credited to participants' accounts in the same proportion on each issue as it votes those shares credited to participants' accounts for which it received voting directions from participants. (B) Tender Offers. ------------- (1) Upon commencement of a tender offer for any securities held in the Trust that are HEI common stock, the Sponsor shall notify each Plan participant with an interest in such HEI common stock of the tender offer and utilize its best efforts to timely distribute or cause to be distributed to the participant the same information that is distributed to all shareholders of HEI common stock in connection with the tender offer, and, after consulting with the Trustee, shall provide and pay for a means by which the participant may direct the Trustee whether or not to tender the HEI common stock reflecting such participant's proportional interest in the Stock Fund (both vested and unvested). The Sponsor shall provide the Trustee with a copy of any material provided to the participants and shall certify to the Trustee that the materials have been mailed or otherwise sent to participants. (2) Each participant with an interest in the Stock Fund shall have the right to direct the Trustee to tender or not to tender some or all of the shares of HEI common stock reflecting such participant's proportional interest in the Stock Fund (both vested and unvested). Directions from a participant to the Trustee concerning the tender of 7 HEI common stock shall be communicated in writing, or by such other means as is agreed upon by the Trustee and the Sponsor. These directions shall be held in confidence by the Trustee and shall not be divulged to the Sponsor, or any officer or employee thereof, or any other person except to the extent that the consequences of such directions are reflected in reports regularly communicated to any such persons in the ordinary course of the performance of the Trustee's services hereunder. However, the Trustee will provide to the Sponsor, as reasonably requested by the Sponsor, periodic reports indicating the number of shares tendered and not tendered. The Trustee shall tender or not tender shares of HEI common stock as directed by the participant. Except as otherwise required by law, the Trustee shall not tender shares of HEI common stock reflecting a participant's proportional interest in the Stock Fund for which it has received no direction from the participant. (3) Except as otherwise required by law, the Trustee shall tender that number of shares of HEI common stock not credited to participants' accounts in the same proportion as the total number of shares of HEI common stock credited to participants' accounts for which it has received instructions from Participants. (4) A participant who has directed the Trustee to tender some or all of the shares of HEI common stock reflecting the participant's proportional interest in the Stock Fund may, at any time prior to the tender offer withdrawal date, direct the Trustee to withdraw some or all of the tendered shares reflecting the participant's proportional interest, and the Trustee shall withdraw the directed number of shares from the tender offer prior to the tender offer withdrawal deadline. Prior to the withdrawal deadline, if any shares of HEI common stock not credited to participants' accounts have been tendered, the Trustee shall redetermine the number of shares of HEI common stock that would be tendered under Section 4(d)(vi)(B)(3) if the date of the foregoing withdrawal were the date of determination, and withdraw from the tender offer the number of shares of HEI common stock not credited to participants' accounts necessary to reduce the amount of tendered HEI common stock not credited to participants' accounts to the amount so redetermined. A participant shall not be limited as to the number of directions to tender or withdraw that the participant may give to the Trustee. (5) A direction by a participant to the Trustee to tender 8 shares of HEI common stock reflecting the participant's proportional interest in the Stock Fund shall not be considered a written election under the Plan by the participant to withdraw, or have distributed, any or all of his withdrawable shares. The Trustee shall credit a proportional share of the proceeds received by the Trustee in exchange for the shares of HEI common stock tendered to the account of each participant who directed the Trustee to tender some or all of the shares reflecting such participant's proportional interest in the Stock Fund. Pending receipt of directions from the participant or the PIC, as provided in the Plan, as to which of the remaining investment options the proceeds should be invested in, the Trustee shall invest the proceeds in the investment option described in Schedule "C". (vii) General. With respect to all rights other than the ------- right to vote, the right to tender, and the right to withdraw shares previously tendered, in the case of HEI common stock credited to a participant's proportional interest in the Stock Fund, the Trustee shall follow the directions of the participant and if no such directions are received, the directions of the Sponsor or PIC. The Trustee shall have no duty to solicit directions from participants. With respect to all rights other than the right to vote and the right to tender, in the case of HEI common stock not credited to participants' accounts, the Trustee shall follow the directions of the Sponsor or PIC. (viii) Conversion. All provisions in this Section 4(d) shall ---------- also apply to any securities received as a result of a conversion of HEI common stock. (2) Amending and restating Schedules "A", "B", and "C" in their entirety, as attached hereto. (3) Amending and restating Schedule "F" in its entirety, as attached hereto. (4) Adding Schedule "F-1" as attached hereto. 9 IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Fourth Amendment to be executed by their duly authorized officers effective as of the day and year first above written. HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, COMPANY INC. PENSION INVESTMENT COMMITTEE By: /s/ Robert F. Mougeot 12/7/01 By: /s/ Carolyn Redden 12/20/01 ----------------------------------- ----------------------------- Robert F. Mougeot Date Vice President Date Chairman By: /s/ Peter C. Lewis 12/7/01 ----------------------------------- Peter C. Lewis Date Secretary 10 Schedule "A" ADMINISTRATIVE SERVICES ----------------------- Administration - -------------- * Establishment and maintenance of participant account and election percentages. * Maintenance of the following plan investment options: - Fidelity Retirement Money Market Portfolio - ASB Money Market Account - HEI Common Stock Fund - Fidelity Puritan Fund - Fidelity Magellan Fund - Fidelity Overseas Fund - Fidelity Freedom 2000 Fund - Fidelity Freedom 2010 Fund - Fidelity Freedom 2020 Fund - Fidelity Freedom 2030 Fund - Fidelity Freedom 2040 Fund - Fidelity Freedom Income Fund - Spartan U.S. Equity Index Fund - MSIF Trust Value Portfolio - Adviser Class - Neuberger Berman Partners Fund - Trust Class - PBHG Emerging Growth Fund - Fidelity U.S. Bond Index Fund - INVESCO Dynamics Fund * Maintenance of the following money classifications: - Salary Reduction - Participant Voluntary - Rollover - HEI Diversified Plan - Employer ASB - Employer Supplemental - IRA - Voluntary HEISOP - Employer HEISOP * Processing of investment option trades * Establishment and maintenance of participant loans The Trustee will provide only the recordkeeping and administrative services set forth on this Schedule "A" and no others. 11 Processing - ---------- * Weekly processing of contribution data and contributions * Daily processing of transfers and changes of future allocations via the telephone exchange system or by such other means as the Sponsor and Trustee may agree to from time to time * Daily processing of withdrawals * Daily and weekly processing of participant data updates via the Plan Sponsor Webstation or by such other means as the Sponsor and Trustee may agree to from time to time Other - ----- * Monthly trial balance * Monthly loan reports * Quarterly administrative reports * Quarterly participant statements via paper or electronic copy * 1099Rs * Account segregation for Qualified Domestic Relations Orders ("QDRO") as directed Sponsor * Account segregation for named beneficiary(ies) due to a participant's death as directed by Sponsor * Excess contributions report * Periodic meetings with Sponsor * Educational services as needed and mutually agreed upon by the Trustee and the Sponsor * Minimum Required Distribution ("MRD") service * Provide employee communications describing available investment options, including multimedia informational materials and group presentations * Fidelity PortfolioPlanner(SM), an internet-based educational service for participants that generates target asset allocations and model portfolios customized to investment options in the Plan(s) based upon methodology provided by Strategic Advisers, Inc., an affiliate of the Trustee. The Sponsor acknowledges that it has received the ADV Part II for Strategic Advisers, Inc. more than 48 hours prior to executing the Trust amendment. * NetBenefits(SM) * Financial reporting to assist in the preparation of Form 5500 HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, COMPANY INC. PENSION INVESTMENT COMMITTEE By: /s/ Robert F. Mougeot 12/7/01 By: /s/ Carolyn Redden 12/20/01 ------------------------------- ------------------------------- Robert F. Mougeot Date Vice President Date Chairman By: /s/ Peter C. Lewis 12/7/01 ------------------------------- Peter C. Lewis Date Secretary 12 Schedule "B" FEE SCHEDULE ------------ Recordkeeping Fees - ------------------ * Annual Participation Fee: $0 per participant. * Minimum Required Distribution (MRD): $25.00 per MRD recipient per year. * Plan Establishment Fee: $2,500.00 * Loan Fee: Establishment fee of $35.00 per loan account; annual fee of $15.00 per loan account.** * Plan Sponsor WebStation (PSW): All User ID fees waived. * Net Benefits: All User ID fees waived. * Non-Fidelity Mutual Funds: .35% annual administrative fee on the following Non-Fidelity Mutual Fund assets which are equity/balanced funds: MSIF Trust Value Portfolio - Adviser Class; Neuberger Berman Partners Fund-Trust Class and the PBHG Emerging Growth Fund; .25% annual administration fee plus an $8.00 per participant fee, subject to a maximum total fee of .35%, on all INVESCO Dynamics Fund assets (to be paid by the Non-Fidelity Mutual Fund vendor). * Other Fees: separate charges for optional nondiscrimination testing, extraordinary expenses resulting from large numbers of simultaneous manual transactions, from errors not caused by Fidelity, reports not contemplated in this Agreement, corporate actions, or the provision of communications materials in hard copy which are also accessible to participants via electronic services in the event that the provision of such material in hard copy would result in an additional expense deemed to be material. ** This fee will be imposed pro rata for each calendar quarter, or any part -------- thereof, that it remains necessary to keep a participant's loan(s) as part of the Plan's records through the calendar yearend for 1099R reporting. 13 Trustee Fees - ------------ Investment Options * Sponsor Stock: 0.10% per annum of such assets in the Trust payable quarterly on the basis of such assets as of the average market value for each calendar quarter. In no event will the fee be less than $10,000 nor more than $35,000 per year. * Others: None. Note: These fees have been negotiated and accepted based on the following ---- Plan characteristics, as of 3/22/01: 1 plan in the relationship, plan assets of $189.9 million, participation of 3,152 participants, Sponsor Stock assets of $44.6 million, total Fidelity actively managed Mutual Fund assets of $105.4 million, total Fidelity nonactively managed Mutual Fund assets of $16.4 million, total Non-Fidelity Mutual Funds and ASB MMA assets of $23.5 million, projected net cash flows of $0.0 million per year, and up to 18 investment options. Subject to Section 13 of the Trust Agreement, fees will be subject to review when the Sponsor requests a change to the Plan and/or the Plan characteristics have changed by +/- 10%. HAWAIIAN ELECTRIC FIDELITY MANAGEMENT TRUST INDUSTRIES, INC. COMPANY BY: HAWAiIAN ELECTRIC INDUSTRIES, INC. PENSION INVESTMENT COMMITTEE By: /s/ Robert F. Mougeot 12/7/01 By: /s/ Carolyn Redden 12/20/01 ------------------------------------ ------------------------------ Robert F. Mougeot Date Vice President Date Chairman By: /s/ Peter C. Lewis 12/7/01 ------------------------------------ Peter C. Lewis Date Secretary 14 Schedule "C" INVESTMENT OPTIONS ------------------ In accordance with Section 4(b), the Named Fiduciary hereby directs the Trustee that participants' individual accounts may be invested in the following investment options: - Fidelity Retirement Money Market Portfolio - ASB Money Market Account - HEI Common Stock Fund - Fidelity Puritan Fund - Fidelity Magellan Fund - Fidelity Overseas Fund - Fidelity Freedom 2000 Fund - Fidelity Freedom 2010 Fund - Fidelity Freedom 2020 Fund - Fidelity Freedom 2030 Fund - Fidelity Freedom 2040 Fund - Fidelity Freedom Income Fund - Spartan U.S. Equity Index Fund - MSIF Trust Value Portfolio - Adviser Class - Neuberger Berman Partners Fund - Trust Class - PBHG Emerging Growth Fund - Fidelity U.S. Bond Index Fund - INVESCO Dynamics Fund The investment option referred to in Section 4(c) and Section 4(d)(v)(B)(5) shall be the ASB Money Market Account. HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, COMPANY INC. PENSION INVESTMENT COMMITTEE By: /s/ Robert F. Mougeot 12/7/01 By: /s/ Carolyn Redden 12/20/01 ---------------------------------- --------------------------------- Robert F. Mougeot Date Vice President Date Chairman By: /s/ Peter C. Lewis 12/7/01 ---------------------------------- Peter C. Lewis Date Secretary 15 Schedule "F" EXCHANGE GUIDELINES ------------------- The following exchange guidelines are currently employed by Fidelity Investments Institutional Operations Company, Inc. (FIIOC). Exchange hours, via a Fidelity participant service representative, are 8:30 a.m. (ET) to 8:00 p.m. (ET) on each business day. A "business day" is any day on which the New York Stock Exchange (NYSE) is open. Exchanges via Voice Response System ("VRS") and the internet at 401k.com (or a successor site), a Fidelity website for Plan participants in Netbenefits, may be made virtually 24 hours a day. FIIOC reserves the right to change these exchange guidelines at its discretion. Note: The NYSE's normal closing time is 4:00 p.m. (ET); in the event the NYSE alters its closing time, all references below to 4:00 p.m. (ET) shall mean the NYSE closing time as altered. Investment Options ------------------ Exchanges Between Investment Options other than Sponsor Stock Fund ------------------------------------------------------------------ Participants may contact Fidelity on any business day to exchange between investment options other than the Sponsor Stock Fund. If the request is confirmed before the close of the market (generally, 4:00 p.m. ET) on a business day, it will receive that day's trade date. Requests confirmed after the close of the market on a business day (or on any day other than a business day) will be processed on a next business day basis. Sponsor Stock Fund ------------------ Provided that the Sponsor Stock Fund is open for purchases and sales of units, the following rules will govern exchanges: Exchanges From all other Investment Options to Sponsor Stock Fund ----------------------------------------------------------------- Participants may contact Fidelity on any business day to exchange from all other investment options into the Sponsor Stock Fund. If the request is confirmed before the close of the market (generally, 4:00 p.m. ET) on a business day, it will receive that day's trade date. Requests confirmed after the close of the market on a business day (or on any day other than a business day) will be processed on a next business day basis. 16 Exchanges From Sponsor Stock Fund to all other Investment Options ----------------------------------------------------------------- Participants may contact Fidelity on any business day to exchange from the Sponsor Stock Fund to all other investment options. If Fidelity receives the request before the close of the market (generally 4:00 p.m. ET) on any business day and Available Liquidity is sufficient to honor the trade after Specified Hierarchy rules are applied, it will receive that day's trade date. Requests received by Fidelity after the close of the market on any business day (or on any day other than a business day) will be processed on a next business day basis, subject to Available Liquidity for such day after application of Specified Hierarchy rules. If Available Liquidity on any day is insufficient to honor the trade after application of Specified Hierarchy rules, it will be suspended until Available Liquidity is sufficient, after application of Specified Hierarchy rules, to honor such trade, and it will receive the trade date and Closing Price of the date on which it was processed. HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, COMPANY INC. PENSION INVESTMENT COMMITTEE By: /s/ Robert F. Mougeot 12/7/01 By: /s/ Carolyn Redden 12/20/01 -------------------------------- ------------------------------- Robert F. Mougeot Date Vice President Date Chairman By: /s/ Peter C. Lewis 12/7/01 -------------------------------- Peter C. Lewis Date Secretary 17 SCHEDULE "F-1" ------------- AVAILABLE LIQUIDITY PROCEDURES FOR UNITIZED SPONSOR STOCK FUND The following procedures shall govern sales of the Sponsor Stock Fund requested for a day on which Available Liquidity is insufficient: 1. Loans, withdrawals and distributions will be aggregated and placed first in the hierarchy. If Available Liquidity is sufficient for the aggregate of such transactions, all such loans, withdrawals and distributions will be honored. If Available Liquidity is not sufficient for the aggregate of such transactions, then such transactions will be suspended, and no transactions requiring a sale of Sponsor Stock Fund units shall be honored for that day. 2. If Available Liquidity has not been exhausted by the aggregate of loans, withdrawals and distributions, then all remaining transactions involving a sale of units in the Sponsor Stock Fund (exchanges out) shall be grouped on the basis of when such requests were received, in accordance with standard procedures maintained by the Trustee for such grouping as they may be amended from time to time. To the extent of Available Liquidity, groups of exchanges out of the Sponsor Stock Fund shall be honored, by group, on a "first in, first out" basis. If Available Liquidity is insufficient to honor all exchanges out within a group, then none of the exchanges out in such group shall be honored, and no exchanges out in a later group shall be honored. 3. Transactions not honored on a particular day due to insufficient Available Liquidity shall be honored, using the hierarchy specified above, on the next business day on which there is Available Liquidity. HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, COMPANY INC. PENSION INVESTMENT COMMITTEE By: /s/ Robert F. Mougeot 12/7/01 By: /s/ Carolyn Redden 12/20/01 -------------------------------- -------------------------------- Robert F. Mougeot Date Vice President Date Chairman By: /s/ Peter C. Lewis 12/7/01 -------------------------------- Peter C. Lewis Date Secretary 18 EX-99.2 9 dex992.txt AMENDMENT 2002-1 TO THE HAWAIIAN ELECTRIC HEI Exhibit 99.2 ---------------- AMENDMENT 2002-1 TO THE HAWAIIAN ELECTRIC INDUSTRIES RETIREMENT SAVINGS PLAN In accordance with Section 8.1 of the Hawaiian Electric Industries Retirement Savings Plan (the "Plan") and resolutions of the Board of Directors of Hawaiian Electric Industries, Inc. adopted January 22, 2002, the Plan is hereby amended as follows: 1. The Introduction is amended by adding the following new paragraph after the first paragraph thereof: The portion of the Plan invested in the Company Stock Fund is designated as an employee stock ownership plan within the meaning of Section 4975 of the Code. 2. Article II of the Plan is amended by adding the following new section at the end thereof: Section 2.6 Contributions to ESOP Component and Non-ESOP Component ------------------------------------------------------------------- To the extent that contributions made pursuant to the foregoing sections are initially invested in the Company Stock Fund in accordance with the Participant investment directions in force at the time such contributions are made, such contributions shall be deemed made to the ESOP Component of the Plan. To the extent that contributions are initially invested in other investment options, such contributions shall be deemed made to the Non-ESOP Component. 3. Section 3.1 of the Plan is amended and restated in its entirety to read as follows : Section 3.1 Section 401(k) Nondiscrimination Rules --------------------------------------------------- (a) ADP Tests. The nondiscriminatory amount test under Section --------- 1.401(a)(4)-1(b)(2) of the Treasury Regulations is met for the salary reduction portions of the Plan if the salary reduction portion of the ESOP Component and the salary reduction portion of the Non-ESOP Component each separately satisfies the actual deferral percentage ("ADP") test of Section 401(k)(3)(ii) of the Code. Contributions to the ESOP Component and Non-ESOP Component shall be determined in accordance with Section 2.6. Effective with the 1997 Plan Year, the Plan uses the prior-year ADP testing method, under which the ADP in the current year for the group of Eligible Employees who are HCEs is compared to the ADP in the previous year for the group of Eligible Employees who were NHCEs in the previous year. The comparative percentages must satisfy one of the following tests: (1) The ADP for the current Plan Year for the group of Eligible Employees who are HCEs is not more than the ADP in the previous Plan Year for the group of Eligible Employees who were NHCEs in the previous Plan Year multiplied by 1.25 [HCE ADP * (NHCE ADP x 1.25)], or [* Denotes less than or equal to] (2) The excess of the ADP for the current Plan Year for the group of Eligible Employees who are HCEs is not more than two percentage points greater than the ADP in the previous Plan Year for the group of Eligible Employees who were NHCEs in the previous Plan Year, and the ADP for the current Plan Year for the group of Eligible --- Employees who are HCEs is not more than twice the ADP in the previous Plan Year for the group of Eligible Employees who were NHCEs in the previous Plan Year [HCE ADP * (NHCE ADP + 2%)] and [HCE ADP * (NHCE ADP --- x 2)]. (b) ADP Rules. --------- (1) The ADP for the ESOP Component or Non-ESOP Component, as the case may be, for a specified group of Eligible Employees for a Plan Year means the average of the ratios (calculated separately for each Eligible Employee in such group) of (i) the amount of the salary reduction contributions actually paid to the ESOP Component or Non-ESOP Component, as the case may be, on behalf of each such Eligible Employee for such Plan Year to (ii) such Eligible Employee's ADP Compensation for such Plan Year. The ADP of an Eligible Employee who is eligible to but does not elect to have salary reduction contributions made to the ESOP Component or Non-ESOP Component, as the case may be, on his or her behalf for a Plan Year shall be zero for that Component. (2) The ADP for each Eligible Employee shall be determined separately with respect to the ESOP Component and the Non-ESOP Component. Contributions to the ESOP Component (determined in accordance with Section 2.6) shall be taken into account only in determining the ADP for the ESOP Component, and contributions to the Non-ESOP Component (determined in accordance with Section 2.6) shall be taken into account only in determining the ADP for the Non-ESOP Component. Except as provided in the foregoing sentences, the ADP for any Eligible Employee who is an HCE for the Plan Year and who is eligible to have contributions allocated to his Account under two or more arrangements described in Section 401(k) of the Code that are maintained by a Participating Employer (other than the ESOP Component and Non-ESOP Component) shall be determined as if such contributions were made under a single arrangement. (3) In calculating the ADP for the group of NHCEs in the previous Plan Year, an Eligible Employee's status as an NHCE shall be determined using the definition of Highly Compensated Employee in effect for the previous Plan Year. (4) For the 2002 Plan Year, which is the first year in which the ESOP Component and Non-ESOP Component must be tested separately, the ADP for the group of NHCEs for the previous Plan Year for each Component shall be deemed to be equal to the ADP for NHCEs for the Plan as a whole for the 2001 Plan Year. [* denotes less than or equal to] 2 The provisions of Section 401(k)(3) of the Code and Section 1.401(k)-1(b) of the Treasury Regulations, as modified by the Small Business Job Protection Act of 1996, are incorporated in the Plan by this reference. (c) Excess Contributions. Effective with the 1997 Plan Year, -------------------- excess contributions are treated as follows: (1) If either or both the ESOP Component or the Non-ESOP Component of the Plan fails to satisfy either of the ADP tests for a Plan Year, the dollar amount of excess contributions for each affected HCE shall be calculated in a manner consistent with Section 401(k)(8)(B) of the Code and Section 1.401(k)-l(f)(2) of the Treasury Regulations, which states that the amount of excess contributions for an HCE is the amount by which such HCE's elective contributions must be reduced for the HCE's actual deferral ratio to equal the highest permitted actual deferral ratio for the year. (2) The excess contributions determined in step (1) shall be totaled and then distributed in accordance with steps (3) and (4). (3) The elective contributions of the HCE with the highest dollar amount of elective contributions shall be reduced by the amount required to cause that HCE's elective contributions to equal the dollar amount of the elective contributions of the HCE with the next highest dollar amount of elective contributions. This amount shall then be distributed to the HCE with the highest dollar amount of elective contributions. However, if a lesser reduction, when added to the total dollar amount already distributed under this step, would equal the total excess contributions for the group, the lesser reduction amount shall be distributed. (4) If the amount distributed under the preceding paragraph is less than the total excess contributions, the steps in the preceding paragraph are repeated until the total excess contributions have been distributed. After the total excess contributions have been distributed, the ADP test is deemed to be satisfied, regardless of whether, if recalculated after the distributions, the ADP test would actually be satisfied. (5) Any excess contributions shall be distributed no later than the last day of the Plan Year following the Plan Year in which the excess contributions were made. To avoid the 10% excise tax under Section 4979 of the Code, the Administrative Committee may cause such distributions to be made within the first 2-1/2 months of such Plan Year. (6) The excess contribution to be so distributed shall be adjusted for income or loss, which shall be determined by multiplying the income or loss allocable to the HCE's Account in the ESOP Component or Non-ESOP Component (whichever is applicable) for such Plan Year (to the extent such HCE's Account balance is derived from salary reduction contributions and 3 earnings thereon) by a fraction, the numerator of which is the amount of the excess contribution on behalf of the HCE to that Component for that Plan Year and the denominator of which is the sum of the HCE's Account balance in that Component attributable to salary reduction contributions as of the beginning of the Plan Year plus the HCE's salary reduction contributions to that Component for the Plan Year. No adjustment shall be made for the gap period between the end of the Plan Year in which the excess contributions were made and the time when the excess contributions are distributed. (7) Excess contributions (if any) shall be determined separately for the ESOP Component and the Non-ESOP Component. 4. Section 4.2 of the Plan is amended by redesignating subsections (b) and (c) as subsections (c) and (d), respectively, and adding the following new subsection (b) after subsection (a) thereof: (b) ESOP Component and Non-ESOP Component. In addition to the ------------------------------------- subaccounts maintained pursuant to the preceding subsection, the Trustee shall maintain an accounting of the ESOP Component and Non-ESOP Component of the Plan. At any particular time, the ESOP Component of the Plan shall consist of all Plan assets invested in the Company Stock Fund at that time, and the Non-ESOP Component shall consist of all other assets of the Plan at that time. Plan assets, including amounts from any of the subaccounts established pursuant to the preceding subsection, may move freely between the ESOP Component and Non-ESOP Component in accordance with Participants' investment elections under Section 4.3. 5. Section 4.3(a) of the Plan is amended by replacing the words "a Company stock fund that invests primarily in common stock of the Company" with "the Company Stock Fund" in the first sentence thereof, and by adding the following new sentence thereof: Amounts invested in the Company Stock Fund are part of the ESOP Component, and amounts invested in all other available investment options are part of the Non-ESOP Component. 6. Section 4.3(d) of the Plan is amended by replacing the first paragraph thereof with the following: (d) Company Stock. Effective April 1, 1996, all shares of Company ------------- Stock held by the Plan were placed in the Company Stock Fund. Following the establishment of the Company Stock Fund, Participants' Accounts invested in Company Stock were credited with units in the Company Stock Fund. The Plan assets held in the Company Stock Fund constitute the ESOP Component of the Plan. The Company Stock Fund is designated as, and is intended to constitute, an employee stock ownership plan within the meaning of Section 4975 of the Code. 4 7. Sections 4.3(d), 6.2, and 6.5 of the Plan are amended by replacing the words "common stock of the Company" with "Company Stock" and the words "HEI Common Stock Fund" with "Company Stock Fund" in each place where they occur. 8. Section 6.2 of the Plan is amended by replacing the last paragraph thereof with the following: All distributions shall be in the form of cash, except that a Participant's investment in the Company Stock Fund shall be converted to an equivalent number of shares of Company Stock. The normal form of distribution for investments held in the Company Stock Fund shall be such Company Stock. A Participant may also elect to receive any such distribution from the Company Stock Fund in cash in lieu of Company Stock. The value of any fractional share equivalent shall be paid in cash. A Participant may determine the portion of his or her Account balance that will be distributable in Company Stock by directing the investment of such portion in the Company Stock Fund before a distribution is made. 9. Section 10.1 of the Plan is amended by adding the words "(including both the ESOP Component and the Non-ESOP Component") after the word "Plan" in the first sentence thereof. 10. Article X of the Plan is amended by adding the following new definitions, to be appropriately numbered: Company Stock means common stock of the Company. ------------- Company Stock Fund means a fund established pursuant to the Trust ------------------ Agreement that consists of Company Stock and a small percentage of cash or cash equivalents. All Company Stock held by the Plan is held in the Company Stock Fund. ESOP Component means the portion of the Plan that is invested in the -------------- Company Stock Fund and is designated as an employee stock ownership plan within the meaning of Section 4975 of the Code. Non-ESOP Component means the portion of the Plan that is not invested -------- in the Company Stock Fund. 11. Article XII of the Plan is redesignated Article XIII, and the following new Article is inserted after Article XI: 5 ARTICLE XII ESOP PROVISIONS --------------- Section 12.1 Purpose and Designation of ESOP Component ------------------------------------------------------ The ESOP Component of the Plan is designated as, and is intended to constitute, an employee stock ownership plan within the meaning of Section 4975 of the Code. The ESOP Component is designed to invest primarily in Company Stock. The Plan shall be interpreted consistently with the designation and intent stated in this Section. Section 12.2 Assets of ESOP Component ------------------------------------- The assets of the ESOP Component shall consist of all Plan assets held in the Company Stock Fund. Amounts contributed to the Plan from any source (including elective contributions and HEIDI contributions) shall become assets of the ESOP Component to the extent that such amounts are invested in the Company Stock Fund pursuant to Participant investment elections under Section 4.3 of the Plan. Amounts transferred to the Company Stock Fund from other investment alternatives in accordance with Participant investment elections shall become part of the ESOP Component, and amounts transferred from the Company Stock Fund to other investment alternatives shall cease to be part of the ESOP Component and become part of the Non-ESOP Component. Section 12.3 Participant Voting Rights -------------------------------------- Participants in the ESOP Component shall have the right to vote shares of Company Stock as provided in Section 4.3. Section 12.4 Right to Demand Company Stock ------------------------------------------ Participants in the ESOP Component shall have the right to demand that benefits be distributed in the form of Company Stock as provided in Section 6.2. Section 12.5 Commencement of Distributions ------------------------------------------ Participants in the ESOP Component shall have the right to commence distributions as provided in Section 6.1. Section 12.6 Election to Receive or Reinvest Dividends ------------------------------------------------------ Dividends on Company Stock held in the ESOP Component shall be paid to the Trustee and allocated among Participants in accordance with their account balances in the ESOP Component. Each Participant's allocable share of each such dividend payment shall, at the election of such Participant, be either (i) paid to such Participant in cash, or (ii) reinvested in the Company Stock Fund for the benefit of such Participant and held as part of such Participant's Account. Such Participant elections and cash payments shall be made in accordance with 6 procedures established by the Administrative Committee. The Administrative Committee may establish reasonable restrictions on the right to receive dividends in cash, including a reasonable minimum amount for such distributions and a reasonable deadline prior to each dividend distribution for the making of such elections. If a Participant does not affirmatively elect to receive a dividend in cash, he or she shall be deemed to have elected reinvestment of such dividend. Section 12.6 Diversification ---------------------------- Nothing in this Article XII or other Plan provision relating to the ESOP Component shall limit the right of any Participant to direct the investment of his or her Account balance as provided in Section 4.3, including the right of such Participant to direct the transfer of all or any portion of his or her Account balance from the Company Stock Fund to any other available investment alternative at any time. Notwithstanding the foregoing, Participant investment directions may be suspended or limited to the extent reasonably necessary for Plan administrative purposes (including, without limitation, any change of Trustee or other service provider) or as may be required by applicable securities laws. 12. The foregoing amendments shall be effective January 1, 2002. TO RECORD the adoption of these amendments to the Plan, the Hawaiian Electric Industries, Inc. Pension Investment Committee has caused this document to be executed this 28 day of February, 2002. HAWAIIAN ELECTRIC INDUSTRIES, INC. PENSION INVESTMENT COMMITTEE By /s/ Robert F. Clarke ------------------------------------ Its member By /s/ Robert F. Mougeot ------------------------------------ Its member 7 -----END PRIVACY-ENHANCED MESSAGE-----