UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as Commission I.R.S. Employer
Specified in Its Charter File Number Identification No.
--------------------------- ----------- ------------------
HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500
State of Hawaii
--------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding November 3, 2000 -------------------------------------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. (Without Par Value)........... 32,831,065 Shares Hawaiian Electric Company, Inc. ($6 2/3 Par Value)............... 12,805,843 Shares (not publicly traded) ============================================================================================================== |
Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended September 30, 2000
INDEX
Page No.
Glossary of terms............................................................... ii
Forward-looking statements...................................................... v
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) -
September 30, 2000 and December 31, 1999.......................... 1
Consolidated statements of income (unaudited) -
three and nine months ended September 30, 2000 and 1999........... 2
Consolidated statements of retained earnings (unaudited) -
three and nine months ended September 30, 2000 and 1999........... 3
Consolidated statements of cash flows (unaudited) -
nine months ended September 30, 2000 and 1999..................... 4
Notes to consolidated financial statements (unaudited).............. 5
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) -
September 30, 2000 and December 31, 1999.......................... 11
Consolidated statements of income (unaudited) -
three and nine months ended September 30, 2000 and 1999........... 12
Consolidated statements of retained earnings (unaudited) -
three and nine months ended September 30, 2000 and 1999........... 12
Consolidated statements of cash flows (unaudited) -
nine months ended September 30, 2000 and 1999..................... 13
Notes to consolidated financial statements (unaudited).............. 14
Item 2. Management's discussion and analysis of financial condition
and results of operations......................................... 36
Item 3. Quantitative and qualitative disclosures about market risk.......... 51
PART II. OTHER INFORMATION
Item 1. Legal proceedings................................................... 52
Item 5. Other information................................................... 52
Item 6. Exhibits and reports on Form 8-K.................................... 54
Signatures...................................................................... 55
|
Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended September 30, 2000
GLOSSARY OF TERMS
Terms Definitions
----- -----------
AFUDC Allowance for funds used during construction
ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI
Diversified, Inc. and parent company of American Savings
Investment Services Corp., ASB Service Corporation,
AdCommunications, Inc., American Savings Mortgage Co., Inc.
and ASB Realty Corporation
Baotou Steel Baotou Iron & Steel (Group) Co., Ltd.
ASBR ASB Realty Corporation
BLNR Board of Land and Natural Resources of the State of Hawaii
CDUP Conservation District Use Permit
Company Hawaiian Electric Industries, Inc. and its direct and indirect
subsidiaries, including, without limitation, Hawaiian Electric
Company, Inc., Maui Electric Company, Limited, Hawaii Electric
Light Company, Inc., HECO Capital Trust I, HECO Capital Trust
II, HEI Diversified, Inc., American Savings Bank, F.S.B. and
its subsidiaries, HEI Power Corp. and its subsidiaries,
Pacific Energy Conservation Services, Inc., HEI District
Cooling, Inc., ProVision Technologies, Inc., HEI Properties,
Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian
Electric Industries Capital Trust I, Hawaiian Electric
Industries Capital Trust II, Hawaiian Electric Industries
Capital Trust III, HEI Preferred Funding, LP, The Old Oahu Tug
Service, Inc. (formerly Hawaiian Tug & Barge Corp.) and Malama
Pacific Corp. and its subsidiaries
Consumer Division of Consumer Advocacy, Department of Commerce and
Advocate Consumer Affairs of the State of Hawaii
D&O Decision and order
DLNR Department of Land and Natural Resources of the State of Hawaii
DOH Department of Health of the State of Hawaii
DTCC Dual-train combined-cycle
EAPRC East Asia Power Resources Corporation
Enserch Enserch Development Corporation
EPA Environmental Protection Agency - federal
EPHE EPHE Philippines Energy Company, Inc.
|
GLOSSARY OF TERMS, continued
Terms Definitions
----- -----------
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
federal U.S. Government
FHLB Federal Home Loan Bank
GAAP Accounting principles generally accepted in the United States of
America
GPA Guam Power Authority
Hamakua Hamakua Energy Partners, L.P., formerly known as Encogen Hawaii,
Partners L.P.
HCPC Hilo Coast Power Company
HECO Hawaiian Electric Company, Inc., a wholly owned electric utility
subsidiary of Hawaiian Electric Industries, Inc. and parent
company of Maui Electric Company, Limited, Hawaii Electric
Light Company, Inc., HECO Capital Trust I and HECO Capital
Trust II
HEI Hawaiian Electric Industries, Inc., direct parent company of
Hawaiian Electric Company, Inc., HEI Diversified, Inc., HEI
Power Corp., Pacific Energy Conservation Services, Inc., HEI
District Cooling, Inc., ProVision Technologies, Inc., HEI
Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc.,
Hawaiian Electric Industries Capital Trust I, Hawaiian
Electric Industries Capital Trust II, Hawaiian Electric
Industries Capital Trust III, The Old Oahu Tug Service, Inc.
(formerly Hawaiian Tug & Barge Corp.) and Malama Pacific Corp.
HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc. and the parent company of American
Savings Bank, F.S.B.
HEIII HEI Investments, Inc. (formerly HEI Investment Corp.), a
subsidiary of HEI Power Corp.
HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric
Industries, Inc., and the parent company of several
subsidiaries
HEIPC
Group HEI Power Corp. and its subsidiaries
HELCO Hawaii Electric Light Company, Inc., a wholly owned electric
utility subsidiary of Hawaiian Electric Company, Inc.
|
GLOSSARY OF TERMS, continued
Terms Definitions
----- -----------
HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power
Corp.
IMPC Inner Mongolia Power Company
IPP Independent power producer
KCP Kawaihae Cogeneration Partners
KWH Kilowatthour
MECO Maui Electric Company, Limited, a wholly owned electric utility
subsidiary of Hawaiian Electric Company, Inc.
MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc. and parent company of several real
estate subsidiaries. On September 14, 1998, the HEI Board of
Directors adopted a plan to exit the residential real estate
development business engaged in by Malama Pacific Corp. and
its subsidiaries.
MW Megawatt
NOV Notice of Violation
OTS Office of Thrift Supervision, Department of Treasury
PSD permit Prevention of Significant Deterioration/Covered Source permit
PUC Public Utilities Commission of the State of Hawaii
ROACE Return on average common equity
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
SOP Statement of Position
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.
YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian
Tug & Barge Corp.which was sold on November 10, 1999
|
Forward-looking statements
This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and its subsidiaries contains "forward-looking statements," which include statements that are predictive in nature, depend upon or refer to future events or conditions, and/or include words such as "expects", "anticipates", "intends", "plans", "believes", "estimates" or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings/losses or growth rates), ongoing business strategies or prospects and possible future actions, which may be provided by management are also forward- looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about HEI and its subsidiaries, the performance of the industries in which they do business and economic and market factors, among other things. These statements are not guaranties of future performance. Such risks, uncertainties and other important factors could cause actual results to differ materially from those in the forward-looking statements and include, but are not limited to, the following:
. the effect of international, national and local economic conditions, including the condition of the Hawaii tourist and construction industries and the Hawaii housing market;
. the effects of weather and natural disasters;
. product demand and market acceptance risks;
. increasing competition in the electric utility, banking and international power industries;
. capacity and supply constraints or difficulties;
. fuel oil price changes;
. new technological developments;
. federal, state and international governmental and regulatory actions, including changes in laws, rules and regulations applicable to HEI and its subsidiaries, decisions in rate cases and on permitting issues, required corrective actions and changes in taxation;
. the results of financing efforts;
. the timing and extent of changes in interest rates;
. the timing and extent of changes in foreign currency exchange rates, particularly in the Philippines and China;
. the convertibility and availability of foreign currency, particularly in the Philippines and China;
. the risks inherent in implementing hedging strategies, including the availability and pricing of forward contracts;
. political and business risks inherent in doing business in developing countries;
. the risks associated with the installation of new computer systems;
. the risk that ASB Realty Corporation fails to qualify as a real estate investment trust for federal and state income tax purposes, in which case it would be subject to regular corporate income taxation; and
. other risks or uncertainties described elsewhere in this report and in other periodic reports previously and subsequently filed by HEI and/or Hawaiian Electric Company, Inc. (HECO) with the Securities and Exchange Commission (SEC).
Forward-looking statements speak only as of the date of this report.
Hawaiian Electric Industries, Inc. and subsidiaries Consolidated balance sheets (unaudited)
September 30, December 31,
(in thousands) 2000 1999
------------------------------------------------------------------------------------------------------------------------
Assets
------
Cash and equivalents................................................................ $ 179,653 $ 199,906
Accounts receivable and unbilled revenues, net...................................... 174,551 154,605
Available-for-sale investment securities............................................ 107,955 -
Held-to-maturity investment and mortgage/asset-backed securities.................... 2,193,189 2,159,945
Loans receivable, net............................................................... 3,222,625 3,211,878
Property, plant and equipment, net of accumulated
depreciation of $1,208,339 and $1,129,078........................................ 2,078,306 2,066,195
Regulatory assets................................................................... 116,299 114,759
Other............................................................................... 313,755 276,997
Goodwill and other intangibles...................................................... 127,227 106,741
---------- ----------
$8,513,560 $8,291,026
========== ==========
Liabilities and stockholders' equity
------------------------------------
Liabilities
Accounts payable.................................................................... $ 129,687 $ 117,447
Deposit liabilities................................................................. 3,558,285 3,491,655
Short-term borrowings............................................................... 93,483 151,833
Securities sold under agreements to repurchase...................................... 584,652 661,215
Advances from Federal Home Loan Bank................................................ 1,308,612 1,189,081
Long-term debt...................................................................... 1,080,324 977,529
Deferred income taxes............................................................... 186,000 181,277
Contributions in aid of construction................................................ 208,316 206,302
Other............................................................................... 256,073 231,854
---------- ----------
7,405,432 7,208,193
---------- ----------
HEI- and HECO-obligated preferred securities of trust subsidiaries
directly or indirectly holding solely HEI and HEI-guaranteed
and HECO and HECO-guaranteed subordinated debentures............................ 200,000 200,000
Preferred stock of subsidiaries - not subject to mandatory redemption............... 34,406 34,406
Minority interests.................................................................. 851 841
---------- ----------
235,257 235,247
---------- ----------
Stockholders' equity
Preferred stock, no par value, authorized 10,000 shares; issued: none.............. - -
Common stock, no par value, authorized 100,000 shares; issued
and outstanding: 32,792 shares and 32,213 shares................................ 680,814 665,335
Retained earnings................................................................... 192,057 182,251
---------- ----------
872,871 847,586
---------- ----------
$8,513,560 $8,291,026
========== ==========
|
See accompanying "Notes to consolidated financial statements."
Hawaiian Electric Industries, Inc. and subsidiaries Consolidated statements of income (unaudited)
Three months ended Nine months ended
(in thousands, except per share amounts and September 30, September 30,
----------------------- ------------------------------
ratio of earnings to fixed charges) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
Revenues
Electric utility.................................................. $ 337,324 $ 277,283 $ 934,574 $ 767,346
Savings bank...................................................... 114,300 102,624 333,266 304,663
International power............................................... (5,719) 933 (8,004) 3,257
Other............................................................. (38) 11,610 1,042 39,119
--------- --------- ---------- ----------
445,867 392,450 1,260,878 1,114,385
--------- --------- ---------- ----------
Expenses
Electric utility.................................................. 284,031 230,811 778,036 635,637
Savings bank...................................................... 97,321 87,705 280,782 258,824
International power............................................... 3,038 2,315 9,635 6,751
Other............................................................. 967 15,068 6,587 43,880
--------- --------- ---------- ----------
385,357 335,899 1,075,040 945,092
--------- --------- ---------- ----------
Operating income (loss)
Electric utility.................................................. 53,293 46,472 156,538 131,709
Savings bank...................................................... 16,979 14,919 52,484 45,839
International power............................................... (8,757) (1,382) (17,639) (3,494)
Other............................................................. (1,005) (3,458) (5,545) (4,761)
--------- --------- ---------- ----------
60,510 56,551 185,838 169,293
--------- --------- ---------- ----------
Interest expense--other than savings bank......................... (19,261) (17,600) (58,489) (54,488)
Allowance for borrowed funds used during construction............. 807 716 2,220 1,955
Preferred stock dividends of subsidiaries......................... (501) (498) (1,505) (1,624)
Preferred securities distributions of trust subsidiaries.......... (4,008) (4,009) (12,026) (12,016)
Allowance for equity funds used during construction............... 1,505 1,176 4,102 3,202
--------- --------- ---------- ----------
Income before income taxes........................................ 39,052 36,336 120,140 106,322
Income taxes...................................................... 17,003 14,704 50,019 41,180
--------- --------- ---------- ----------
Net income........................................................ $ 22,049 $ 21,632 $ 70,121 $ 65,142
========= ========= ========== ==========
Basic earnings per common share................................... $ 0.68 $ 0.67 $ 2.16 $ 2.02
========= ========= ========== ==========
Diluted earnings per common share................................. $ 0.67 $ 0.67 $ 2.15 $ 2.02
========= ========= ========== ==========
Dividends per common share........................................ $ 0.62 $ 0.62 $ 1.86 $ 1.86
========= ========= ========== ==========
Weighted-average number of
common shares outstanding...................................... 32,642 32,203 32,438 32,180
Dilutive effect of stock options and dividend equivalents.... 135 91 132 97
--------- --------- ---------- ----------
Adjusted weighted-average shares.................................. 32,777 32,294 32,570 32,277
========= ========= ========== ==========
Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits........................... 1.71 1.78
========== ==========
Including interest on ASB deposits........................... 1.47 1.46
========== ==========
|
See accompanying "Notes to consolidated financial statements."
Hawaiian Electric Industries, Inc. and subsidiaries Consolidated statements of retained earnings (unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
(in thousands) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period..... $ 190,224 $ 168,858 $ 182,251 $ 165,252
Net income................................. 22,049 21,632 70,121 65,142
Common stock dividends..................... (20,216) (19,972) (60,315) (59,876)
----------- ----------- ----------- -----------
Retained earnings, end of period........... $ 192,057 $ 170,518 $ 192,057 $ 170,518
=========== =========== =========== ===========
|
See accompanying "Notes to consolidated financial statements."
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
Nine months ended
September 30,
------------------------------
(in thousands) 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income................................................................................... $ 70,121 $ 65,142
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment.......................................... 81,657 81,871
Other amortization..................................................................... 7,493 11,345
Provision for loan losses.............................................................. 9,400 10,848
Deferred income taxes.................................................................. 4,726 (4,175)
Allowance for equity funds used during construction.................................... (4,102) (3,202)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net............ (19,946) 914
Increase in accounts payable..................................................... 12,240 15,145
Changes in other assets and liabilities.......................................... 67,459 1,711
--------- ---------
Net cash provided by operating activities.................................................... 229,048 179,599
--------- ---------
Cash flows from investing activities
Held-to-maturity mortgage/asset-backed securities purchased.................................. (320,102) (623,942)
Principal repayments on held-to-maturity mortgage/asset-backed securities.................... 191,873 470,063
Principal repayments on held-to-maturity investment securities............................... 1,455 -
Held-to-maturity investment securities purchased............................................. (56,500) (54,782)
Principal repayments on held-to-maturity investment securities............................... 43,000 43,000
Loans receivable originated and purchased.................................................... (417,302) (528,777)
Principal repayments on loans receivable..................................................... 352,050 435,725
Capital expenditures......................................................................... (92,887) (88,444)
Acquisition of a Philippines investment...................................................... (87,500) -
Other........................................................................................ 46,940 19,585
--------- ---------
Net cash used in investing activities........................................................ (338,973) (327,572)
--------- ---------
Cash flows from financing activities
Net increase (decrease) in deposit liabilities............................................... 66,630 (306,467)
Net decrease in short-term borrowings with original maturities of three months or less....... (58,419) (58,237)
Net increase in retail repurchase agreements................................................. 8,560 167,765
Proceeds from securities sold under agreements to repurchase................................. 460,181 290,000
Repurchase of securities sold under agreements to repurchase................................. (550,710) (378,612)
Proceeds from advances from Federal Home Loan Bank........................................... 470,031 684,100
Principal payments on advances from Federal Home Loan Bank................................... (350,500) (407,600)
Proceeds from issuance of long-term debt..................................................... 113,150 167,452
Repayment of long-term debt.................................................................. (10,500) (88,500)
Redemption of electric utility subsidiaries' preferred stock................................. - (47,080)
Net proceeds from issuance of common stock................................................... 10,841 3,432
Common stock dividends....................................................................... (52,278) (59,876)
Preferred securities distributions of trust subsidiaries..................................... (12,026) (12,016)
Other........................................................................................ (5,288) (9,212)
--------- ---------
Net cash provided by (used in) financing activities.......................................... 89,672 (54,851)
--------- ---------
Net decrease in cash and equivalents......................................................... (20,253) (202,824)
Cash and equivalents, beginning of period.................................................... 199,906 412,254
--------- ---------
Cash and equivalents, end of period.......................................................... $ 179,653 $ 209,430
========= =========
See accompanying "Notes to consolidated financial statements."
|
The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HEI's Annual Report on SEC Form 10-K for the year ended December 31, 1999 and the consolidated financial statements and the notes thereto in HEI's Quarterly Reports on SEC Form 10-Q for the quarters ended March 31, 2000 and June 30, 2000.
In the opinion of HEI's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the Company's financial position as of September 30, 2000 and December 31, 1999, and the results of its operations for the three and nine months ended September 30, 2000 and 1999, and its cash flows for the nine months ended September 30, 2000 and 1999. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year.
Certain reclassifications have been made to prior periods' consolidated financial statements to conform to the 2000 presentation.
Segment financial information was as follows:
Electric Savings International
($ in thousands) utility bank Power Other Total
-------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2000
Revenues from external customers*....... 337,312 114,300 (5,779) 34 445,867
Intersegment revenues................... 12 - 60 (72) -
----------- ------------ ------------- ----------- -------------
Revenues............................ 337,324 114,300 (5,719) (38) 445,867
=========== ============ ============= =========== =============
Income (loss) before income taxes....... 40,955 15,568 (9,184) (8,287) 39,052
Income taxes (benefit).................. 15,935 5,753 343 (5,028) 17,003
----------- ------------ ------------- ----------- -------------
Net income (loss)................... 25,020 9,815 (9,527) (3,259) 22,049
=========== ============ ============= =========== =============
Nine months ended September 30, 2000
Revenues from external customers........ 934,545 333,262 (8,067) 1,138 1,260,878
Intersegment revenues................... 29 4 63 (96) -
----------- ------------ ------------- ----------- -------------
Revenues............................ 934,574 333,266 (8,004) 1,042 1,260,878
=========== ============ ============= =========== =============
Income (loss) before income taxes....... 119,023 48,257 (18,550) (28,590) 120,140
Income taxes (benefit).................. 46,264 17,825 692 (14,762) 50,019
----------- ------------ ------------- ----------- -------------
Net income (loss)................... 72,759 30,432 (19,242) (13,828) 70,121
=========== ============ ============= =========== =============
Assets**................................ 2,331,307 5,981,326 173,164 27,763 8,513,560
=========== ============ ============= =========== =============
Three months ended September 30, 1999
Revenues from external customers........ 277,274 102,616 933 11,627 392,450
Intersegment revenues................... 9 8 - (17) -
----------- ------------ ------------- ----------- -------------
Revenues............................ 277,283 102,624 933 11,610 392,450
=========== ============ ============= =========== =============
Income (loss) before income taxes....... 33,704 13,569 (1,514) (9,423) 36,336
Income taxes (benefit).................. 13,389 5,070 (80) (3,675) 14,704
----------- ------------ ------------- ----------- -------------
Net income (loss)................... 20,315 8,499 (1,434) (5,748) 21,632
=========== ============ ============= =========== =============
Nine months ended September 30, 1999
Revenues from external customers........ 767,337 304,640 3,257 39,151 1,114,385
Intersegment revenues................... 9 23 - (32) -
----------- ------------ ------------- ----------- -------------
Revenues............................ 767,346 304,663 3,257 39,119 1,114,385
=========== ============ ============= =========== =============
Income (loss) before income taxes....... 92,740 41,789 (3,808) (24,399) 106,322
Income taxes (benefit).................. 36,120 15,708 (148) (10,500) 41,180
----------- ------------ ------------- ----------- -------------
Net income (loss)................... 56,620 26,081 (3,660) (13,899) 65,142
=========== ============ ============= =========== =============
Assets**................................ 2,292,350 5,753,432 47,712 148,154 8,241,648
=========== ============ ============= =========== =============
|
* "International Power" includes the equity in net losses of EPHE Philippines Energy Company, Inc.
** At September 30.
Revenues attributed to foreign countries for the periods identified above were not significant.
For Hawaiian Electric Company, Inc.'s consolidated financial information, including its commitments and contingencies, see pages 11 through 35.
Selected financial information
American Savings Bank, F.S.B. and subsidiaries Consolidated balance sheet data
September 30, December 31,
(in thousands) 2000 1999
-------------------------------------------------------------------------------------------------------------
Assets
Cash and equivalents.............................................. $ 171,101 $ 192,807
Available-for-sale investment securities.......................... 107,955 -
Held-to-maturity investment securities............................ 90,393 186,799
Held-to-maturity mortgage/asset-backed securities................. 2,102,796 1,973,146
Loans receivable, net............................................. 3,222,625 3,211,878
Other............................................................. 185,574 176,836
Goodwill and other intangibles.................................... 100,882 106,741
---------- ----------
$5,981,326 $5,848,207
========== ==========
Liabilities and equity
Deposit liabilities............................................... $3,558,285 $3,491,655
Securities sold under agreements to repurchase.................... 584,652 661,215
Advances from Federal Home Loan Bank.............................. 1,308,612 1,189,081
Other............................................................. 77,538 70,239
---------- ----------
5,529,087 5,412,190
Minority interests................................................ 3,468 3,300
Preferred stock................................................... 75,113 75,113
Common stock equity............................................... 373,658 357,604
---------- ----------
$5,981,326 $5,848,207
========== ==========
|
American Savings Bank, F.S.B. and subsidiaries Consolidated income statement data
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
(in thousands) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------
Interest income.................................... $108,326 $ 95,402 $314,110 $281,840
Interest expense................................... 61,885 51,592 175,937 153,351
-------- -------- -------- --------
Net interest income................................ 46,441 43,810 138,173 128,489
Provision for loan losses.......................... (3,000) (4,750) (9,400) (10,848)
Other income....................................... 5,974 7,222 19,156 22,823
Operating, administrative and general expenses..... (32,436) (31,363) (95,445) (94,625)
-------- -------- -------- --------
Operating income................................... 16,979 14,919 52,484 45,839
Minority interests................................. 58 - 168 -
Income taxes....................................... 5,753 5,070 17,825 15,708
-------- -------- -------- --------
Income before preferred stock dividends............ 11,168 9,849 34,491 30,131
Preferred stock dividends.......................... 1,353 1,350 4,059 4,050
-------- -------- -------- --------
Net income......................................... $ 9,815 $ 8,499 $ 30,432 $ 26,081
======== ======== ======== ========
|
In June 2000, the Office of Thrift Supervision (OTS) advised ASB that four debt securities in the original principal amount of $114 million were impermissible investments under regulations applicable to federal savings banks. The securities are trust certificates which are rated Aaa as to principal repayment but are not rated as to interest. In the second quarter of 2000, ASB had reclassified these trust certificates from a "held-to-maturity" status to an "available-for-sale" status in its financial statements and recorded these securities at their estimated fair value. For the nine months ended September 30, 2000, ASB realized a $3.8 million net loss on the writedown of these securities. Interest income on these securities is being recognized on a cash basis. Additional losses could result from the ultimate disposition of these securities, or if there is a further decline in their fair value.
China project
In 1998 and 1999, the HEIPC Group acquired what is now a 75% interest in a joint venture, Baotou Tianjiao Power Co., Ltd., formed to design, construct, own, operate and manage a 200 megawatt (MW) (net) coal-fired power plant to be located in Inner Mongolia, People's Republic of China. The power plant is being built "inside the fence" for Baotou Iron & Steel (Group) Co., Ltd. (Baotou Steel). The project has received approval from both the National and Inner Mongolia governments. Construction had commenced and the first of the two units had been expected to be online by early 2001, and the second six months later. However, the Inner Mongolia Power Company (IMPC), which owns and operates the electricity grid in Inner Mongolia, has refused to enter into a satisfactory interconnection arrangement with the joint venture. The HEIPC Group does not believe that it is prudent to continue construction without an interconnection arrangement whose terms are consistent with the project as approved by the National and Inner Mongolia governments. Under the Power Purchase Contract between the joint venture and Baotou Steel, it is Baotou Steel's responsibility to secure an interconnection arrangement with IMPC. The HEIPC Group continues to work with Baotou Steel and IMPC to secure a satisfactory interconnection arrangement. If such an arrangement is not obtained, the HEIPC Group intends to withdraw from the project (including the HEIPC Group's commitment to invest up to an additional $86 million toward the project, subject to certain conditions) and seek recovery of its investment of approximately $25 million to date. Management cannot predict the outcome of such efforts, nor estimate its impairment loss, if any, at this time. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Philippines investment
On March 7, 2000, an indirect subsidiary of HEIPC acquired a 50% interest in EPHE Philippines Energy Company, Inc. (EPHE), an indirect subsidiary of El Paso Energy Corporation (EPEC), for $87.5 million plus up to an additional $6 million of payments that are contingent upon future earnings of East Asia Power Resources Corporation (EAPRC). EPHE owns approximately 91.7% of the common shares of EAPRC, a Philippines holding company primarily engaged in the electric generation business in Manila and Cebu through its direct and indirect subsidiaries, using land and barge-based generating facilities fired by bunker fuel oil, with total installed capacity of approximately 390 MW. The HEIPC Group accounts for its investment in EPHE under the equity method of accounting. Revenues for the international power segment for the third quarter and first nine months of 2000 include the equity in net losses of EPHE. The net losses of EPHE do not reflect any U.S. or Philippines tax benefits. The Company consolidates the accounts of the HEIPC Group on a one-month lag due to the time needed to consolidate HEIPC's subsidiaries. At September 30, 2000, the Company's investment in EPHE was $69.7 million and is included in the consolidated balance sheet in "Other" assets and "Goodwill and other intangibles." The decline in carrying value from $87.5 million was due to the equity in net losses, goodwill amortization and a negative $3.5 million foreign currency translation adjustment.
The Company evaluates equity investments when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Due to the net losses incurred in the second and third quarters of 2000 from the investment in EPHE and the changes in the political and economic conditions related to the investment (e.g., devaluation of the Philippine peso and increase in fuel oil prices), management has
evaluated the investment for impairment. The Company determines whether an impairment has occurred based on an estimate of undiscounted future cash flows (excluding interest) attributable to the investment, as compared to the carrying value of the investment. As of September 30, 2000, based upon current conditions and assumptions, no writedown of the investment in EPHE is required for financial statement purposes based on the estimated undiscounted future cash flows (excluding interest) attributable to the investment. However, if estimates or circumstances change, it may be necessary for the Company to adjust the carrying value of its investment down to the then estimated fair value and any such adjustment would likely be material.
In connection with and subsequent to the HEIPC Group's investment in EPHE, HEI has guaranteed up to $35 million of existing and potential obligations related to this investment.
Change in method of calculating market-related value of retirement benefit plan assets
Since 1993, the Company has determined the market-related value of retirement benefit (pension and other postretirement benefits) plan assets by calculating the difference between the expected return and the actual return on the fair value of the plan assets, then amortizing the difference over future years -- 0% in the first year and 25% in years two to five, and finally subtracting the unamortized differences for the past four years from fair value. For the year 2000 and future years, the method of calculating the market-related value of the plan assets was changed to include a 15% range around the fair value of such assets (i.e., 85% to 115% of fair value). If the market-related value is outside the 15% range, then the amount outside the range will be recognized immediately in the calculation of annual net periodic benefit cost. If the market-related value remains within the 15% range, the Company will continue to amortize the difference over future years using the amortization method previously used. This change in accounting principle is preferable because it results in calculated asset values of the plans that more closely approximate fair value, while still mitigating the effect of annual fair value fluctuations. No range was used in prior years as the market-related value of the plan assets has been within the 15% range at each yearend from 1993 to 1998. Therefore, the cumulative effect of this change is nil. The effect of the change in accounting principle on the first nine months of 2000 was to increase net income approximately $3 million ($0.10 in basic earnings per common share).
Change in discount rate
The Company changed the discount rate used to calculate the net periodic costs of pension and other postretirement benefits from 6.5% at December 31, 1998 to 7.75% at December 31, 1999 based on interest rates prevailing at the time. The effect of the change was to reduce the projected benefit obligation at December 31, 1999 by approximately $110 million and to increase net income by approximately $4 million ($0.13 in basic earnings per common share) for the first nine months of 2000.
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized amounts) and income taxes was as follows:
Nine months ended September 30,
-----------------------------------------
(in thousands) 2000 1999
----------------------------------------------------------------------------------------------------------------------
Interest (including interest paid by savings bank, but excluding interest
paid on nonrecourse debt on leveraged leases).............................. $205,784 $199,198
================== ==================
Income taxes................................................................ $ 12,214 $ 38,289
================== ==================
|
The decrease in income taxes paid for the nine months ended September 30, 2000 compared to the same period in 1999 was primarily due to the change in the timing of recognition of the real estate investment trust taxable income.
Supplemental disclosures of noncash activities
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 $8.0 million for the nine months ended September 30, 2000.
Derivative instruments and hedging activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The provisions of SFAS No. 133 were amended by SFAS No. 137 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133, as amended, on January 1, 2001. Management believes the impact of adoption will not be material.
Certain transactions involving stock compensation
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, An Interpretation of APB Opinion No. 25," which clarifies the application of Accounting Principles Board (APB) Opinion No. 25 for certain issues but does not address any issues related to the application of the fair value method in SFAS No. 123. The Interpretation clarifies (a) the definition of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The Company adopted the provisions of the Interpretation on July 1, 2000 with no resulting material impact to the Company's results of operations, financial condition or liquidity.
See note (5), "International power subsidiary," above and note (5), "Commitments and contingencies," in HECO's "Notes to consolidated financial statements."
On September 14, 1998, the HEI Board of Directors adopted a plan to exit the residential real estate development business (engaged by MPC and its subsidiaries) by September 1999. Accordingly, MPC management commenced a program to sell all of MPC's real estate assets and investments and HEI reported MPC as a discontinued operation in the Company's consolidated statement of income in the third quarter of 1998. In the slow Hawaii real estate market, however, the plan to dispose of MPC's real estate assets and investments is taking longer than expected.
As of September 30, 2000, the remaining net assets of the discontinued residential real estate development operations amounted to $13 million (included in "Other" assets) and consisted primarily of real estate assets, receivables and deferred tax assets, reduced by loans and accounts payable.
In November 1999, HTB sold substantially all of its operating assets and YB for a nominal gain.
Hawaiian Electric Company, Inc. and subsidiaries Consolidated balance sheets (unaudited)
September 30, December 31,
(in thousands, except par value) 2000 1999
-------------------------------------------------------------------------------------------------------------------
Assets
Utility plant, at cost
Land................................................................ $ 28,999 $ 30,952
Plant and equipment................................................. 2,925,970 2,851,126
Less accumulated depreciation....................................... (1,147,681) (1,076,373)
Plant acquisition adjustment, net................................... 419 458
Construction in progress............................................ 166,937 151,981
----------------- ---------------
Net utility plant............................................. 1,974,644 1,958,144
----------------- ---------------
Current assets
Cash and equivalents................................................ 3,432 1,966
Customer accounts receivable, net................................... 80,578 68,768
Accrued unbilled revenues, net...................................... 59,918 53,830
Other accounts receivable, net...................................... 1,642 2,172
Fuel oil stock, at average cost..................................... 31,135 34,954
Materials and supplies, at average cost............................. 20,134 20,046
Prepayments and other............................................... 4,619 4,649
----------------- ---------------
Total current assets.......................................... 201,458 186,385
----------------- ---------------
Other assets
Regulatory assets................................................... 116,299 114,759
Other............................................................... 38,906 43,521
----------------- ---------------
Total other assets............................................ 155,205 158,280
----------------- ---------------
$ 2,331,307 $ 2,302,809
================= ===============
Capitalization and liabilities
Capitalization
Common stock, $6 2/3 par value, authorized
50,000 shares; outstanding 12,806 shares......................... $ 85,387 $ 85,387
Premium on capital stock............................................ 295,611 295,510
Retained earnings................................................... 448,208 425,206
----------------- ---------------
Common stock equity........................................... 829,206 806,103
Cumulative preferred stock - not subject to mandatory redemption.... 34,293 34,293
HECO-obligated mandatorily redeemable trust preferred securities of
subsidiary trusts holding solely HECO and HECO-guaranteed
debentures........................................................ 100,000 100,000
Long-term debt, net................................................. 659,324 646,029
----------------- ---------------
Total capitalization.......................................... 1,622,823 1,586,425
----------------- ---------------
Current liabilities
Short-term borrowings from nonaffiliates and affiliate.............. 82,303 107,013
Accounts payable.................................................... 54,360 52,116
Interest and preferred dividends payable............................ 17,817 8,160
Taxes accrued....................................................... 92,279 66,535
Other............................................................... 9,114 31,485
----------------- ---------------
Total current liabilities..................................... 255,873 265,309
----------------- ---------------
Deferred credits and other liabilities
Deferred income taxes............................................... 137,710 131,105
Unamortized tax credits............................................. 48,033 48,206
Other............................................................... 58,552 65,462
----------------- ---------------
Total deferred credits and other liabilities.................. 244,295 244,773
----------------- ---------------
Contributions in aid of construction................................... 208,316 206,302
----------------- ---------------
$ 2,331,307 $ 2,302,809
================= ===============
|
See accompanying notes to HECO's consolidated financial statements.
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of income (unaudited)
Three months ended Nine months ended
(in thousands, except for ratio of earnings September 30, September 30,
------------------------------ ------------------------------
to fixed charges) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
Operating revenues.................................... $335,263 $275,925 $930,167 $763,408
------------- ------------- ------------- -------------
Operating expenses
Fuel oil.............................................. 95,883 58,942 262,130 151,046
Purchased power....................................... 85,092 71,952 225,762 199,581
Other operation....................................... 30,582 35,730 85,787 100,530
Maintenance........................................... 16,156 14,436 42,311 41,324
Depreciation.......................................... 24,605 23,322 73,269 70,041
Taxes, other than income taxes........................ 31,615 26,039 87,981 72,459
Income taxes.......................................... 15,828 13,419 46,222 36,208
------------- ------------- ------------- -------------
299,761 243,840 823,462 671,189
------------- ------------- ------------- -------------
Operating income...................................... 35,502 32,085 106,705 92,219
------------- ------------- ------------- -------------
Other income
Allowance for equity funds used during construction... 1,505 1,176 4,102 3,202
Other, net............................................ 1,856 998 3,569 3,370
------------- ------------- ------------- -------------
3,361 2,174 7,671 6,572
------------- ------------- ------------- -------------
Income before interest and other charges.............. 38,863 34,259 114,376 98,791
------------- ------------- ------------- -------------
Interest and other charges
Interest on long-term debt............................ 10,024 10,313 29,876 30,139
Amortization of net bond premium and expense.......... 485 436 1,452 1,203
Other interest charges................................ 1,725 1,494 5,257 5,414
Allowance for borrowed funds used during construction. (807) (716) (2,220) (1,955)
Preferred stock dividends of subsidiaries............. 228 229 686 716
Preferred securities distributions of trust
subsidiaries.......................................... 1,918 1,919 5,756 5,746
------------- ------------- ------------- -------------
13,573 13,675 40,807 41,263
------------- ------------- ------------- -------------
Income before preferred stock dividends of HECO....... 25,290 20,584 73,569 57,528
Preferred stock dividends of HECO..................... 270 269 810 908
------------- ------------- ------------- -------------
Net income for common stock........................... $ 25,020 $ 20,315 $ 72,759 $ 56,620
============= ============= ============= =============
Ratio of earnings to fixed charges (SEC method)....... 3.68 3.07
============= =============
|
Hawaiian Electric Company, Inc. and subsidiaries Consolidated statements of retained earnings (unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
(in thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period................ $441,199 $415,944 $425,206 $405,836
Net income for common stock........................... 25,020 20,315 72,759 56,620
Common stock dividends................................ (18,011) (14,419) (49,757) (40,616)
------------- ------------- ------------- -------------
Retained earnings, end of period...................... $448,208 $421,840 $448,208 $421,840
============= ============= ============= =============
|
HEI owns all the common stock of HECO. Therefore, per share data with respect to shares of common stock of HECO are not meaningful.
See accompanying notes to HECO's consolidated financial statements.
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
Nine months ended
September 30,
--------------------------------
(in thousands) 2000 1999
--------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income before preferred stock dividends of HECO............................ $ 73,569 $ 57,528
Adjustments to reconcile income before preferred stock dividends of HECO
to net cash provided by operating activities
Depreciation of property, plant and equipment........................ 73,269 70,041
Other amortization................................................... 5,379 4,718
Deferred income taxes................................................ 6,605 313
Tax credits, net..................................................... 1,016 1,568
Allowance for equity funds used during construction.................. (4,102) (3,202)
Changes in assets and liabilities
Decrease (increase) in accounts receivable...................... (11,280) 4,135
Increase in accrued unbilled revenues........................... (6,088) (4,123)
Decrease (increase) in fuel oil stock........................... 3,819 (9,793)
Increase in materials and supplies.............................. (88) (2,044)
Increase in regulatory assets................................... (2,707) (2,464)
Increase in accounts payable.................................... 2,244 10,741
Changes in other assets and liabilities......................... 13,359 17,546
------------- -------------
Net cash provided by operating activities.................................. 154,995 144,964
------------- -------------
Cash flows from investing activities
Capital expenditures....................................................... (88,955) (68,714)
Contributions in aid of construction....................................... 6,713 6,327
Proceeds from sale of assets............................................... - 1,499
Payments on notes receivable............................................... 138 1,199
------------- -------------
Net cash used in investing activities...................................... (82,104) (59,689)
------------- -------------
Cash flows from financing activities
Common stock dividends..................................................... (49,757) (40,616)
Preferred stock dividends.................................................. (810) (908)
Preferred securities distributions of trust subsidiaries................... (5,756) (5,746)
Proceeds from issuance of long-term debt................................... 13,150 73,052
Repayment of long-term debt................................................ - (50,000)
Redemption of preferred stock.............................................. - (47,080)
Net decrease in short-term borrowings from nonaffiliates and affiliate
with original maturities of three months or less........................ (24,710) (36,302)
Other...................................................................... (3,542) (6,279)
------------- -------------
Net cash used in financing activities...................................... (71,425) (113,879)
------------- -------------
Net increase (decrease) in cash and equivalents............................ 1,466 (28,604)
Cash and equivalents, beginning of period.................................. 1,966 54,783
------------- -------------
Cash and equivalents, end of period........................................ $ 3,432 $ 26,179
============= =============
See accompanying notes to HECO's consolidated financial statements.
|
The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HECO's Annual Report on SEC Form 10-K for the year ended December 31, 1999 and the consolidated financial statements and the notes thereto in HECO's Quarterly Reports on SEC Form 10-Q for the quarters ended March 31, 2000 and June 30, 2000.
In the opinion of HECO's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the financial position of HECO and its subsidiaries as of September 30, 2000 and December 31, 1999, and the results of their operations for the three and nine months ended September 30, 2000 and 1999, and their cash flows for the nine months ended September 30, 2000 and 1999. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year.
Certain reclassifications have been made to prior periods' consolidated financial statements to conform to the 2000 presentation.
Change in method of calculating market-related value of retirement benefit plan assets
Since 1993, HECO and its subsidiaries have determined the market-related value of retirement benefit (pension and other postretirement benefits) plan assets by calculating the difference between the expected return and the actual return on the fair value of the plan assets, then amortizing the difference over future years -- 0% in the first year and 25% in years two to five, and finally subtracting the unamortized differences for the past four years from fair value. For the year 2000 and future years, the method of calculating the market-related value of the plan assets was changed to include a 15% range around the fair value of such assets (i.e., 85% to 115% of fair value). If the market-related value is outside the 15% range, then the amount outside the range will be recognized immediately in the calculation of annual net periodic benefit cost. If the market-related value remains within the 15% range, HECO and its subsidiaries will continue to amortize the difference over future years using the amortization method previously used. This change in accounting principle is preferable because it results in calculated asset values of the plans that more closely approximate fair value, while still mitigating the effect of annual fair value fluctuations. No range was used in prior years as the market-related value of the plan assets has been within the 15% range at each yearend from 1993 to 1998. Therefore, the cumulative effect of this change is nil. The effect of the change in accounting principle on the first nine months of 2000 was to increase net income approximately $3 million.
Change in discount rate
HECO and its subsidiaries changed the discount rate used to calculate the net periodic costs of pension and other postretirement benefits from 6.5% at December 31, 1998 to 7.75% at December 31, 1999 based on interest rates prevailing at the time. The effect of the change was to reduce the projected benefit obligation at December 31, 1999 by approximately $102 million and to increase net income by approximately $4 million for the first nine months of 2000.
Regulatory asset related to Barbers Point Tank Farm project costs
In 1989, HECO began planning and engineering for a combined cycle unit addition as a contingency in the event an independent power producer was not able to deliver firm power to HECO as planned. Subsequently, HECO's planning and engineering work expanded from contingency planning to adding new generation. In December 1991, HECO filed an application for the installation of a nominal 200 MW combined cycle power plant located at HECO's Barbers Point Tank Farm. Due to changes in circumstances, the expected timing for HECO's next generating unit was significantly delayed, and HECO withdrew its application in May 1993.
In August 1994, HECO informed the Public Utilities Commission of the State of Hawaii (PUC) that, consistent with past and current company practices, the $5.8 million in accumulated project costs would be allocated primarily to ongoing active capital projects as part of the engineering clearing. The PUC advised HECO to file an application, which it did in February 1995. The Consumer Advocate objected to the accounting treatment proposed by HECO.
To simplify and expedite the proceeding, in September 2000, HECO and the Consumer Advocate reached an agreement on the accounting treatment, subject to PUC approval. Acceptance of the agreement by the parties was without prejudice to any position either of them may take in this or any subsequent proceeding. Under the agreement, $4.5 million of the $5.8 million total project costs will be amortized to operating expense ratably over a five-year period after receiving PUC approval. In September 2000, HECO adjusted the project costs to reflect the agreement with the Consumer Advocate, resulting in an after tax write-off of $0.8 million. The PUC's approval of the agreement has been requested.
Integrated Resource Planning costs
In 1992, the PUC established a framework for Integrated Resource Planning (IRP) and ordered the companies to develop an integrated resource plan in accordance with the IRP framework. The framework also provides that the utilities are entitled to recover appropriate IRP and implementation costs. Each year, the electric utilities submit a budget of the IRP costs for the upcoming year, and request subsequent recovery of the actual costs incurred. Actual IRP costs incurred since 1995 have been recorded as a regulatory asset, and the electric utilities have been awaiting PUC approval for recovery of those costs.
In August 2000, pursuant to a stipulation filed by the electric utilities and the parties in the IRP cost proceedings, the PUC issued an order allowing the electric utilities to begin recovering the 1995 through 1999 IRP costs (over a 12 month period for HECO and a 24 month period for HELCO and MECO), subject to refund with interest, pending the PUC's final decision and order approving recovery of each respective year's IRP costs. On September 1, 2000, the electric utilities began recovering 1995 through 1999 IRP costs through a surcharge on customers bills. As of September 30, 2000, the amount of revenues recorded, subject to refund with interest, amounted to $0.8 million.
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized amounts) and income taxes was as follows:
Nine months ended September 30,
--------------------------------
(in thousands) 2000 1999
-------------------------------------------------------------------------------------------
Interest................................................... $24,298 $28,786
============= ==============
Income taxes............................................... $20,941 $17,352
============= ==============
|
Supplemental disclosure of noncash activities
The allowance for equity funds used during construction, which was charged to construction in progress as part of the cost of electric utility plant, amounted to $4.1 million and $3.2 million for the nine months ended September 30, 2000 and 1999, respectively.
HELCO power situation
The timing of the installation of HELCO's phased DTCC unit at the Keahole power plant site has been revised on several occasions due to delays, described below, in (a) obtaining approval from the Hawaii Board of Land and Natural Resources (BLNR) of a Conservation District Use Permit (CDUP) amendment and (b) obtaining from the Department of Health of the State of Hawaii (DOH) and the U.S. Environmental Protection Agency (EPA) a Prevention of Significant Deterioration/Covered Source permit (PSD permit) for the Keahole power plant site. The delays are also attributable to lawsuits, claims and petitions filed by independent power producers (IPPs) and other parties challenging these permits and objecting to the expansion, alleging among other things that (1) operation of the expanded Keahole site would not comply with land use regulations (including noise standards) and HELCO's land patent; (2) HELCO cannot operate the plant within current air quality standards; and (3) HELCO could alternatively purchase power from IPPs to meet increased electric generation demand.
The final judgment with respect to HELCO's entitlement to automatically put its land to the uses requested in its CDUP amendment application (which is in part 1 of the final judgment, and is referred to as HELCO's "default entitlement") was entered February 11, 1998. The final judgment states that HELCO must comply with the conditions in its application (part 2 of the final judgment), and that the standard conditions in Section 13-2-21 of the Hawaii Administrative Rules (HAR), the rules of the Department of Land and Natural Resources (DLNR), apply to the extent the standard conditions are not incompatible with HRS Section 183-41 (part 3 of the final judgment). On August 17, 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 or could meet the applicable conditions. At a September 23, 1999 hearing, the Third 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 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 Third 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 the conservation district. However, the Third 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.
On November 5, 1999, the same plaintiffs filed a third joint motion to enforce judgment. In this motion, they asked that the 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 motions were heard on December 13, 1999 and were denied by the Court. The Court also ruled that any complaints received by the BLNR or DLNR regarding the Keahole project were to be addressed in writing within 32 days of mailing of the complaint. An Order to this effect was issued on February 22, 2000. On April 13, 2000, KDC and an individual plaintiff filed a fourth motion to enforce the judgment, which substantially reiterates their second joint motion dated November 2, 1999 (see above) and a motion for sanctions against the BLNR. In light of a BLNR hearing on April 14, 2000, a stipulation to withdraw these motions was filed, and the plaintiffs indicated that they would refile the fourth motion after the written order from the BLNR is issued.
On June 21, 2000, the same plaintiffs filed a fifth joint motion to enforce judgment, generally restating the claims in the second and fourth motions. On July 7, 2000, Department of Hawaiian Home Lands filed a joinder in that motion and on July 12, 2000 Waimana also filed a joinder. A hearing was held on August 28, 2000. At that hearing, 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 Court took the matter under advisement. Because discussion at the August 28, 2000 hearing had raised the question of whether KDC and an individual plaintiff had specifically posed certain questions to the BLNR in their February 7, 2000 Request to Nullify, on August 31, 2000 HELCO filed a letter with the BLNR requesting specific rulings on these issues. In response, on September 5, 2000, KDC and the individual plaintiff filed an ex-parte
motion to file a memorandum in response to HELCO's letter and filed the memorandum itself, which claimed that HELCO's letter was an improper communication with the Court while a matter was pending decision. On September 6, 2000, the Court granted the ex-parte motion and set a hearing for September 18, 2000. At the hearing, the Court ruled to strike HELCO's letter from the Court record and 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. The Court also denied KDC and the individual plaintiff's request for an injunction barring further construction.
HELCO filed a request for extension with BLNR on October 20, 2000. Management believes the extension will be obtained. Because substantially all of the pre- PSD construction has been completed and because HELCO is awaiting the necessary PSD permit before the generating units can be installed, it is not anticipated that the Court's ruling will have any immediate impact on project construction. For other developments regarding these issues, see "BLNR petitions."
On October 27, 2000, KDC and another plaintiff filed a motion requesting the 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. A hearing is scheduled for December 11, 2000.
On November 25, 1998, the EAB issued an Order Denying Review in Part and
Remanding in Part. The EAB denied appeals of the permit that were based on
challenges to (1) the DOH's use of a netting analysis (with respect to nitrogen
oxide (NOx) emissions), (2) the DOH's determination of Best Available Control
Technology for control of sulfur dioxide emissions, and (3) certain aspects of
the DOH's ambient air and source impact analysis. However, the EAB concluded
that the DOH had not adequately responded to comments that had been made during
the public comment period that data relating to certain ambient air
concentrations were outdated or were measured at unrepresentative locations. The
EAB remanded the proceedings and directed the DOH to reopen the permit for the
limited purpose of (1) providing an updated air quality impact report
incorporating current data on sulfur dioxide and particulate matter ambient
concentrations and (2) providing a sufficient explanation of why the carbon
monoxide and ozone data used to support the permit are reasonably
representative, or performing a new air quality analysis based on data shown to
be representative of the air quality in the area to be affected by the project.
The EAB directed the DOH to accept and respond to public comments on the DOH's
decisions with respect to these issues and ruled that any further appeals of its
decision would be limited to the issues addressed on remand. On March 3, 1999,
the EAB issued an Order denying motions for reconsideration which had been filed
by HELCO, KDC and Kawaihae Cogeneration Partners (KCP). HELCO, working closely
with the DOH and EPA, planned its response to the EAB remand and, in January
1999, commenced collection of several months of additional data at a new site.
As part of the remand process, the DOH held a public hearing on the draft permit
on October 7, 1999, limited to the issues remanded by the EAB. After considering
issues raised at the public hearing, the DOH changed its position and required
HELCO to complete a full 12 months of data collection at the new site (which
collection began in January 1999) and also required that two months of data be
collected at a more representative elevation to corroborate the data collected
at the new site. This data collection was completed at the end of April 2000 and
provided excellent corroboration of the data collected at the new site. HELCO is
awaiting issuance of a revised permit by DOH, at which time DOH will open the
public comment period and schedule another public hearing. It is anticipated
that the hearing will take place in December 2000. As a result of these
actions, there have been further delays in HELCO's construction of CT-4 and CT-
5. Although the actual length of the delays is uncertain, management believes
CT-4 and CT-5 will be in service in early to mid-2002. HELCO continues to work
with the DOH and EPA with the objective of having the final permit reissued in
early 2001 and of reaching a final resolution of any appeals to the EAB as
expeditiously as possible thereafter. HELCO believes that the PSD permit will
eventually be obtained and that installation of CT-4 and CT-5 will begin when the PSD permit is obtained and any EAB appeals from its issuance are resolved.
On April 12, 1999, the Court ruled that, because there were no remaining issues of fact in the case, a May 1999 trial date was vacated, no further discovery was authorized, and proceedings before the Court were suspended pending any further administrative action by the DOH and BLNR. The Court's rulings to date on the six counts in the KDC complaint are as follows:
1. Count I (State Clean Air Act): At a hearing on April 5, 1999, the Court ruled that the DOH was within its discretionary authority in granting HELCO's requests for additional extensions of time to file its Title V air permit applications.
2. Count II (State Noise Pollution Act): At a hearing relating to Count II on February 16, 1999, the DOH notified the Court and the parties of a change in its interpretation of the noise rules promulgated under the State Noise Pollution Act. The change in interpretation would apply to the Keahole plant the noise standard applicable to the emitter property (which the DOH claims to be a 55 dBA daytime and 45 dBA nighttime standard) rather than the previously-applied noise standard of the receptor properties in the surrounding agricultural park (a 70 dBA standard).
In response to the new position announced by the DOH, on February 23, 1999 HELCO filed a declaratory judgment action against the DOH, alleging that the noise rules were invalid on constitutional grounds. At a hearing on March 31, 1999, the Court granted KDC's motion to dismiss 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 Court specifically reserved ruling on HELCO's claims or potential claims based on estoppel and on the constitutionality of the noise rules "as applied" to HELCO's Keahole plant. On March 31, 1999, the Third 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.
On May 12, 1999, the Order dismissing HELCO's declaratory judgment complaint was issued and final judgment was entered. The DOH objected to the entry of final judgment before all issues in the lawsuit were resolved, but an Order denying that motion was issued on July 26, 1999. HELCO filed a notice of appeal on August 25, 1999 and KDC filed a notice of cross-appeal on September 3, 1999. Opening briefs were filed with the Hawaii Supreme Court in January 2000, answering briefs were filed in February and March 2000 and reply briefs were filed in March and April 2000. Briefing is now complete.
The DOH has not issued any formal enforcement action applying the 55/45 dBA standard to the Keahole plant. Meanwhile, HELCO has installed noise mitigation measures on the existing diesel units at Keahole, has obtained from the DLNR an administrative approval to install an additional silencer on CT-2 and is exploring possible noise mitigation measures, which can be implemented if necessary, for CT-4 and CT-5.
3. Count III (violation of CDUP): At a hearing on April 12, 1999, the Court granted HELCO's motion for summary judgment and suspended proceedings on this Count pending referral of this matter to the
BLNR. (Should the DOH find HELCO in violation of the noise rules (see Count II), the BLNR would be called to act on the impact of such violation, if any, on the CDUP.)
4. Count IV (violations of HELCO's land patent): At a hearing on April 12, 1999, the Court granted HELCO's motion for summary judgment and suspended proceedings on this Count pending referral of this matter to the BLNR. (Should the DOH find HELCO in violation of the noise rules (see Count II), the BLNR would be requested to determine the impact of such violation, if any, on the land patent.)
5. Count V (HELCO's ability to comply with land use regulations): At a hearing on April 12, 1999, the Court granted HELCO's motion for summary judgment and suspended proceedings on this Count pending referral of this matter to the BLNR for resolution of the administrative proceeding which had been pending before it. (See "BLNR petitions" herein.)
6. Count VI (amendment of HELCO's land patent): At the March 31, 1999 hearing, the Court granted Plaintiffs' motion for summary judgment, finding that a 1984 amendment to HELCO's land patent was invalid because the BLNR had failed to comply with the statutory procedure relating to amendments. The amendment was intended to correct an error in the original land patent with regard to the repurchase clause in the patent and to conform the language to the applicable statute, under which the State would have the right to repurchase the site (as opposed to an automatic reversion) if it were no longer used for utility purposes. This matter was heard by the BLNR at its hearing on February 25, 2000 and a corrected land patent has been issued. (See "BLNR petitions" herein.)
If and when the DOH and BLNR/DLNR act on all issues relating to Counts II through VI, and depending upon their rulings, the KDC lawsuit may be moot.
Orders were entered on April 16, 1999 with regard to Count I, May 18, 1999 with regard to Count VI, and June 3, 1999 with regard to Counts II through V. On April 30, 1999, KDC filed a motion to determine prevailing party and to tax attorney fees and costs and a motion for discovery sanctions. After hearing the motion, the Court ruled that Plaintiffs were the prevailing party as to Counts II and V and were entitled to fees and costs with regard to those counts, denied Plaintiffs' motion for fees as the prevailing party with regard to Count VI, denied HELCO's motion for fees as the prevailing party with regard to Count I and granted Plaintiffs' request for discovery sanctions against HELCO for late supplementation of responses to discovery requests. HELCO filed motions to alter or amend the orders regarding attorneys' fees and costs, and orders granting those motions were issued on September 22, 1999. HELCO appealed the amended orders to the Hawaii Supreme Court, which dismissed the appeal on January 20, 2000, on the grounds that the appeal was premature. On September 1, 2000, KDC and others filed a motion in Third Circuit Court to enter partial (nonfinal) judgment based on the September 22, 1999 order. The motion was denied by an order dated September 21, 2000.
HELCO intends to continue to vigorously defend against the claims raised in this case and in related administrative actions.
entitlement and, therefore, each of the standard land use conditions applied to the expansion. The BLNR did not, at that time, determine whether HELCO has complied with the applicable conditions. The BLNR also determined that specific conditions imposed by the BLNR on HELCO's original CDUP and amendments thereto continue to apply to the existing plant but not to the expansion under the default entitlement. An order to this effect was issued on November 19, 1999.
On February 7, 2000, KDC and an individual plaintiff filed with the BLNR a Request to Nullify "Default Entitlement." In the request, it is alleged that HELCO's default entitlement is 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. At its hearing on February 25, 2000, the BLNR denied KDC's request. The BLNR stated that it has the power to consider whether conditions have been met and to enforce those conditions if they are not met, but not to enforce conditions in a way which violates either HRS Section 183-41 or the order of the Third Circuit Court which recognized HELCO's ability to proceed with the Keahole project under a default entitlement. As to the third claim, the BLNR authorized the issuance of a land patent with a corrected repurchase provision at its hearing on February 25, 2000, after which time the repurchase issue became moot since HELCO continues to use the land for public utility purposes. (See "KDC declaratory judgment action," relating to Count VI.) A written decision on the February 25, 2000 rulings was issued on August 16, 2000.
Subsequent to the February 25th hearing, an issue was raised administratively as to whether the BLNR should impose condition 15, which would impose a completion deadline on the project of three years following "approval." The issue was included on the agenda for the April 14, 2000 BLNR hearing. However, during the hearing the BLNR passed a motion to remove the item from the agenda. For a discussion of the subsequent decision of the Third Circuit Court on this issue and a discussion of HELCO's request for extension, see "CDUP amendment" above.
In September 1995, the PUC allowed HELCO to continue to pursue construction of and commit expenditures for the second combustion turbine (CT-5) and the steam recovery generator (ST-7) for its planned DTCC unit, but stated in its order that "no part of the project may be included in HELCO's rate base unless and until the project is in fact installed, and is used and useful for utility purposes." The PUC also ordered HELCO to continue negotiating with the IPPs and held that the facility to be built (i.e., either HELCO's or one of the IPP's) should be the one that can be most expeditiously put into service at "allowable cost."
The current status of the KCP complaint is as follows:
recommendation to the PUC regarding the terms and conditions of a PPA and the calculation of avoided cost. HELCO filed a memorandum in opposition to KCP's motion on December 2, 1998. On July 9, 1999, KCP filed an additional motion, asking the PUC to reopen its complaint docket and to enforce the Public Utility Regulatory Policies Act of 1978 by calculating the utility's avoided cost. HELCO filed a memorandum in opposition to KCP's motion on July 16, 1999, KCP filed a reply on July 22, 1999 and the Consumer Advocate filed a SOP on August 2, 1999. No decision has been issued on KCP's two most recent motions.
On October 29, 1999, the Third 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 is under scrutiny by the DOH, as it may have expired on January 31, 2000. In light of these and other issues, management believes that KCP's proposal is not viable and, therefore, should not impact installation of CT-4 and CT-5.
On January 16, 1998, HELCO filed with the PUC an application for approval of a PPA for a 60 MW (net) facility and an interconnection agreement with Encogen Hawaii, L.P. (Encogen), an Enserch affiliate, both dated October 22, 1997. The PUC issued a decision and order approving the agreements on July 14, 1999. The decision was amended at HELCO's request on July 21, 1999 and became final and nonappealable on August 23, 1999. Enserch sold its interest in the partnership, now called Hamakua Energy Partners L.P. (Hamakua Partners) in November 1999. The first phase of the project (22 MW) began commercial operation on August 12, 2000 and, according to Hamakua Partners, the remainder of its 60 MW facility is expected to be in-service by December 2000. This PPA was necessary to ensure reliable service to customers on the island of Hawaii and, in the opinion of management, does not supplant the need for CT-4 and CT-5.
In December 1999, the PUC approved an amended and restated PPA between HELCO and HCPC under which HCPC will continue to provide 22 MW of firm capacity. The term of the agreement is for five years (through December 31, 2004) and may continue beyond that time unless either party provides notice of termination to the other party by May 30 in the year of termination. HELCO has the right to terminate the contract as of the end of 2002, 2003 or 2004 for an early termination amount of $0.5 million for each of the remaining years in the five-year term. Like the PPA with Hamakua Partners, this restated and amended PPA with HCPC was necessary to ensure reliable service to customers. However, because the short term of the PPA is intended to ensure reliability until the Keahole project is constructed, in the opinion of management it does not supplant the need for CT-4 and CT-5.
Apollo Energy Corporation (Apollo), which has an existing contract to provide HELCO with as-available windpower through June 29, 2002, filed a petition for hearing with the PUC on April 28, 2000, alleging that it had unsuccessfully attempted for over 75 days 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 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, and briefing is to follow. Because Apollo is an as- available energy provider, management believes this matter would not affect the need for the Keahole project.
The first increment of new generation to be available to HELCO was added on August 12, 2000 (Hamakua Partners' 22 MW CT). 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 late 2000 (the remaining 38 MW of Hamakua Partners' 60 MW DTCC unit) and in early to mid-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 its older, smaller generating units.
Although management believes it has acted prudently with respect to the Keahole project, effective December 1, 1998, HELCO decided to discontinue the accrual of AFUDC on CT-4 and CT-5 (which would have been approximately $0.5 million after tax per month). The length of the delays to date and potential further delays were factors considered by management in its decision to discontinue the accrual of AFUDC. HELCO has also deferred plans for ST-7 to approximately 2005. Since ST-7 is not needed in the near future, no costs for ST-7 are included in construction in progress.
Management believes that the issues surrounding the amendment to the land use permit, the air permit, the IPP complaints and related matters will be satisfactorily resolved and will not prevent HELCO from ultimately constructing CT-4 and CT-5. The recovery of costs relating to CT-4 and CT-5 are subject to the rate-making process governed by the PUC. Management believes no adjustment to costs incurred to put CT-4 and CT-5 into service is required as of September 30, 2000.
Competition proceeding
On December 30, 1996, the PUC instituted a proceeding to identify and examine the issues surrounding electric competition and to determine the impact of competition on the electric utility infrastructure in Hawaii. After a collaborative process involving the 19 parties to the proceeding, final statements of position were prepared by several of the parties and submitted to the PUC in October 1998. HECO's position is that retail competition is not feasible in Hawaii, but that some of the benefits of competition can be achieved through competitive bidding for new
generation, performance-based rate-making (PBR) and innovative pricing provisions. The other parties to the proceeding advanced numerous other proposals in their statements of position. The PUC submitted a status report on its investigation to the Legislature. In the report, the PUC stated that competitive bidding for new power supplies (i.e., wholesale generation competition) is a logical first step to encourage competition in the state's electric industry and that it plans to proceed with an examination of the feasibility of competitive bidding. The PUC also plans to review specific policies to encourage renewable energy resources in the power generation mix. The report states that "further steps" by the PUC "will involve the development of specific policies to encourage wholesale competition and the continuing examination of other areas suitable for the development of competition."
HECO cannot predict what the ultimate outcome of the proceeding will be or which (if any) of the proposals advanced in the proceeding will be implemented. In addition, some of the parties may seek state legislative action on their proposals.
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 allow adjustments in the electric utilities' rates (for up to five years after a rate case) based on an index-based price cap, an earnings sharing mechanism and a service quality mechanism.
In March 2000, the PUC approved HELCO's standard form contract for customer retention that allows HELCO to provide a rate option for customers who would otherwise reduce their energy use from HELCO's system by using energy from a nonutility generator. The standard form contract provides a 10% discount on base energy rates for "Large Power" and "General Service Demand" customers. In May 1999, the PUC authorized HECO to offer a similar standard form contract.
Environmental regulation
In early 1995, the DOH initially advised HECO, Hawaiian Tug & Barge Corp. (HTB), Young Brothers, Limited (YB) and others that it was conducting an investigation to determine the nature and extent of actual or potential releases of hazardous substances, oil, pollutants or contaminants at or near Honolulu Harbor. The DOH issued letters in December 1995, indicating that it had identified a number of parties, including HECO, HTB and YB, who appear to be potentially responsible for the contamination and/or operate their facilities upon contaminated land. The DOH met with these identified parties in January 1996 and certain of the identified parties (including HECO, Chevron Products Company, the State of Hawaii Department of Transportation Harbors Division and others) formed the Honolulu Harbor Work Group. Effective January 30, 1998, the Work Group and the DOH entered into a voluntary agreement and scope of work to determine the nature and extent of any contamination, the responsible parties and appropriate remedial actions.
In 1999, the Work Group submitted reports to the DOH presenting environmental conditions and recommendations for additional data gathering to allow for an assessment of the need for risk-based corrective action (Conceptual Site Model). The Work Group also engaged a consultant who identified 27 additional potentially responsible parties, including YB. Under the terms of the agreement for the sale of YB, HEI and The Old Oahu Tug Service, Inc. (TOOTS, formerly HTB) have certain indemnity obligations, including obligations with respect to the Honolulu Harbor investigation. Texaco Group, Inc. and Philips Petroleum have joined the Work Group. In response to the DOH's request for technical assistance, the EPA became involved with the harbor investigation in June 2000. In August 2000, the Work Group, the DOH, the EPA and the U.S. Coast Guard met to discuss the Conceptual Site Model, how to proceed and other matters.
The Work Group is working on closing out any remaining obligations under the voluntary agreement, including completing responses to questions raised by the DOH on the Conceptual Site Model, and proposing an interim plan and procedure to respond to petroleum discharges in the Honolulu Harbor area.
Because the process for determining appropriate remedial and cleanup action, if any, is at an early stage, management cannot predict at this time the costs of further site analysis or future remediation and cleanup requirements, nor can it estimate when such costs would be incurred. Certain of the costs incurred may be
claimed and covered under insurance policies, but such coverage is not determinable at this time. The Work Group is working on determining a fair method of cost allocation within the group to fund future remediation work that may be required by the DOH or EPA.
In March 1997, HECO Capital Trust I (Trust I), a grantor trust and a wholly owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO- Obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997 (1997 trust preferred securities) with an aggregate liquidation preference of $50 million and (ii) to HECO, common securities with a liquidation preference of approximately $1.55 million. Proceeds from the sale of the 1997 trust preferred securities and the common securities were used by Trust I to purchase 8.05% Junior Subordinated Deferrable Interest Debentures, Series 1997 (1997 junior deferrable debentures) issued by HECO in the principal amount of $31.55 million and issued by each of MECO and HELCO in the respective principal amounts of $10 million. The 1997 junior deferrable debentures, which bear interest at 8.05% and mature on March 27, 2027, together with the subsidiary guarantees (pursuant to which the obligations of MECO and HELCO under their respective debentures are fully and unconditionally guaranteed by HECO), are the sole assets of Trust I. The 1997 trust preferred securities must be redeemed at the maturity of the underlying debt on March 27, 2027, which maturity may be shortened to a date no earlier than March 27, 2002 or extended to a date no later than March 27, 2046, and are not redeemable at the option of the holders, but may be redeemed by Trust I, in whole or in part, from time to time, on or after March 27, 2002 or upon the occurrence of certain events. All of the proceeds from the sale were invested by Trust I in the underlying debt securities of HECO, HELCO and MECO.
In December 1998, HECO Capital Trust II (Trust II), a grantor trust and a wholly owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO- Obligated 7.30% Cumulative Quarterly Income Preferred Securities, Series 1998 (1998 trust preferred securities) with an aggregate liquidation preference of $50 million and (ii) to HECO, common securities with a liquidation preference of approximately $1.55 million. Proceeds from the sale of the 1998 trust preferred securities and the common securities were used by Trust II to purchase 7.30% Junior Subordinated Deferrable Interest Debentures, Series 1998 (1998 junior deferrable debentures) issued by HECO in the principal amount of $31.55 million and issued by each of MECO and HELCO in the respective principal amounts of $10 million. The 1998 junior deferrable debentures, which bear interest at 7.30% and mature on December 15, 2028, together with the subsidiary guarantees (pursuant to which the obligations of MECO and HELCO under their respective debentures are fully and unconditionally guaranteed by HECO), are the sole assets of Trust II. The 1998 trust preferred securities must be redeemed at the maturity of the underlying debt on December 15, 2028, which maturity may be shortened to a date no earlier than December 15, 2003 or extended to a date no later than December 15, 2047, and are not redeemable at the option of the holders, but may be redeemed by Trust II, in whole or in part, from time to time, on or after December 15, 2003 or upon the occurrence of certain events. All of the proceeds from the sale were invested by Trust II in the underlying debt securities of HECO, HELCO and MECO, who used such proceeds from the sale of the 1998 junior deferrable debentures primarily to effect the redemption of certain series of their preferred stock having a total par value of $47 million.
The 1997 and 1998 junior deferrable debentures and the common securities of the Trusts have been eliminated in HECO's consolidated balance sheets as of September 30, 2000 and December 31, 1999. The 1997 and 1998 junior deferrable debentures are redeemable only (i) at the option of HECO, MECO and HELCO, respectively, in whole or in part, on or after March 27, 2002 (1997 junior deferrable debentures) and December 15, 2003 (1998 junior deferrable debentures) or (ii) at the option of HECO, in whole, upon the occurrence of a "Special Event" (relating to certain changes in laws or regulations).
Derivative instruments and hedging activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The provisions of SFAS No. 133 were amended by SFAS No. 137 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. HECO and its subsidiaries will adopt SFAS No. 133, as amended, on January 1, 2001. Management believes the impact of adoption will not be material.
Certain transactions involving stock compensation
In March 2000, the FASB issued FASB Interpretation No. 44, " Accounting for Certain Transactions Involving Stock Compensation, An Interpretation of APB Opinion No. 25," which clarifies the application of APB Opinion No. 25 for certain issues but does not address any issues related to the application of the fair value method in SFAS No. 123. The Interpretation clarifies (a) the definition of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option award, and (d) the accounting for an exchange of stock compensation awards in a business combination. HECO and its subsidiaries adopted the provisions of the Interpretation on July 1, 2000 with no resulting material impact to HECO's consolidated results of operations, financial condition or liquidity.
September 30, 2000
-----------------------------------------------------------------------------------
Reclassi-
fications
and
HECO HECO Elimina-
Capital Capital tions HECO
(in thousands) HECO HELCO MECO Trust I Trust II Consolidated
----------------------------------------------------------------------------------------------------------------------------
Assets
Utility plant, at cost
Utility plant (including construction
in progress)...................... $1,942,327 $ 618,687 $ 561,311 $ - $ - $ - $ 3,122,325
Less accumulated depreciation....... (737,715) (218,449) (191,517) - - - (1,147,681)
------------ ----------- ---------- ---------- --------- ------------ -------------
Net utility plant............... 1,204,612 400,238 369,794 - - - 1,974,644
------------ ----------- ---------- ---------- --------- ------------ -------------
Investment in wholly owned subsidiaries,
at equity.......................... 333,663 - - - - (333,663) -
------------ ----------- ---------- ---------- --------- ------------ -------------
Current assets
Cash and equivalents................ 9 2,555 868 - - - 3,432
Advances to affiliates ............. 14,800 - 10,500 51,546 51,546 (128,392) -
Customer accounts receivable, net .. 54,295 14,579 11,704 - - - 80,578
Accrued unbilled revenues, net...... 42,060 9,388 8,470 - - - 59,918
Other accounts receivable, net...... 1,600 1,153 (4) - - (1,107) 1,642
Fuel oil stock, at average cost..... 21,844 3,928 5,363 - - - 31,135
Materials and supplies, at average
cost.............................. 9,488 3,118 7,528 - - - 20,134
Prepayments and other............... 2,973 1,300 346 - - - 4,619
------------ ----------- ---------- ---------- --------- ------------ -------------
Total current assets............ 147,069 36,021 44,775 51,546 51,546 (129,499) 201,458
------------ ----------- ---------- ---------- --------- ------------ -------------
Other assets
Regulatory assets................... 77,703 20,012 18,584 - - - 116,299
Other............................... 25,841 5,481 7,584 - - - 38,906
------------ ----------- ---------- ---------- --------- ------------ -------------
Total other assets.............. 103,544 25,493 26,168 - - - 155,205
------------ ----------- ---------- ---------- --------- ------------ -------------
$1,788,888 $ 461,752 $ 440,737 $ 51,546 $ 51,546 $(463,162) $ 2,331,307
============ =========== ========== ========== ========= ============ =============
Capitalization and liabilities
Capitalization
Common stock equity................. $ 829,206 $163,518 $167,053 $ 1,546 $ 1,546 $(333,663) $ 829,206
Cumulative preferred stock-not
subject to mandatory redemption... 22,293 7,000 5,000 - - - 34,293
HECO-obligated mandatorily
redeemable trust preferred
securities of subsidiary trusts
holding solely HECO and HECO-
guaranteed debentures............. - - - 50,000 50,000 - 100,000
Long-term debt, net................. 445,257 145,924 171,235 - - (103,092) 659,324
------------ ----------- ---------- ---------- --------- ------------ -------------
Total capitalization............ 1,296,756 316,442 343,288 51,546 51,546 (436,755) 1,622,823
------------ ----------- ---------- ---------- --------- ------------ -------------
Current liabilities
Short-term borrowings from
nonaffiliates and affiliate....... 92,803 14,800 - - - (25,300) 82,303
Accounts payable.................... 37,766 11,012 5,582 - - - 54,360
Interest and preferred
dividends payable................. 10,645 3,162 4,154 - - (144) 17,817
Taxes accrued....................... 48,894 20,286 23,099 - - - 92,279
Other............................... 3,858 1,298 4,921 - - (963) 9,114
------------ ----------- ---------- ---------- --------- ------------ -------------
Total current liabilities....... 193,966 50,558 37,756 - - (26,407) 255,873
------------ ----------- ---------- ---------- --------- ------------ -------------
Deferred credits and other liabilities
Deferred income taxes............... 117,878 10,660 9,172 - - - 137,710
Unamortized tax credits............. 28,387 9,201 10,445 - - - 48,033
Other............................... 19,704 23,153 15,695 - - - 58,552
------------ ----------- ---------- ---------- --------- ------------ -------------
Total deferred credits and
other liabilities.......... 165,969 43,014 35,312 - - - 244,295
------------ ----------- ---------- ---------- --------- ------------ -------------
Contributions in aid of construction... 132,197 51,738 24,381 - - - 208,316
------------ ----------- ---------- ---------- --------- ------------ -------------
$1,788,888 $ 461,752 $ 440,737 $ 51,546 $ 51,546 $(463,162) $ 2,331,307
============ =========== ========== ========== ========= ============ =============
|
Hawaiian Electric Company, Inc. and subsidiaries Consolidating balance sheet
December 31, 1999
-------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
----------------------------------------------------------------------------------------------------------------------------------
Assets
Utility plant, at cost
Utility plant (including construction
in progress)........................ $1,893,318 $ 602,504 $ 538,695 $ - $ - $ - $ 3,034,517
Less accumulated depreciation........... (696,045) (204,578) (175,750) - - - (1,076,373)
---------- --------- --------- ------- -------- --------- -----------
Net utility plant................... 1,197,273 397,926 362,945 - - - 1,958,144
---------- --------- --------- ------- -------- --------- -----------
Investment in wholly owned subsidiaries,
at equity............................... 326,646 - - - - (326,646) -
---------- --------- --------- ------- -------- --------- -----------
Current assets
Cash and equivalents.................... 1,039 198 729 - - - 1,966
Advances to affiliates.................. 26,200 - 8,400 51,546 51,546 (137,692) -
Customer accounts receivable, net....... 46,744 12,155 9,869 - - - 68,768
Accrued unbilled revenues, net.......... 37,454 8,924 7,452 - - - 53,830
Other accounts receivable, net.......... 186 920 274 - - 792 2,172
Fuel oil stock, at average cost......... 24,438 3,610 6,906 - - - 34,954
Materials and supplies, at average cost. 9,096 3,195 7,755 - - - 20,046
Prepayments and other................... 3,076 1,258 315 - - - 4,649
---------- --------- --------- ------- -------- --------- -----------
Total current assets................ 148,233 30,260 41,700 51,546 51,546 (136,900) 186,385
---------- --------- --------- ------- -------- --------- -----------
Other assets
Regulatory assets....................... 77,264 20,233 17,262 - - - 114,759
Other................................... 28,955 7,393 7,173 - - - 43,521
---------- --------- --------- ------- -------- --------- -----------
Total other assets.................. 106,219 27,626 24,435 - - - 158,280
---------- --------- --------- ------- -------- --------- -----------
$1,778,371 $ 455,812 $ 429,080 $51,546 $ 51,546 $(463,546) $ 2,302,809
========== ========= ========= ======= ======== ========= ===========
Capitalization and liabilities
Capitalization
Common stock equity..................... $ 806,103 $ 159,719 $ 163,835 $ 1,546 $ 1,546 $(326,646) $ 806,103
Cumulative preferred stock-not
subject to mandatory redemption... 22,293 7,000 5,000 - - - 34,293
HECO-obligated mandatorily redeemable
trust preferred securities of
subsidiary trusts holding solely
HECO and HECO-guaranteed
debentures....................... - - - 50,000 50,000 - 100,000
Long-term debt, net..................... 432,112 145,810 171,200 - - (103,093) 646,029
---------- --------- --------- ------- -------- --------- -----------
Total capitalization................ 1,260,508 312,529 340,035 51,546 51,546 (429,739) 1,586,425
---------- --------- --------- ------- -------- --------- -----------
Current liabilities
Short-term borrowings from
nonaffiliates and affiliate......... 115,413 26,200 - - - (34,600) 107,013
Accounts payable........................ 36,658 6,977 8,481 - - - 52,116
Interest and preferred dividends
payable............................... 4,922 1,486 1,910 - - (158) 8,160
Taxes accrued........................... 37,876 13,205 15,454 - - - 66,535
Other................................... 21,721 4,362 4,451 - - 951 31,485
---------- --------- --------- ------- -------- --------- -----------
Total current liabilities........... 216,590 52,230 30,296 - - (33,807) 265,309
---------- --------- --------- ------- -------- --------- -----------
Deferred credits and other liabilities
Deferred income taxes................... 111,345 10,413 9,347 - - - 131,105
Unamortized tax credits................. 28,270 9,238 10,698 - - - 48,206
Other................................... 29,015 21,712 14,735 - - - 65,462
---------- --------- --------- ------- -------- --------- -----------
Total deferred credits and
other liabilities.............. 168,630 41,363 34,780 - - - 244,773
---------- --------- --------- ------- -------- --------- -----------
Contributions in aid of construction....... 132,643 49,690 23,969 - - - 206,302
---------- --------- --------- ------- -------- --------- -----------
$1,778,371 $ 455,812 $ 429,080 $51,546 $ 51,546 $(463,546) $ 2,302,809
========== ========= ========= ======= ======== ========= ===========
|
Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of income
Three months ended September 30, 2000
------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
--------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................... $235,151 $ 50,240 $ 49,872 $ - $ - $ - $335,263
-------- -------- -------- ------- -------- -------- --------
Operating expenses
Fuel oil.............................. 65,316 10,887 19,680 - - - 95,883
Purchased power....................... 70,275 12,947 1,870 - - - 85,092
Other operation....................... 20,346 4,719 5,517 - - - 30,582
Maintenance........................... 9,641 2,691 3,824 - - - 16,156
Depreciation.......................... 14,910 4,809 4,886 - - - 24,605
Taxes, other than income taxes........ 22,125 4,791 4,699 - - - 31,615
Income taxes.......................... 10,304 2,713 2,811 - - - 15,828
-------- -------- -------- ------- -------- -------- --------
212,917 43,557 43,287 - - - 299,761
-------- -------- -------- ------- -------- -------- --------
Operating income...................... 22,234 6,683 6,585 - - - 35,502
-------- -------- -------- ------- -------- -------- --------
Other income
Allowance for equity funds used
during construction................ 1,169 92 244 - - - 1,505
Equity in earnings of subsidiaries.... 8,658 - - - - (8,658) -
Other, net............................ 1,848 234 265 1,037 941 (2,469) 1,856
-------- -------- -------- ------- -------- -------- --------
11,675 326 509 1,037 941 (11,127) 3,361
-------- -------- -------- ------- -------- -------- --------
Income before interest and other
charges............................ 33,909 7,009 7,094 1,037 941 (11,127) 38,863
-------- -------- -------- ------- -------- -------- --------
Interest and other charges
Interest on long-term debt............ 5,833 1,905 2,286 - - - 10,024
Amortization of net bond premium
and expense........................ 318 79 88 - - - 485
Other interest charges................ 3,101 732 361 - - (2,469) 1,725
Allowance for borrowed funds used
during construction................ (633) (56) (118) - - - (807)
Preferred stock dividends of
subsidiaries......................... - - - - - 228 228
Preferred securities distributions
of trust subsidiaries.............. - - - - - 1,918 1,918
-------- -------- -------- ------- -------- -------- --------
8,619 2,660 2,617 - - (323) 13,573
-------- -------- -------- ------- -------- -------- --------
Income before preferred stock
dividends of HECO.................. 25,290 4,349 4,477 1,037 941 (10,804) 25,290
Preferred stock dividends of HECO..... 270 133 95 1,006 912 (2,146) 270
-------- -------- -------- ------- -------- -------- --------
Net income for common stock........... $ 25,020 $ 4,216 $ 4,382 $ 31 $ 29 $ (8,658) $ 25,020
======== ======== ======== ======= ======== ======== ========
|
Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of retained earnings
Three months ended September 30, 2000
------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
--------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period $441,199 $62,430 $71,612 $ - $ - $(134,042) $441,199
Net income for common stock........... 25,020 4,216 4,382 31 29 (8,658) 25,020
Common stock dividends................ (18,011) (3,060) (3,164) (31) (29) 6,284 (18,011)
-------- ------- ------- ------- -------- --------- --------
Retained earnings, end of period...... $448,208 $63,586 $72,830 $ - $ - $(136,416) $448,208
======== ======= ======= ======= ======== ========= ========
|
Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of income
Three months ended September 30, 1999
----------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
-------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................... $192,920 $41,212 $41,793 $ - $ - $ - $ 275,925
-------- ------- ------- ------- -------- --------- ---------
Operating expenses
Fuel oil.............................. 36,428 9,157 13,357 - - - 58,942
Purchased power....................... 63,578 7,064 1,310 - - - 71,952
Other operation....................... 24,284 5,911 5,535 - - - 35,730
Maintenance........................... 7,727 1,625 5,084 - - - 14,436
Depreciation.......................... 14,040 4,492 4,790 - - - 23,322
Taxes, other than income taxes........ 18,223 3,837 3,979 - - - 26,039
Income taxes.......................... 8,704 2,541 2,174 - - - 13,419
-------- ------- ------- ------- -------- --------- --------
172,984 34,627 36,229 - - - 243,840
-------- ------- ------- ------- -------- --------- ---------
Operating income...................... 19,936 6,585 5,564 - - - 32,085
-------- ------- ------- ------- -------- --------- ---------
Other income
Allowance for equity funds used
during construction................ 880 100 196 - - - 1,176
Equity in earnings of subsidiaries.... 7,421 - - - - (7,421) -
Other, net............................ 889 266 292 1,037 941 (2,427) 998
-------- ------- ------- ------- -------- --------- ---------
9,190 366 488 1,037 941 (9,848) 2,174
-------- ------- ------- ------- -------- --------- ---------
Income before interest and
other charges...................... 29,126 6,951 6,052 1,037 941 (9,848) 34,259
-------- ------- ------- ------- -------- --------- ---------
Interest and other charges
Interest on long-term debt............ 5,776 2,148 2,389 - - - 10,313
Amortization of net bond premium
and expense........................ 284 69 83 - - - 436
Other interest charges................ 3,040 718 163 - - (2,427) 1,494
Allowance for borrowed funds used
during construction................ (558) (61) (97) - - - (716)
Preferred stock dividends of
subsidiaries......................... - - - - - 229 229
Preferred securities distributions
of trust subsidiaries.............. - - - - - 1,919 1,919
-------- ------- ------- ------- -------- --------- ---------
8,542 2,874 2,538 - - (279) 13,675
-------- ------- ------- ------- -------- --------- ---------
Income before preferred stock
dividends of HECO.................. 20,584 4,077 3,514 1,037 941 (9,569) 20,584
Preferred stock dividends of HECO..... 269 133 96 1,007 912 (2,148) 269
-------- ------- ------- ------- -------- --------- ---------
Net income for common stock........... $ 20,315 $ 3,944 $ 3,418 $ 30 $ 29 $ (7,421) $ 20,315
======== ======= ======= ======= ======== ========= =========
|
Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of retained earnings
Three months ended September 30, 1999
---------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period.... $415,944 $56,918 $67,455 $ - $ - $(124,373) $415,944
Net income for common stock............... 20,315 3,944 3,418 30 29 (7,421) 20,315
Common stock dividends.................... (14,419) (1,340) - (30) (29) 1,399 (14,419)
-------- ------- ------- ------- -------- --------- --------
Retained earnings, end of period.......... $421,840 $59,522 $70,873 $ - $ - $(130,395) $421,840
======== ======= ======= ======= ======== ========= ========
|
Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of income
Nine months ended September 30, 2000
-------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
---------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................... $648,225 $141,030 $140,912 $ - $ - $ - $930,167
-------- -------- -------- ------- -------- --------- --------
Operating expenses
Fuel oil.............................. 171,972 35,917 54,241 - - - 262,130
Purchased power....................... 191,082 29,647 5,033 - - - 225,762
Other operation....................... 57,118 13,669 15,000 - - - 85,787
Maintenance........................... 26,726 6,165 9,420 - - - 42,311
Depreciation.......................... 44,106 14,507 14,656 - - - 73,269
Taxes, other than income taxes........ 61,257 13,400 13,324 - - - 87,981
Income taxes.......................... 29,450 7,842 8,930 - - - 46,222
-------- -------- -------- ------- -------- --------- --------
581,711 121,147 120,604 - - - 823,462
-------- -------- -------- ------- -------- --------- --------
Operating income...................... 66,514 19,883 20,308 - - - 106,705
-------- -------- -------- ------- -------- --------- --------
Other income
Allowance for equity funds used
during construction................ 3,081 210 811 - - - 4,102
Equity in earnings of subsidiaries.... 26,345 - - - - (26,345) -
Other, net............................ 3,640 613 911 3,112 2,822 (7,529) 3,569
-------- -------- -------- ------- -------- --------- --------
33,066 823 1,722 3,112 2,822 (33,874) 7,671
-------- -------- -------- ------- -------- --------- --------
Income before interest and
other charges...................... 99,580 20,706 22,030 3,112 2,822 (33,874) 114,376
-------- -------- -------- ------- -------- --------- --------
Interest and other charges
Interest on long-term debt............ 17,318 5,715 6,843 - - - 29,876
Amortization of net bond premium
and expense........................ 952 234 266 - - - 1,452
Other interest charges................ 9,441 2,286 1,059 - - (7,529) 5,257
Allowance for borrowed funds used
during construction................ (1,700) (126) (394) - - - (2,220)
Preferred stock dividends of
subsidiaries......................... - - - - - 686 686
Preferred securities distributions
of trust subsidiaries.............. - - - - - 5,756 5,756
-------- -------- -------- ------- -------- --------- --------
26,011 8,109 7,774 - - (1,087) 40,807
-------- -------- -------- ------- -------- --------- --------
Income before preferred stock
dividends of HECO.................. 73,569 12,597 14,256 3,112 2,822 (32,787) 73,569
Preferred stock dividends of HECO..... 810 400 286 3,019 2,737 (6,442) 810
-------- -------- -------- ------- -------- --------- --------
Net income for common stock........... $ 72,759 $ 12,197 $ 13,970 $ 93 $ 85 $ (26,345) $ 72,759
======== ======== ======== ======= ======== ========= ========
|
Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of retained earnings
Nine months ended September 30, 2000
----------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
------------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period.... $425,206 $59,806 $ 69,633 $ - $ - $(129,439) $425,206
Net income for common stock............... 72,759 12,197 13,970 93 85 (26,345) 72,759
Common stock dividends.................... (49,757) (8,417) (10,773) (93) (85) 19,368 (49,757)
-------- ------- -------- ------- -------- --------- --------
Retained earnings, end of period.......... $448,208 $63,586 $ 72,830 $ - $ - $(136,416) $448,208
======== ======= ======== ======= ======== ========= ========
|
Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of income
Nine months ended September 30, 1999
------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
--------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................... $532,595 $116,039 $114,774 $ - $ - $ - $763,408
-------- -------- -------- ------- ------- --------- --------
Operating expenses
Fuel oil.............................. 96,247 22,027 32,772 - - - 151,046
Purchased power....................... 173,127 21,922 4,532 - - - 199,581
Other operation....................... 66,340 18,760 15,430 - - - 100,530
Maintenance........................... 22,153 6,820 12,351 - - - 41,324
Depreciation.......................... 42,212 13,471 14,358 - - - 70,041
Taxes, other than income taxes........ 50,551 10,974 10,934 - - - 72,459
Income taxes.......................... 23,936 5,593 6,679 - - - 36,208
-------- -------- -------- ------- ------- --------- --------
474,566 99,567 97,056 - - - 671,189
-------- -------- -------- ------- ------- --------- --------
Operating income...................... 58,029 16,472 17,718 - - - 92,219
-------- -------- -------- ------- ------- --------- --------
Other income
Allowance for equity funds used
during construction................ 2,441 255 506 - - - 3,202
Equity in earnings of subsidiaries.... 19,259 - - - - (19,259) -
Other, net............................ 3,205 774 593 3,112 2,812 (7,126) 3,370
-------- -------- -------- ------- ------- --------- --------
24,905 1,029 1,099 3,112 2,812 (26,385) 6,572
-------- -------- -------- ------- ------- --------- --------
Income before interest and
other charges...................... 82,934 17,501 18,817 3,112 2,812 (26,385) 98,791
-------- -------- -------- ------- ------- --------- --------
Interest and other charges
Interest on long-term debt............ 16,899 6,211 7,029 - - - 30,139
Amortization of net bond premium
and expense........................ 786 168 249 - - - 1,203
Other interest charges................ 9,270 2,228 1,042 - - (7,126) 5,414
Allowance for borrowed funds used
during construction................ (1,549) (158) (248) - - - (1,955)
Preferred stock dividends of - - - - - 716 716
subsidiaries.........................
Preferred securities distributions
of trust subsidiaries.............. - - - - - 5,746 5,746
-------- -------- -------- ------- ------- --------- --------
25,406 8,449 8,072 - - (664) 41,263
-------- -------- -------- ------- ------- --------- --------
Income before preferred stock
dividends of HECO.................. 57,528 9,052 10,745 3,112 2,812 (25,721) 57,528
Preferred stock dividends of HECO..... 908 400 316 3,019 2,727 (6,462) 908
-------- -------- -------- ------- ------- --------- --------
Net income for common stock........... $ 56,620 $ 8,652 $ 10,429 $ 93 $ 85 $ (19,259) $ 56,620
======== ======== ======== ======= ======= ========= ========
|
Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of retained earnings
Nine months ended September 30, 1999
-------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
---------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period $405,836 $57,210 $62,992 $ - $ - $(120,202) $405,836
Net income for common stock........... 56,620 8,652 10,429 93 85 (19,259) 56,620
Common stock dividends................ (40,616) (6,340) (2,548) (93) (85) 9,066 (40,616)
-------- ------- ------- ------- -------- --------- --------
Retained earnings, end of period...... $421,840 $59,522 $70,873 $ - $ - $(130,395) $421,840
======== ======= ======= ======= ======== ========= ========
|
Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of cash flows
Nine months ended September 30, 2000
----------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income before preferred stock
dividends of HECO....................... $ 73,569 $ 12,597 $ 14,256 $ 3,112 $ 2,822 $(32,787) $ 73,569
Adjustments to reconcile income before
preferred stock dividends of HECO to net
cash provided by operating activities
Equity in earnings................... (26,345) - - - - 26,345 -
Common stock dividends received
from subsidiaries............... 19,368 - - - - (19,368) -
Depreciation of property,
plant and equipment............. 44,106 14,507 14,656 - - - 73,269
Other amortization................... 3,436 670 1,273 - - - 5,379
Deferred income taxes................ 6,532 247 (174) - - - 6,605
Tax credits, net..................... 933 139 (56) - - - 1,016
Allowance for equity funds used
during construction............. (3,081) (210) (811) - - - (4,102)
Changes in assets and liabilities
Increase in accounts receivable.. (8,965) (2,657) (1,557) - - 1,899 (11,280)
Increase in accrued unbilled
revenues........................ (4,606) (464) (1,018) - - - (6,088)
Decrease (increase) in fuel oil
stock........................... 2,594 (318) 1,543 - - - 3,819
Decrease (increase) in materials
and supplies............... (392) 77 227 - - - (88)
Increase in regulatory assets.... (1,403) (174) (1,130) - - - (2,707)
Increase (decrease) in accounts
payable.................... 1,108 4,035 (2,899) - - - 2,244
Changes in other assets and
liabilities..................... (8,752) 8,729 9,525 - - 3,857 13,359
-------- -------- -------- ------- ------- -------- -------
Net cash provided by operating activities.. 98,102 37,178 33,835 3,112 2,822 (20,054) 154,995
-------- -------- -------- ------- ------- -------- -------
Cash flows from investing activities
Capital expenditures....................... (51,023) (16,088) (21,844) - - - (88,955)
Contributions in aid of construction....... 2,927 2,479 1,307 - - - 6,713
Advances to (repayments from) affiliates... 11,400 - (2,100) - - (9,300) -
Payments on notes receivable............... - 138 - - - - 138
-------- -------- -------- ------- ------- -------- -------
Net cash used in investing activities...... (36,696) (13,471) (22,637) - - (9,300) (82,104)
-------- -------- -------- ------- ------- -------- -------
Cash flows from financing activities
Common stock dividends..................... (49,757) (8,417) (10,773) (93) (85) 19,368 (49,757)
Preferred stock dividends.................. (810) (400) (286) - - 686 (810)
Preferred securities distributions
of trust subsidiaries................. - - - (3,019) (2,737) - (5,756)
Proceeds from issuance of long-term debt... 13,059 91 - - - - 13,150
Net decrease in short-term borrowings
from nonaffiliates and affiliate with
original maturities of three months
or less.............................. (22,610) (11,400) - - - 9,300 (24,710)
Other...................................... (2,318) (1,224) - - - - (3,542)
-------- -------- -------- ------- ------- -------- -------
Net cash used in financing activities...... (62,436) (21,350) (11,059) (3,112) (2,822) 29,354 (71,425)
-------- -------- -------- ------- ------- -------- -------
Net increase (decrease) in
cash and equivalents.................. (1,030) 2,357 139 - - - 1,466
Cash and equivalents, beginning of period.. 1,039 198 729 - - - 1,966
-------- -------- -------- ------- ------- -------- -------
Cash and equivalents, end of period........ $ 9 $ 2,555 $ 868 $ - $ - $ - $ 3,432
======== ======== ======== ======= ======= ======== =======
|
Hawaiian Electric Company, Inc. and subsidiaries Consolidating statement of cash flows
Nine months ended September 30, 1999
----------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income before preferred stock
dividends of HECO......................... $ 57,528 $ 9,052 $ 10,745 $ 3,112 $ 2,812 $ (25,721) $ 57,528
Adjustments to reconcile income before
preferred stock dividends of HECO to net
cash provided by operating activities
Equity in earnings..................... (19,259) - - - - 19,259 -
Common stock dividends received
from subsidiaries................. 9,066 - - - - (9,066) -
Depreciation of property,
plant and equipment............... 42,212 13,471 14,358 - - - 70,041
Other amortization..................... 2,235 570 1,913 - - - 4,718
Deferred income taxes.................. 1,129 (453) (363) - - - 313
Tax credits, net....................... 1,304 318 (54) - - - 1,568
Allowance for equity funds used
during construction............... (2,441) (255) (506) - - - (3,202)
Changes in assets and liabilities
Decrease (increase) in
accounts receivable.......... 3,020 1,170 (1,073) - 178 840 4,135
Increase in accrued unbilled
revenues.......................... (2,423) (718) (982) - - - (4,123)
Increase in fuel oil stock......... (7,271) (734) (1,788) - - - (9,793)
Increase in materials and
supplies.......................... (1,796) (222) (26) - - - (2,044)
Decrease (increase) in regulatory
assets........................ 707 (1,323) (1,848) - - - (2,464)
Increase in accounts payable....... 6,392 195 4,154 - - - 10,741
Changes in other assets
and liabilities.............. 6,560 1,439 4,819 - (178) 4,906 17,546
-------- -------- -------- ------- ------- --------- ---------
Net cash provided by operating activities.... 96,963 22,510 29,349 3,112 2,812 (9,782) 144,964
-------- -------- -------- ------- ------- --------- ---------
Cash flows from investing activities
Capital expenditures......................... (41,322) (12,737) (14,655) - - - (68,714)
Contributions in aid of construction......... 4,600 757 970 - - - 6,327
Advances to (repayments from) affiliates..... 4,400 - (8,800) - - 4,400 -
Proceeds from sale of assets................. 1,499 - - - - - 1,499
Payments on notes receivable................. - 1,199 - - - - 1,199
-------- -------- -------- ------- -------- --------- ---------
Net cash used in investing activities........ (30,823) (10,781) (22,485) - - 4,400 (59,689)
-------- -------- -------- ------- ------- --------- ---------
Cash flows from financing activities
Common stock dividends....................... (40,616) (6,340) (2,548) (93) (85) 9,066 (40,616)
Preferred stock dividends.................... (908) (400) (316) - - 716 (908)
Preferred securities distributions
of trust subsidiaries................... - - - (3,019) (2,727) - (5,746)
Proceeds from issuance of long-term debt..... 39,313 24,843 8,896 - - - 73,052
Repayment of long-term debt.................. (30,000) (11,000) (9,000) - - - (50,000)
Redemption of preferred stock................ (28,600) (10,000) (8,480) - - - (47,080)
Net decrease in short-term borrowings
from nonaffiliates and affiliate with
original maturities of three months
or less................................ (27,502) (4,400) - - - (4,400) (36,302)
Other........................................ (4,768) (1,267) (244) - - - (6,279)
-------- -------- -------- ------- ------- --------- ---------
Net cash used in financing activities........ (93,081) (8,564) (11,692) (3,112) (2,812) 5,382 (113,879)
-------- -------- -------- ------- ------- --------- ---------
Net increase (decrease) in
cash and equivalents.................... (26,941) 3,165 (4,828) - - - (28,604)
Cash and equivalents, beginning of period.... 29,753 10,024 15,006 - - - 54,783
-------- -------- -------- ------- ------- --------- ---------
Cash and equivalents, end of period.......... $ 2,812 $ 13,189 $ 10,178 $ - $ - $ - $ 26,179
======== ======== ======== ======= ======= ========= =========
|
HECO has not provided separate financial statements and other disclosures concerning HELCO and MECO because management has concluded that such financial statements and other information are not material to holders of the 1997 and 1998 junior deferrable debentures issued by HELCO and MECO which have been fully and unconditionally guaranteed by HECO.
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
(in thousands) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
Operating income from regulated and nonregulated activities
before income taxes (per HEI consolidated statements of income).. $ 53,293 $ 46,472 $ 156,538 $ 131,709
Deduct:
Income taxes on regulated activities............................. (15,828) (13,419) (46,222) (36,208)
Revenues from nonregulated activities............................ (2,061) (1,358) (4,407) (3,938)
Add:
Expenses from nonregulated activities............................ 98 390 796 656
----------- -------- --------- ---------
Operating income from regulated activities after income taxes
(per HECO consolidated statements of income)..................... $ 35,502 $ 32,085 $ 106,705 $ 92,219
=========== ======== ========= =========
|
The following discussion should be read in conjunction with the consolidated financial statements of HEI and HECO and accompanying notes.
Three months ended
September 30,
(in thousands, except per ----------------------- % Primary reason(s) for
share amounts) 2000 1999 change Significant change*
---------------------------------------------------------------------------------------------------------------------------------
Revenues........................... $445,867 $392,450 14 Increases for the electric utility and savings bank
segments, partly offset by decreases for the "other"
and international power segments
Operating income................... 60,510 56,551 7 Increases for the electric utility, savings bank and
"other" segments, partly offset by a decrease for the
international power segment
Net income......................... 22,049 21,632 2 Higher operating income and AFUDC, partly offset by
higher interest expense due to higher average
borrowings resulting from an HEIPC acquisition in
March 2000 and higher income taxes due to no tax
reductions for losses from foreign operations
Basic earnings
per common share................ $ 0.68 $ 0.67 1 See explanation for net income
Weighted-average number of common
shares outstanding................ 32,642 32,203 1 Issuances under the Dividend Reinvestment and Stock
Purchase Plan and other plans
|
Nine months ended
September 30,
(in thousands, except per ------------------------- % Primary reason(s) for
share amounts) 2000 1999 change significant change*
------------------------------------------------------------------------------------------------------------------------------------
Revenues........................... $1,260,878 $1,114,385 13 Increases for the electric utility and savings bank
segments, partly offset by decreases for the "other"
and international power segments
Operating income................... 185,838 169,293 10 Increases for the electric utility and savings bank
segments, partly offset by decreases for the
international power and "other" segments
Net income......................... 70,121 65,142 8 Higher operating income and AFUDC, partly offset by
higher interest expense due to higher average
borrowings resulting from an HEIPC acquisition in
March 2000 and higher income taxes due to higher
operating income and no tax reductions for losses
from foreign operations
Basic earnings
per common share................ $ 2.16 $ 2.02 7 See explanation for net income
Weighted-average number of common
shares outstanding................ 32,438 32,180 1 Issuances under the Dividend Reinvestment and Stock
Purchase Plan and other plans
|
* Also see segment discussions which follow.
Following is a general discussion of the results of operations by business segment.
Three months ended
(in thousands, except per September 30, %
----------------------------
barrel amounts) 2000 1999 Change Primary reason(s) for significant change
-----------------------------------------------------------------------------------------------------------------------------------
Revenues...................... $337,324 $277,283 22 Higher fuel oil and purchased energy prices,
the effects of which are passed on to
customers ($50 million), and 4.1% higher KWH
sales ($8 million)
Expenses
Fuel oil..................... 95,883 58,942 63 Higher fuel oil prices and more KWHs generated
Purchased power.............. 85,092 71,952 18 Higher fuel prices and more KWHs purchased
Other........................ 103,056 99,917 3 Higher taxes, other than income taxes,
maintenance and depreciation expenses, partly
offset by lower other operation expenses
(including lower retirement benefits expenses)
Operating income.............. 53,293 46,472 15 Higher KWH sales and lower other operation
expenses, partly offset by higher taxes,
other than income taxes, maintenance and
depreciation expenses
Net income................... 25,020 20,315 23 Higher operating income and AFUDC, partially
offset by higher income taxes
Kilowatthour sales (millions). 2,433 2,338 4
Average fuel oil price
per barrel................. $ 34.42 $ 21.69 59
|
Nine months ended
(in thousands, except per September 30,
------------------------------------ %
barrel amounts) 2000 1999 change Primary reason(s) for significant change
-----------------------------------------------------------------------------------------------------------------------------------
Revenues...................... $934,574 $767,346 22 Higher fuel oil and purchased energy prices,
the effects of which are passed on to
customers ($145 million), 3.1% higher KWH
sales ($20 million) and the recovery of
integrated resource planning costs
Expenses
Fuel oil..................... 262,130 151,046 74 Higher fuel oil prices and more KWHs generated
Purchased power.............. 225,762 199,581 13 Higher fuel prices and more KWHs purchased
Other........................ 290,144 285,010 2 Higher taxes, other than income taxes,
maintenance and depreciation expenses, partly
offset by lower other operation expense
(including lower retirement benefits expenses)
Operating income.............. 156,538 131,709 19 Higher KWH sales and lower other operation
expense, partly offset by higher taxes, other
than income taxes, maintenance and
depreciation expenses
Net income................... 72,759 56,620 29 Higher operating income and AFUDC, partially
offset by higher income taxes
Kilowatthour sales (millions). 6,902 6,692 3
Average fuel oil price
per barrel................. $ 32.09 $ 18.86 70
|
Kilowatthour (KWH) sales in the third quarter and first nine months of 2000 increased 4.1% and 3.1%, respectively, from the same periods in 1999, partly due to an increase in the number of customers, warmer weather and an improvement in Hawaii's economy. From December 1999 to September 2000, fuel prices on Oahu have increased approximately 33%, but the typical monthly Oahu residential electricity bill for 600 KWH has increased only 8%. HECO and its subsidiaries pass both increases and decreases in the cost of fuel and purchased energy prices through to their customers via their Energy Cost Adjustment Clauses. In spite of the increase in rates due to higher fuel prices, the electric utilities' KWH sales have increased. Electric utility operating income for the first nine months of 2000 increased 19% from the first nine months of 1999, primarily due to the higher KWH sales and 10% lower other operation and maintenance expenses. Other operation expenses were lower primarily due to a decrease of approximately $9 million in pension and other postretirement benefits expenses partly due to an increase in the discount rate (from 6.50% at December 31, 1998 to 7.75% at December 31, 1999) and a change in the method of determining market-related value of retirement benefit plan assets (see note (2) in HECO's "Notes to consolidated financial statements").
In October 2000, due to flashfloods and lightning storms, HELCO's transmission and distribution facilities and generation power plants were damaged. Uninsured repairs are estimated to amount to $1.5 million.
Competition
The electric utility industry is becoming increasingly competitive. IPPs are well established in Hawaii and continue to actively pursue new projects. Customer self-generation, with or without cogeneration, has made inroads in Hawaii and is a continuing competitive factor. Competition in the generation sector in Hawaii is moderated, however, by the scarcity of generation sites, various permitting processes and lack of interconnections to other electric utilities. HECO has been able to compete successfully by offering customers economic alternatives that, among other things, employ energy efficient electrotechnologies such as the heat pump water heater.
On December 30, 1996, the PUC instituted a proceeding to identify and examine the issues surrounding electric competition and to determine the impact of competition on the electric utility infrastructure in Hawaii. In their statement of position (SOP), HECO and its subsidiaries proposed to achieve some of the benefits of competition through proposals for (1) competitive bidding for new generation, (2) performance-based rate-making (which would include an index- based price cap, an earnings sharing mechanism and a benchmark incentive plan) and (3) innovative pricing provisions (including rate restructuring, expanded time-of-use rates, customer migration rates such as standby charges, flexible pricing to encourage economic development and to compete with customer generation options, new service options and two-part rates incorporating real- time pricing). HECO and its subsidiaries suggest in their SOP that these proposals be implemented through PUC approval of applications submitted in a series of separate proceedings to be initiated by HECO, HELCO and MECO. See "Competition proceeding" in note (5) in HECO's "Notes to consolidated financial statements."
PUC regulation of electric utility rates
The PUC has broad discretion in its regulation of the rates charged by HEI's electric utility subsidiaries and in other matters. Any adverse decision and order (D&O) by the PUC concerning the level or method of determining electric utility rates, the authorized returns on equity or other matters, or any prolonged delay in rendering a D&O in a rate or other proceeding, could have a material adverse effect on the Company's financial condition and results of operations. Upon a showing of probable entitlement, the PUC is required to issue an interim D&O in a rate case within 10 months from the date of filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed). There is no time limit for rendering a final D&O. Interim rate increases are subject to refund with interest, pending the final outcome of the case. Management cannot predict with certainty when D&Os in pending or future rate cases will be rendered or the amount of any interim or final rate increase that may be granted.
Recent rate requests
HEI's electric utility subsidiaries initiate PUC proceedings from time to time to request electric rate increases to cover rising operating costs, the cost of purchased power and the cost of plant and equipment, including the cost of new capital projects to maintain and improve service reliability. As of September 30, 2000, the return on average common equity (ROACE) found by the PUC to be reasonable in the most recent final rate decision for each utility was 11.4% for HECO (D&O issued on December 11, 1995 and based on a 1995 test year), 11.65% for HELCO (D&O issued on April 2, 1997 and based on a 1996 test year) and 10.94% for MECO (D&O issued on April 6, 1999 and based on a 1999 test year).
In October 1999, HELCO filed a request to increase rates by 9.6%, or $15.5 million in annual revenues, based on a 2000 test year, primarily to recover (1) costs relating to the agreement to buy power from the 60 MW plant of Hamakua Energy Partners, L.P. (Hamakua) and (2) depreciation of and a return on additional investments in plant and equipment since the last rate case, including pre-PSD facilities placed in service at the Keahole power plant (see "HELCO power situation--Pre-PSD work and notices of violation" in note (5) of HECO's "Notes to consolidated financial statements").
The Consumer Advocate filed its testimony on May 8, 2000. HELCO filed its rebuttal testimony on June 19, 2000 and continued to justify an increase of at least $15.5 million and a ROACE of 13.25% for the 2000 test year. Hearings were held in August 2000.
To simplify and expedite the rate case proceeding, HELCO and the Consumer Advocate entered into a negotiated settlement agreement, subject to PUC consideration and approval, with respect to certain test year estimates. As part of the settlement agreement, HECO, MECO and HELCO (the electric utilities) agreed to make a prospective change to their accounting treatment of canceled project costs. Historically, the electric utilities classified projects that were not completed as either canceled or abandoned, depending on whether the projects were stopped before (canceled) or after (abandoned) significant costs were incurred for material purchases and/or construction. The parties agreed that effective October 1, 2000, the electric utilities will charge the costs of canceled projects to operating expense, which is similar to and consistent with the treatment for abandoned project costs. An appropriate amount of canceled project costs will be included in revenue requirements in rate case proceedings. Prior to October 1, 2000, the electric utilities allocated the costs of canceled projects to on-going capital projects, operation and maintenance expenses and other accounts through a clearing process. Management believes that this change in accounting procedure will not have a material effect on the electric utilities' results of operations, financial condition or liquidity. The electric utilities may seek PUC approval for different accounting treatments in unusual or special circumstances.
In September 2000, HELCO received an interim D&O from the PUC which authorized a 1.93%, or $3.5 million, increase in annual revenues, effective September 1, 2000 and based on an 11.65% ROACE which was the ROACE authorized in HELCO's previous rate case. The interim D&O granted rate relief for the cost to buy power from Phase I of the Hamakua facility, which is currently in service. HELCO has requested a step increase in rates when Phase II of the Hamakua facility is placed in service in late November 2000, if a final D&O has not been issued by that time. While certain revenue requirement amounts contested by the Consumer Advocate were included in rates approved on an interim basis, others were not. For example, the interim D&O included rates to cover HELCO's calculation of fuel oil expense and its purchase power payments to HCPC, but did not include rates to cover depreciation of and a return on investments in facilities placed in service since the last rate case at the Keahole Power Plant to serve both existing and yet unbuilt generating units. The Consumer Advocate disagreed with HELCO's calculation of fuel oil expense and purchase power payments to HCPC and objected to including the pre-service costs in rates until the new generating units are in service.
The PUC may grant an interim rate increase (subject to refund with interest pending the final outcome of the case) if the PUC believes that the public utility is probably entitled to an increase in its rates. The adoption of revenue, expense, rate base and cost of capital amounts (including the ROACE) for purposes of an interim rate increase does not commit the PUC to accept any such amounts in its final D&O. In determining such interim amounts, the PUC has stated that it must often postpone determinations of reasonableness with respect to contested matters.
The timing of a future HELCO rate increase request, if any, to recover costs relating to adding CT-4 and CT-5 will depend on future circumstances. See "HELCO power situation" in note (5) of HECO's "Notes to consolidated financial statements."
Accounting for the effects of certain types of regulation
In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," the Company's financial statements reflect assets and costs of HECO and its subsidiaries based on current cost-based rate-making regulations. Management believes HECO and its subsidiaries' operations currently satisfy the SFAS No. 71 criteria. However, if events or circumstances should change so that those criteria are no longer satisfied, management believes that a material adverse effect on the Company's results of operations, financial position or liquidity may result. As of September 30, 2000, HECO's consolidated regulatory assets amounted to $116 million.
Three months ended
September 30, %
----------------------------------------
(in thousands) 2000 1999 change Primary reason(s) for significant change
---------------------------------------------------------------------------------------------------------------------------
Revenues............... $114,300 $102,624 11 Higher interest income as a result of
higher weighted-average yields on
mortgage/asset-backed securities and loan
balances and a 6% higher average
interest-earning asset balance
Operating income....... 16,979 14,919 14 Higher net interest income, partly offset
by the writedown of "available-for-sale"
debt securities. See note (4) in HEI's
"Notes to consolidated financial
statements."
Net income............. 9,815 8,499 15 Higher operating income, partly offset by
higher income taxes
Interest rate spread... 3.11% 3.22% (3) 46 basis points increase in the
weighted-average yield on interest-earning
assets, more than offset by a 57 basis
points increase in the weighted-average
rate on interest-bearing liabilities
|
Nine months ended
September 30, %
----------------------------------------
(in thousands) 2000 1999 Change Primary reason(s) for significant change
--------------------------------------------------------------------------------------------------------------------------
Revenues............... $333,266 $304,663 9 Higher interest income as a result of
higher weighted-average yields on
mortgage/asset-backed securities and loan
balances and a 5% higher average
interest-earning asset balance
Operating income....... 52,484 45,839 14 Higher net interest income, partly offset
by the writedown of "available-for-sale"
debt securities. See note (4) in HEI's
"Notes to consolidated financial
statements."
Net income............. 30,432 26,081 17 Higher operating income, partly offset by
higher income taxes
Interest rate spread... 3.18% 3.17% - 39 basis points increase in the
weighted-average yield on interest-earning
assets, mostly offset by a 38 basis points
increase in the weighted-average rate on
interest-bearing liabilities
|
ASB's interest rate spread--the difference between the weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities--decreased 3.4% and increased 0.3% for the third quarter and first nine months of 2000, respectively, compared to the same periods in 1999. Comparing the first
nine months and the third quarter of 2000 to the same periods in 1999, the weighted-average yields on interest-earning assets increased more than the weighted-average rates on interest-bearing liabilities increased. Impacting the weighted-average yield on interest-earning assets was the recognition of interest income on a cash basis for four debt securities in the principal amount of $114 million. The weighted-average yield on interest-earning assets is calculated by dividing the annualized interest or dividend income by the average interest-earning asset balances. Since the interest on the four debt securities is accounted for on a cash basis, the interest income received on these debt securities is not annualized for the purposes of calculating the weighted- average yields on interest-earning assets. See note (4) in HEI's "Notes to consolidated financial statements."
Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. Deposits increased by $67 million in the first nine months of 2000, including $73 million of interest credited to accounts. ASB also derives funds from borrowings, payments of interest and principal on outstanding loans receivable and mortgage/asset-backed securities, and other sources. In recent years, advances from the Federal Home Loan Bank (FHLB) of Seattle and securities sold under agreements to repurchase have become more significant sources of funds as the demand for deposits decreased due in part to increased competition from money market and mutual funds. Using sources of funds with a higher cost than deposits, such as advances from the FHLB, puts downward pressure on ASB's interest rate spread and net interest income.
During the first nine months of 2000, ASB added $9 million to its allowance for loan losses. As of September 30, 2000, ASB's allowance for loan losses was 1.15% of average loans outstanding. The following table presents the changes in the allowance for loan losses for the periods indicated.
Nine months ended
September 30,
-----------------------------------------
(in thousands) 2000 1999
--------------------------------------------------------------------------------------------------------------
Allowance for loan losses, beginning of period....................... $ 35,348 $ 39,779
Additions to provisions for losses................................... 9,400 10,848
Net charge-offs...................................................... (7,914) (9,980)
------------ ----------
Allowance for loan losses, end of period............................. $ 36,834 $ 40,647
============ ==========
|
In March 1998, ASB formed a wholly owned operating subsidiary, ASB Realty Corporation, which elects to be taxed as a real estate investment trust. This reorganization has reduced ASB's income taxes. For the first nine months of 2000, ASB and subsidiaries' effective income tax rate was 34%. Although the State of Hawaii has indicated that it may challenge the tax treatment of this reorganization, ASB believes that its tax position is proper.
Regulation
Federal Deposit Insurance Corporation (FDIC) regulations restrict the ability of financial institutions that are not "well-capitalized" to compete on the same terms as "well-capitalized" institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of September 30, 2000, ASB was "well-capitalized" (ratio requirements noted in parentheses) with a leverage ratio of 5.9% (5.0%), a Tier- 1 risk-based ratio of 10.3% (6.0%) and a total risk-based ratio of 11.2% (10.0%).
risk associated with the loan and investment portfolios, real estate owned, other assets, and off-balance sheet risks as well as the institution's ability to manage those risks. The "M" rating is a reflection of the performance of the entire management team of the institution, including the board of directors and all levels of management. The rating is an assessment of management's overall effectiveness. The "E" component evaluates whether earnings are sufficient for necessary capital formation. The quality (stability) and composition (source) of earnings are important criteria in this evaluation. The "L" rating measures liquidity in relation to the institution's level of liquid assets, its outside sources of funds, and the adequacy of its funds (or cash flow) management practices. The "S" rating component addresses the degree that changes in interest rates, commodity prices, and equity prices could adversely affect the earnings or economic capital of the institution. The "S" component, while broad in scope, is applied by the financial institution regulators only to the elements of market risk that are relevant to the institution being examined. As applied to ASB, the OTS has in the past and will likely continue in the future to focus the S component inquiry on interest-rate risk. (ASB does not hold inventories of foreign currency, and it does not have material exposure to equity price volatility).
Thrift Bulletin 13a (TB 13a), adopted by the OTS on December 1, 1998, provides guidance on the management of interest rate risks, investment securities and derivatives activities. TB 13a updates the OTS's minimum standards for thrift institutions' interest rate risk management practices with regard to board- approved limits and interest rate risk measurement systems. TB 13a also contains guidance on thrifts' investment and derivative activities by describing the types of analysis institutions should perform prior to purchasing securities or financial derivatives. TB 13a also provides guidelines on the use of certain types of securities and financial derivatives for purposes other than reducing portfolio risk. TB 13a also provides quantitative guidelines for an initial assessment of an institution's level of interest rate risk. Examiners have broad discretion in implementing those guidelines. Finally, TB 13a also provides guidelines concerning the factors examiners consider in assessing the quality of an institution's risk management systems and procedures. These factors include, among others, consideration of various interest-rate sensitivity measures in the context of the institution's regulatory capital position. Examiners will base their conclusions about an institution's level of interest rate risk--the first dimension for determining the "S" component rating--primarily on the interest rate sensitivity of the institution's net portfolio value. The two specific measures of risk that will receive examiners' primary attention are the Interest Rate Sensitivity Measure and the Post-shock Net Present Value (NPV) Ratio. The "Interest Rate Sensitivity Measure" is defined as the magnitude of the decline in an institution's NPV Ratio that occurs as a result of an adverse rate shock of 200 basis points. This measure equals the difference between an institution's Pre-shock NPV Ratio and its Post- shock NPV Ratio and is expressed in basis points. "Post-shock NPV Ratio" is a ratio determined by dividing an institution's NPV by the present value of its assets, where both the numerator and the denominator are measured after a 200 basis point increase or decrease in market interest rates, whichever produces a smaller ratio. In assessing the level of interest rate risk, a high (i.e., risky) Interest Rate Sensitivity Measure, by itself, may not cause supervisory concern when the institution has a strong capital position. Because an institution's risk of failure is linked to capital and, hence, to its ability to absorb adverse economic shocks, an institution with a high level of economic capital (i.e., NPV) may be able to support a high Interest Rate Sensitivity Measure. The Post-shock NPV Ratio is a more comprehensive gauge of risk than the Interest Rate Sensitivity Measure because it incorporates estimates of the current economic value of an institution's portfolio, in addition to the reported capital level and interest rate risk sensitivity.
Management has developed and is implementing an action plan to improve ASB's interest rate risk position. The plan includes obtaining additional capital and making changes to improve the matching of asset and liability durations, such as lengthening the term of costing liabilities and selling a portion of ASB's long- term fixed rate loan production.
The OTS regularly conducts "safety and soundness" examinations of ASB on generally a thirteen-month cycle. In accordance with TB 69, each CAMELS component is examined and given a component rating. An overall CAMELS rating is also given, after taking into account all of the component ratings. An institution, its directors, officers and employees, are prohibited from disclosing in any manner the OTS's report of its safety and soundness examination or the component and overall CAMELS rating thereof to any person or organization not officially
connected with the institution as officer, director, employee, attorney, or auditor, except as provided in 12 C.F.R. section 510.5. Independent auditors may be provided access to the report of examination only after providing a written statement that they will not disclose the report or any portion of it.
During 2000, the OTS has conducted CRA, compliance, systems, holding company and safety and soundness examinations of ASB. The most recent OTS safety and soundness examination, covering the period from January 1, 1999, up to and including March 31, 2000, was completed on June 16, 2000 and ASB was not made subject to (and is not subject to) any formal regulatory or administrative direction or supervision such as a "memorandum of understanding" or a "cease and desist" order following that examination.
ASB is undertaking all corrective actions requested by the OTS during the course of its recent examinations and does not expect such corrective actions to have a material adverse effect on its financial condition or results of operations.
In November 1999, Congress passed the Gramm-Leach-Bliley Act of 1998 (the Act). The Act repeals the Depression-era Glass-Steagall Act so that banks, insurance companies and investment firms can compete directly against each other, thereby allowing "one-stop shopping" for an array of financial services. Although the Act further restricts the creation of so-called "unitary savings and loan holding companies" (i.e., companies such as HEI whose subsidiaries include one or more savings associations and one or more nonfinancial subsidiaries), the unitary savings and loan holding company relationship among HEI, HEIDI and ASB is "grandfathered" under the Act so that HEI and its subsidiaries will be able to continue to engage in their current activities. It is too early to assess the net effect of the Act on ASB's competitive position. On the one hand, the availability of "one-stop shopping" for financial services might increase competitive pressures on ASB. On the other hand, the restriction on the creation of new unitary savings and loan association holding companies may decrease competitive pressure by reducing the incentive to create new thrifts. Under the Act, any proposed acquisition of ASB would have to satisfy applicable statutory and regulatory requirements and potential acquirers of ASB would most likely be limited to companies that are already qualified as, or capable of qualifying as, either a traditional savings and loan association holding company or a bank holding company, or as one of the newly authorized financial holding companies permitted under the Act.
In addition to its effects upon competition, the Act might result in increased costs for ASB. For example, the Act imposes on financial institutions an obligation to protect the security and confidentiality of its customers' nonpublic personal information, and directs, among others, the FDIC and the OTS to establish appropriate standards to protect such information and the use thereof. On June 1, 2000, the FDIC and the OTS, among others, issued joint rules to implement in part the provisions of the Act concerning the disclosure of customers' nonpublic information and have set a required implementation date no later than July 1, 2001. On June 26, 2000, the FDIC and the OTS, among others, issued proposed joint rules concerning administrative, technical and physical safeguards for customer records and information. ASB currently has in place a policy concerning customer privacy and believes that any additional compliance costs would not be significant.
Three months ended
September 30, %
------------------------------
(in thousands) 2000 1999 change Primary reason(s) for significant change
-------------------------------------------------------------------------------------------------------------------
Revenues......... $(5,719) $ 933 NM Losses from HEIPC's indirect investment in
EAPRC
Operating loss... (8,757) (1,382) (534) Losses from the EAPRC investment and
additional expenses related to the investment
|
Nine months ended
September 30, %
-------------------------------------
(in thousands) 2000 1999 change Primary reason(s) for significant change
--------------------------------------------------------------------------------------------------------------------
Revenues......... $ (8,004) $ 3,257 NM Losses from HEIPC's indirect investment in
EAPRC
Operating loss... (17,639) (3,494) (405) Losses from the EAPRC investment and
additional expenses related to the investment
|
NM Not meaningful.
HEIPC was formed in 1995 and its direct and indirect subsidiaries have been formed from time to time to pursue independent power and integrated energy services projects in Asia and the Pacific.
In September 1996, HEI Power Corp. Guam (HPG), entered into an energy conversion agreement for approximately 20 years with the Guam Power Authority (GPA), pursuant to which HPG has repaired and is operating and maintaining two oil- fired 25 MW (net) units at Tanguisson, Guam. HPG's total cost to repair the two units was $15 million. In 1999, a mechanical failure of one of the units resulted in additional expenses and lost revenue for HPG of approximately $1 million. In September 2000, HPG recovered this amount from GPA.
The GPA project site is contaminated with oil from spills occurring prior to HPG's assuming operational control. HPG has agreed to manage the operation and maintenance of GPA's waste oil recovery system at the project site consistent with GPA's oil recovery plan as approved by the EPA. GPA, however, has agreed to indemnify and hold HPG harmless from any pre-existing environmental liability.
In 1998 and 1999, the HEIPC Group acquired what is now a 75% interest in a joint venture, Baotou Tianjiao Power Co., Ltd., formed to design, construct, own, operate and manage a 200 MW (net) coal-fired power plant to be located inside Baotou Steel's complex in Inner Mongolia, People's Republic of China. The IMPC, which owns and operates the electricity grid in Inner Mongolia, has refused to enter into a satisfactory interconnection arrangement with the joint venture. The HEIPC Group continues to work with Baotou Steel and IMPC to secure a satisfactory interconnection arrangement. See "China project," in note (5) of HEI's "Notes to consolidated financial statements."
In December 1998, the HEIPC Group invested $7.6 million to acquire convertible cumulative nonparticipating 8% preferred shares in Cagayan Electric Power & Light Co., Inc. (CEPALCO), an electric distribution company in the Philippines. In September 1999, the HEIPC Group also acquired 5% of the outstanding CEPALCO common stock for $2.1 million. The acquisitions were strategic moves intended to put the HEIPC Group in a position to participate in the anticipated privatization of the National Power Corporation and growth in the electric distribution business in the Philippines.
On March 7, 2000, an indirect subsidiary of HEIPC acquired a 50% interest in EPHE, which is an indirect subsidiary of El Paso Energy Corporation, for $87.5 million plus up to an additional $6 million of payments that are contingent upon future earnings of EAPRC. EPHE owns approximately 91.7% of the common shares of EAPRC, a Philippines holding company primarily engaged in the electric generation business in Manila and Cebu through its direct and indirect subsidiaries, using land and barge-based generating facilities fired by bunker fuel oil, with total installed capacity of approximately 390 MW. See note (5) in HEI's "Notes to Consolidated Financial Statements."
The HEIPC Group's higher net losses for the third quarter and first nine months of 2000 compared to the same periods in 1999 are primarily attributable to results from the investment in EAPRC and its subsidiaries (the EAPRC
Group). The HEIPC Group accounts for its investment in EPHE under the equity method of accounting. HEI consolidates the accounts of the HEIPC Group on a one- month lag due to the time needed to consolidate HEIPC's subsidiaries. The results for the nine months ended September 30, 2000 thus reflects results of the HEIPC Group's operations for the months of December 1999 and January through August 2000 (including the results of EPHE under the equity method of accounting from March 7, 2000) and the results for the quarter ended September 30, 2000 thus reflects results for the months of June, July and August 2000. The EAPRC Group is exposed to the impact of changes in fuel oil prices and foreign currency fluctuations. Higher fuel oil prices and the weakened value of the Philippine peso were the primary causes of the losses incurred by the EAPRC Group for the third quarter and first nine months of 2000.
The rates charged by the EAPRC Group under its purchase power agreements are generally at a discount to the rates charged by the National Power Corporation, a government owned and controlled corporation of the Philippines. Most of the fluctuation in fuel oil prices is not recovered in rates charged by the EAPRC Group. The EAPRC Group's base price of fuel oil per metric ton for March, April, May, June, July, August and September 2000 was approximately $143, $170, $153, $163, $175, $149 and $171, respectively. To reduce its near-term exposure to higher fuel oil prices, the EAPRC Group has purchased nondeliverable forward contracts for fuel oil at an average price of $155 per metric ton for approximately 80% of its anticipated purchases from August 1 to December 31, 2000 and has purchased call option contracts at $159.75 per metric ton and sold put option contracts at $120 per metric ton for approximately 30% of its anticipated purchases from January 1 to June 30, 2001.
As of September 30, 2000, the EAPRC Group had approximately $200 million in U.S. dollar denominated debt. From March 7, 2000 (acquisition date) to August 31, 2000, the high and low Philippine peso (PhP) exchange rate was PhP40.82 = $1 and PhP45.22 = $1, respectively, an 11% fluctuation. Due to the deterioration of the exchange rate from March 7 to August 31, 2000, as of September 30, 2000 the HEIPC Group incurred a loss of approximately $7 million related to the EAPRC Group's U.S. dollar denominated debt position. The potential immediate pretax loss to the HEIPC Group that would result from a hypothetical 10% devaluation (from PhP51.00 = $1) in the Philippine peso exchange rate based on this position would be approximately $8 million (assuming no hedges are in place). As of November 3, 2000, the exchange rate had further deteriorated to PhP51.00 = $1. To reduce its near-term exposure to devaluation in the Philippine peso exchange rate, the EAPRC Group purchased nondeliverable and deliverable forward contracts and nondeliverable option contracts (collectively the FX Contracts) to cover substantially all of its U.S. dollar denominated debt. The FX Contracts have maturities from October 2000 through January 2001 at rates ranging from PhP47.00 to PhP48.30 = $1.
Based on prevailing and hedged fuel oil prices and trends in currency exchange rates, management expects that the HEIPC Group will incur net losses for the remainder of 2000 and that the net loss of the HEIPC Group for 2000 will cause the Company`s 2000 earnings to be lower than its earnings in 1999. The EAPRC Group continues to evaluate strategies to reduce its exposure to future fuel oil price and foreign currency fluctuations.
As of September 30, 2000, the HEIPC Group has invested in or advanced to overseas power projects approximately $138 million. The success of any project undertaken by the HEIPC Group will be dependent on many factors, including the economic, political, monetary, technological, regulatory and logistical circumstances surrounding each project and the location of the project. Due to political or regulatory actions or other circumstances, projects may be delayed or even prohibited. There is no assurance that any project undertaken by the HEIPC Group will be successfully completed or that the HEIPC Group's investment in any such project will not be lost, in whole or in part.
Three months ended
September 30, %
---------------------------------
(in thousands) 2000 1999 change Primary reason(s) for significant change
------------------------------------------------------------------------------------------------------------------
Revenues......... $ (38) $11,610 NM In November 1999, HTB sold YB and
substantially all of its operating assets
for a nominal gain. Third quarter 1999
includes $12 million of HTB/YB revenues.
Operating loss... (1,005) (3,458) (71) $2 million estimated loss on HTB's sale of
YB and most of its other assets which was
recorded in the third quarter of 1999 and
reversed in the fourth quarter of 1999, and
lower corporate expenses
|
Nine months ended
September 30, %
----------------------------------
(in thousands) 2000 1999 Change Primary reason(s) for significant change
-------------------------------------------------------------------------------------------------------------------
Revenues......... $ 1,042 $39,119 (97) In November 1999, HTB sold YB and
substantially all of its operating assets
for a nominal gain. The first nine months
of 1999 includes $38 million of HTB/YB
revenues.
Operating loss... (5,545) (4,761) (16) No maritime freight transportation and
harbor assist operations in the first nine
months of 2000
|
NM Not meaningful.
The "other" business segment includes results of operations of TOOTS, formerly HTB and its formerly owned subsidiary, YB, maritime freight transportation and harbor assist companies which were sold or shutdown in the fourth quarter of 1999; Pacific Energy Conservation Services, Inc., a contract services company primarily providing windfarm operational and maintenance services to an affiliated electric utility; HEI District Cooling, Inc., a company formed to develop, build, own, operate and/or maintain central chilled water, cooling system facilities, and other energy related products and services; ProVision Technologies, Inc., a company formed to sell, install, operate and maintain on- site power generation equipment and auxiliary appliances in Hawaii and the Pacific Rim; HEI Properties, Inc., a company currently holding passive investments and expected to hold real estate and related assets; HEI Leasing, Inc., a company formed to own real estate subject to leases; Hawaiian Electric Industries Capital Trust I, HEI Preferred Funding, LP and Hycap Management, Inc., companies formed primarily for the purpose of effecting the issuance of 8.36% Trust Originated Preferred Securities; HEI and HEI Diversified, Inc., holding companies; and eliminations of intercompany transactions.
In November 1999, HTB sold YB and substantially all of its operating assets for a nominal gain. The maritime freight transportation and harbor assist subsidiaries recorded an operating loss of $0.7 million in the third quarter of 1999 and operating income of $1.5 million in the first nine months of 1999.
See note (10) in HEI's "Notes to consolidated financial statements."
See note (9) and note (5) in HEI's and HECO's respective "Notes to consolidated financial statements" for discussions of contingencies.
See note (8) and note (7) in HEI's and HECO's respective "Notes to consolidated financial statements."
FINANCIAL CONDITION
The Company and consolidated HECO each believe that its ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund their respective construction programs and investments and to satisfy debt and other cash requirements in the foreseeable future.
The consolidated capital structure of HEI was as follows:
(in millions) September 30, 2000 December 31, 1999
---------------------------------------------------------------------------------------------------------------------
Short-term borrowings............................. $ 94 4% $ 152 7%
Long-term debt.................................... 1,080 47 978 44
HEI- and HECO-obligated preferred
securities of trust subsidiaries............... 200 9 200 9
Preferred stock of subsidiaries................... 34 2 34 2
Minority interests................................ 1 - 1 -
Common stock equity............................... 873 38 848 38
----------- ---------- ----------- ----------
$2,282 100% $2,213 100%
=========== ========== =========== ==========
|
ASB's deposit liabilities, securities sold under agreements to repurchase and advances from the FHLB are not included in the table above.
For the first nine months of 2000, net cash provided by operating activities of consolidated HEI was $229 million. Net cash used in investing activities was $339 million, largely due to ASB's origination of loans and purchase of mortgage/asset-backed and investment securities, net of repayments, the HEIPC Group's investment in the Philippines and HECO's consolidated capital expenditures. Net cash provided by financing activities was $90 million as a result of several factors, including net increases in deposit liabilities, long- term debt and advances from Federal Home Loan Bank, partly offset by the payment of common stock dividends and trust preferred securities distributions and net decreases in securities sold under agreements to repurchase and short-term borrowings.
Total HEI consolidated financing requirements for 2000 through 2004, including net capital expenditures (which exclude AFUDC and capital expenditures funded by third-party cash contributions in aid of construction), long-term debt retirements (excluding repayments of advances from the FHLB of Seattle and securities sold under agreements to repurchase) and preferred stock retirements, are estimated to total $1.2 billion. Of this amount, approximately $0.8 billion is for net capital expenditures (mostly relating to the electric utilities' net capital expenditures described below). HEI's consolidated internal sources, after the payment of HEI dividends, are expected to provide approximately 66% of the consolidated financing requirements, with debt and equity financing providing the remaining requirements. Additional debt and equity financing may be required to fund activities not included in the 2000-2004 forecast, such as increases in the amount of or an acceleration of capital expenditures of the electric utilities.
In March 1999, HEI filed a registration statement with the SEC to register $300 million of Medium-Term Notes, Series C (Series C Notes). In April 2000, HEI sold $100 million of its Series C Notes, with $100 million of Series C
Notes remaining available for issuance from time to time. The $100 million of Series C Notes sold have a floating rate of LIBOR plus 105 basis points (adjusted every three months and an initial interest rate of 7.33%) and a maturity date of April 15, 2003. Simultaneous with the sale of the Series C Notes, however, HEI entered into a swap agreement with Bank of America, N.A., which effectively fixes the interest rate on the $100 million of debt at 7.995% until maturity.
Following is a discussion of the liquidity and capital resources of HEI's largest segments.
Electric utility
HECO's consolidated capital structure was as follows:
(in millions) September 30, 2000 December 31, 1999
------------------------------------------------------------------------------------------------------------------
Short-term borrowings......................... $ 82 5% $ 107 6%
Long-term debt................................ 659 39 646 38
HECO-obligated preferred securities of trust
subsidiaries................................. 100 6 100 6
Preferred stock............................... 34 2 34 2
Common stock equity........................... 829 48 806 48
----------- ---------- ------------- ----------
$1,704 100% $1,693 100%
=========== ========== ============= ==========
|
Operating activities provided $155 million in net cash during the first nine months of 2000. Investing activities used net cash of $82 million, primarily for capital expenditures. Financing activities used net cash of $71 million, including $56 million for the payment of common and preferred dividends and preferred securities distributions and $25 million for the net repayment of short-term borrowings, partially offset by a $13 million net increase in long- term debt.
The electric utilities' consolidated financing requirements for 2000 through 2004, including net capital expenditures and long-term debt retirements, are estimated to total $595 million. HECO's consolidated internal sources, after the payment of common stock and preferred stock dividends, are expected to provide cash in excess of the consolidated financing requirements and may also be used to repay short-term borrowings. As of September 30, 2000, $30 million of proceeds from previous sales by the Department of Budget and Finance of the State of Hawaii of special purpose revenue bonds issued for the benefit of HECO, MECO and HELCO remain undrawn. Also as of September 30, 2000, an additional $65 million of special purpose revenue bonds remains authorized by the Hawaii Legislature for issuance for the benefit of HECO and HELCO prior to the end of 2003. The equity requirements of HECO and its subsidiaries over the five-year period will likely be met by retained earnings. The PUC must approve issuances, if any, of long-term debt and equity securities by HECO, HELCO and MECO.
Capital expenditures include the costs of projects which are required to meet expected load growth, to improve reliability and to replace and upgrade existing equipment. Net capital expenditures for the five-year period 2000 through 2004 are currently estimated to total $571 million. Approximately 70% of forecast gross capital expenditures, which includes the allowance for funds used during construction and capital expenditures funded by third-party cash contributions in aid of construction, is for transmission and distribution projects, with the remaining 30% primarily for generation projects.
For 2000, electric utility net capital expenditures are estimated to be $140 million. Gross capital expenditures are estimated to be $161 million, comprised of approximately $109 million for transmission and distribution projects, approximately $39 million for new generation projects and approximately $13 million for general plant and other projects. Drawdowns of proceeds from previous sales of tax-exempt special purpose revenue bonds and the generation of funds from internal sources are expected to provide the cash needed for net capital expenditures in 2000.
Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of KWH sales and peak load, the availability of purchased power and changes in expectations concerning the construction and ownership of future generating units, the availability of generating sites and transmission and distribution corridors, the ability to obtain adequate and timely rate increases, escalation in construction costs, demand-side management programs and requirements of environmental and other regulatory and permitting authorities.
Savings bank
September 30, December 31, %
(in millions) 2000 1999 change
--------------------------------------------------------------------------------------------------------------
Total assets.......................................... $5,981 $5,848 2
Available-for-sale investment securities.............. 108 - NM
Held-to-maturity investment and
mortgage/asset-backed securities.................. 2,193 2,160 2
Loans receivable, net................................. 3,223 3,212 -
Deposit liabilities................................... 3,558 3,492 2
Securities sold under agreements to repurchase........ 585 661 (11)
Advances from Federal Home Loan Bank.................. 1,309 1,189 10
|
NM Not meaningful.
As of September 30, 2000, ASB was the third largest financial institution in Hawaii based on total assets of $6.0 billion and deposits of $3.6 billion.
For the first nine months of 2000, net cash provided by ASB's operating activities was $61 million. Net cash used in ASB's investing activities was $168 million, due largely to the origination of loans and purchase of mortgage/asset- backed and investment securities, net of repayments. Net cash provided by financing activities was $85 million largely due to net increases of $67 million in deposit liabilities and $120 million in advances in Federal Home Loan Bank, partly offset by a net decrease of $91 million in securities sold under agreements to repurchase and $19 million in common and preferred stock dividends.
Minimum liquidity levels are currently governed by the regulations adopted by the OTS. ASB was in compliance with OTS liquidity requirements as of September 30, 2000.
ASB believes that a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth. As of September 30, 2000, ASB was in compliance with the OTS minimum capital requirements (noted in parentheses) with a tangible capital ratio of 5.9% (1.5%), a core capital ratio of 5.9% (4.0%) and a risk-based capital ratio of 11.2% (8.0%).
The Company considers interest rate risk to be a very significant market risk as it could potentially have a significant effect on the Company's financial condition and results of operations. In April 2000, HEI utilized an interest- rate swap to manage a portion of its interest rate risk. See description in Item 2, "Financial condition - Liquidity and capital resources," above. The Company is also exposed to commodity price risk and foreign currency exchange rate risk primarily due to its indirect equity investment in EAPRC. See discussion in Item 2 above. For additional quantitative and qualitative information about the Company's market risks, see pages 40 to 43 of HEI's 1999 Annual Report to Stockholders.
U.S. Treasury yields at September 30, 2000 and December 31, 1999 were as follows:
September 30, 2000 December 31, 1999
------------------ -----------------
3 month 6.20% 5.31%
1 year 6.08 5.96
5 year 5.84 6.34
10 year 5.80 6.44
30 year 5.88 6.48
|
The 3 month U.S. Treasury yield increased 89 basis points and the 30 year yield decreased 60 basis points from December 31, 1999 to September 30, 2000. Management believes that with the current inverted yield curve there was an unfavorable, but immaterial, change between December 31, 1999 and September 30, 2000 in the Company's estimated fair values of its interest-sensitive assets, liabilities and off-balance sheet items.
There are no significant developments in pending legal proceedings except as set forth in HECO's "Notes to consolidated financial statements," and management's discussion and analysis of financial condition and results of operations.
A. Collective bargaining agreements
In August 2000, HECO, MECO and HELCO employees represented by the International Brotherhood of Electrical Workers, AFL-CIO, Local 1260, ratified new collective bargaining agreements covering approximately 62% of the employees of HECO, MECO and HELCO. The new collective bargaining agreements (including benefit agreements) cover a three-year period from November 1, 2000 through October 31, 2003. The main provisions of the agreements include noncompounded wage increases of 2.25% effective November 1, 2000, 2.5% effective November 1, 2001 and 2.5% effective November 1, 2002. The agreements also included increased employee contributions to medical premiums.
B. EPA inspections at HECO's Waiau and Honolulu generating stations
In September 1999, the EPA conducted unannounced National Pollutant Discharge Elimination System permit compliance inspections at HECO's Waiau and Honolulu generating stations. The resulting compliance inspection report issued by the EPA on December 22, 1999 cited procedural deficiencies in HECO's self-monitoring program. HECO submitted a response to the EPA's findings on January 27, 2000 and HECO has addressed the cited deficiencies. In September 2000, HECO and the EPA signed consent agreements under which HECO will be required to pay $200,000 in penalties. The consent agreements are subject to public comments and final EPA approval.
C. Amended notice of property tax assessment for HELCO
In December 1999, the County Council of Hawaii County amended its ordinances to rescind the exemption from real property taxes for utility companies. The utilities currently pay a Public Service Company (PSC) tax that, by state statutory language, is partly in lieu of real property taxes. In March 2000, the Department of Finance, Real Property Division of the County of Hawaii, sent HELCO a notice of property assessment showing total real property taxes owed of approximately $0.2 million for the fiscal year July 2000 to June 2001 and, in April 2000, the Department sent HELCO an amended notice of property assessment showing total real property taxes owed of approximately $3.9 million. HELCO appealed both the March and April 2000 notices of property assessment. HELCO filed a motion for summary judgment to have the April 2000 amended notice of property assessment held unlawful, invalid and unenforceable on the grounds of denial of an exemption to which taxpayer HELCO is entitled;
unconstitutionality and illegality, including overassessment; improper methodology and other procedural grounds. On July 10, 2000, the Hawaii Tax Court of Appeals ruled in HELCO's favor and granted the motion for summary judgment.
On August 10, 2000, HELCO paid its PSC tax monthly installment under protest and filed a complaint against the State in Tax Appeal Court. On August 20, 2000, HELCO paid its first semi-annual real property tax installment on the March assessment under protest, consistent with the real property tax appeal filed in Tax Appeal court.
The Tax Appeal Court has facilitated settlement discussions among the utilities, the County of Hawaii and the State. Discussions have expanded to include the other counties as well. In these settlement discussions, the parties are discussing a resolution which would involve dividing the PSC tax revenues between the State and the Counties. Details of the tentative settlement are still being negotiated.
On September 20, 2000, the Hawaii County Council passed Bill 276, Draft 3, which attempts to validate the methodology used in the April amended assessment and would allow the County to use the values in the annual financial reports submitted to the PUC, effective January 1, 2001. However, the ordinance provides that the County will not impose this methodology if enabling legislation is passed, which is consistent with the preliminary settlement discussions described above.
D. Ratio of earnings to fixed charges
HEI and subsidiaries
Ratio of earnings to fixed charges excluding interest on ASB deposits
Nine months Years ended December 31,
--------------------------------------------------------------------
ended
September 30, 2000 1999 1998 1997 1996 1995
----------------------- ----------- ---------- --------- ---------- -----------
1.71 1.80 1.85 1.89 1.93 2.02
======================= =========== ========== ========= ========== ===========
|
Ratio of earnings to fixed charges including interest on ASB deposits
Nine months Years ended December 31,
--------------------------------------------------------------------
Ended
September 30, 2000 1999 1998 1997 1996 1995
----------------------- ----------- ---------- --------- ---------- -----------
1.47 1.48 1.47 1.58 1.56 1.60
======================= =========== ========== ========= ========== ===========
|
For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent the sum of (i) pretax income from continuing operations (excluding undistributed net income or net loss from less than fifty-percent-owned persons) and (ii) fixed charges (as hereinafter defined, but excluding capitalized interest). "Fixed charges" are calculated both excluding and including interest on ASB's deposits during the applicable periods and represent the sum of (i) interest, whether capitalized or expensed, but excluding interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statements of income, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense, (iv) the preferred stock dividend requirements of HEI's subsidiaries, increased to an amount representing the pretax earnings required to cover such dividend requirements and (v) the preferred securities distribution requirements of trust subsidiaries.
HECO and subsidiaries
Ratio of earnings to fixed charges
Nine months Years ended December 31,
--------------------------------------------------------------------
Ended
September 30, 2000 1999 1998 1997 1996 1995
----------------------- ----------- ---------- --------- ---------- -----------
3.68 3.09 3.33 3.26 3.58 3.46
======================= =========== ========== ========= ========== ===========
|
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income before preferred stock dividends of HECO
and (ii) fixed charges (as hereinafter defined, but excluding the allowance for
borrowed funds used during construction). "Fixed charges" represent the sum of
(i) interest, whether capitalized or expensed, incurred by HECO and its
subsidiaries, (ii) amortization of debt expense and discount or premium related
to any indebtedness, whether capitalized or expensed, (iii) the interest factor
in rental expense, (iv) the preferred stock dividend requirements of HELCO and
MECO, increased to an amount representing the pretax earnings required to cover
such dividend requirements and (v) the preferred securities distribution
requirements of the trust subsidiaries.
(a) Exhibits
HECO Amendment No. 4 to Power Purchase Agreement between HECO and
Exhibit 10.1 Kalaeloa Partners, L.P., dated October 1, 1999
HECO Termination Notice dated December 27, 1999 for Amended and
Exhibit 10.2 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
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12.1 Computation of ratio of earnings to fixed charges, nine months
ended September 30, 2000 and 1999
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12.2 Computation of ratio of earnings to fixed charges, nine months
ended September 30, 2000 and 1999
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27.1 Financial Data Schedule
September 30, 2000 and nine months ended September 30, 2000
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 27.2 Financial Data Schedule
September 30, 2000 and nine months ended September 30, 2000
HEI First Amendment to Trust Agreement, made and entered into
Exhibit 99.1 August 1, 2000, between Fidelity Management Trust Company and HEI
for the Hawaiian Electric Industries Retirement Savings Plan for
incorporation by reference in the Registration Statement on Forms
S-8 (Regis. No. 333-02103)
HEI Second Amendment to Trust Agreement, made and entered into
Exhibit 99.2 November 1, 2000, between Fidelity Management Trust Company and
HEI for the Hawaiian Electric Industries Retirement Savings Plan
for incorporation by reference in the Registration Statement on
Forms S-8 (Regis. No. 333-02103)
|
(b) Reports on Form 8-K
Subsequent to June 30, 2000, HEI and/or HECO filed Current Reports, Forms 8-K and/or 8-K/A, with the SEC as follows:
Dated Registrant/s Items reported
-------------------------------------------------------------------------------------------------------------
July 14, 2000 HEI Item 5. HEI's July 13, 2000 news release - "HEI's International
(Form 8-K) Operation Estimates Second Quarter Net Loss," "International Power -
Philippines Investment" and "Savings Bank."
July 24, 2000 HEI/HECO Item 5. HEI's July 24, 2000 news release "HEI Reports Second Quarter
(Form 8-K) 2000 Earnings" and other information.
July 24, 2000 HEI/HECO Item 5. HEI's July 24, 2000 news release "HEI Reports Second Quarter
(Form 8-K/A) 2000 Earnings" and other information.
September 1, 2000 HEI/HECO Item 5. Interim decision and order for HELCO.
(Form 8-K)
October 25, 2000 HEI/HECO Item 5. HEI's October 25, 2000 news release "HEI Reports Third
(Form 8-K) Quarter 2000 Earnings" and other information.
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signature of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof.
HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant)
By /s/ Robert F. Mougeot By /s/ Paul Oyer
--------------------------- --------------------------------
Robert F. Mougeot Paul A. Oyer
Financial Vice President and Financial Vice President and
Chief Financial Officer Treasurer
(Principal Financial Officer of HEI) (Principal Financial Officer of
HECO)
Date: November 8, 2000 Date: November 8, 2000
|
AMENDMENT NO. 4 TO POWER PURCHASE AGREEMENT
BETWEEN
HAWAIIAN ELECTRIC COMPANY, INC.
AND
KALAELOA PARTNERS, L.P.
This Amendment No. 4 to Power Purchase Agreement ("Amendment") is made and entered into as of October 1, 1999 by and between HAWAIIAN ELECTRIC COMPANY, INC., a Hawaii corporation ("HECO"), and KALAELOA PARTNERS, L.P., a Delaware limited partnership ("Kalaeloa").
Recitals:
(a) HECO and Kalaeloa entered into a Power Purchase Agreement, dated as of October 14, 1988, as amended and clarified by (i) Amendment No. 1 to Power Purchase Agreement dated as of June 15, 1989, (ii) Restated and Amended Amendment No. 2 to Power Purchase Agreement dated as of February 9, 1990, (iii) Amendment No. 3 to Power Purchase Agreement dated as of December 10, 1991, and (iv) Agreement to Clarify and Interpret dated as of March 31, 1997 (as so amended and clarified, the "Power Purchase Agreement"), which provides for, among other things, the sale by Kalaeloa and the purchase by HECO of electric energy and capacity from Kalaeloa's combined cycle oil-fired cogeneration facility located at Barbers Point, Oahu, Hawaii.
(b) The general partner of Kalaeloa, ABB Hawaiian Cogeneration Inc., a Delaware corporation ("ABB Hawaiian"), has agreed to sell its general partner partnership interest in Kalaeloa to PSEG Kalaeloa Inc., a Delaware corporation formerly known as CEA Kalaeloa, Inc. ("PKI") pursuant to a Purchase Agreement dated February 28, 1997 by and among ABB Hawaiian, New Hawaiian Cogeneration Inc., a Delaware corporation, PKI, and Kalaeloa Investment Partners, L.P., a Delaware limited partnership, as amended by a letter agreement dated April 30, 1997 and a letter agreement dated as of October 1, 1999 (the "Purchase Agreement").
(c) PKI is indirectly wholly-owned by PSEG Global Inc., a New Jersey corporation formerly known as Community Energy Alternatives Incorporated, which in turn is wholly-
EXHIBIT A
owned by PSEG Energy Holdings Inc., a New Jersey corporation formerly known as Enterprise Diversified Holdings Incorporated.
(d) Kalaeloa and HECO desire to amend the Power Purchase Agreement in connection with the transfer of the general partnership interest in Kalaeloa from ABB Hawaiian to PKI.
Agreements:
NOW, THEREFORE, in consideration of the premises and mutual agreements and covenants contained in this Amendment and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree that the Power Purchase Agreement is hereby amended further as follows:
1. Definitions. Capitalized terms used but not defined in this Amendment have the respective meanings given to them in the Power Purchase Agreement.
2. Regarding Article I. The definition in Section 1.1 of Article I of the Power Purchase Agreement is amended to read as follows:
1.1 ABB - ABB Power Generation Inc., or any successor corporation thereto.
3. Regarding Section 2.1(A). The second sentence of Section 2.1(A) is amended to read as follows:
As General Partner of KALAELOA, PSEG Kalaeloa Inc. will have the exclusive authority and full discretion to manage the business of KALAELOA in accordance with the Kalaeloa Partners, L.P., Partnership Agreement.
4. New General Partner. All references in the body of the Power
Purchase Agreement (excluding recitals) to "ABB Hawaiian Cogeneration Inc."
are deleted, and substituted with "PSEG Kalaeloa Inc.", except as set forth in
Section 7 of this Amendment.
5. Regarding Section 3.2M. The third sentence of Section 3.2M is amended to read as follows:
The General Partner of KALAELOA shall, at HECO's request, make available to HECO for direct consultation and communication the executive officer of PSEG Global
EXHIBIT A
Inc. who has the highest direct responsibility and authority concerning the business of the General Partner.
6. Regarding Section 7.1A(8)(b). Section 7.1A(8)(b) of the Power Purchase Agreement is amended to read as follows:
(b) Without the prior written consent of HECO, such consent not to be unreasonably withheld, PSEG Kalaeloa Inc. is no longer controlled by PSEG Energy Holdings Inc. Effective control for purposes of this Section 7.1A(8) shall mean voting control;
7. Regarding Section 10.1. Section 10.1 of the Power Purchase Agreement is amended to read as follows:
HECO shall have the right (a) throughout the Term and for a period of three (3) years following the end of the Term as extended, upon reasonable prior notice, to audit the books and records of KALAELOA and PSEG Kalaeloa Inc., and (b) for a period of four (4) years after ceasing to be a general partner of KALAELOA, to audit the books and records of ABB Hawaiian Cogeneration Inc, in each case to the extent necessary to verify the basis for any claim by KALAELOA for payments from HECO or to determine KALAELOA's compliance with the terms of this Agreement. HECO shall not have the right to audit other financial records of KALAELOA, PSEG Kalaeloa Inc., or ABB Hawaiian Cogeneration Inc. KALAELOA shall make such records available at its office in Kapolei, Hawaii, during normal business hours. PSEG Kalaeloa Inc. and ABB Hawaiian Cogeneration Inc. shall make such records available at their respective principal business offices during normal business hours. HECO shall pay the reasonable costs of KALAELOA, PSEG Kalaeloa Inc., or ABB Hawaiian Cogeneration Inc. for such audits, including allocated overhead.
8. Regarding Section 23.2. Notice address to Kalaeloa is deleted and the following address is substituted therefor:
KALAELOA Kalaeloa Partners, L.P.
Cogeneration Plant
91-111 Kalaeloa Blvd.
Kapolei, Hawaii 96707
|
EXHIBIT A
9. Other Terms Unchanged. All of the terms and conditions of the Power Purchase Agreement which are not altered, amended or replaced by the provisions of this Amendment shall remain in full force and effect. In the event that a conflict arises between the Power Purchase Agreement and this Amendment, this Amendment shall prevail, but the respective documents shall be interpreted to be in harmony with each other where possible.
10. Entire Agreement. This Amendment and the Power Purchase Agreement, as amended herein, embody the whole agreement and understanding of the parties as to matters described herein and supersede and nullify all prior agreements, arrangements and understandings related to the subject matter of this Amendment; provided, however, that:
(a) Nothing in this Section 10 shall cause the Power Purchase Agreement to be invalid or unenforceable against HECO or Kalaeloa on the basis of regulatory action concerning this Amendment, and
(b) Other than as provided in Section 11, neither HECO nor Kalaeloa shall make any claim, directly or indirectly, in any form that this Amendment is invalid or unenforceable on the basis of, or in reliance in any way upon, any regulatory action concerning this Amendment.
11. Effective Date. Each provision of this Amendment shall become effective upon (a) such provision being (i) approved by the Hawaii Public Utilities Commission ("PUC"), and (ii) consented to by ING (U.S.) Capital LLC, as Agent for the Lenders under the Amended and Restated Loan and Note Purchase Agreement, dated as of December 10, 1991, and (b) transfer of ABB Hawaiian's general partner partnership interest in Kalaeloa to PKI pursuant to the Purchase Agreement. Should the PUC not approve this Amendment by March 31, 2000, this Amendment shall be null and void ab initio. After receipt by HECO of a complete set of closing documents for the transactions contemplated herein, HECO will, within a commercially reasonable time, file with the PUC a request for its approval.
EXHIBIT A
IN WITNESS WHEREOF, the parties have executed this Amendment by their respective duly-authorized officers as of the date first stated above.
HAWAIIAN ELECTRIC COMPANY, INC. KALAELOA PARTNERS, L.P.
By ABB Hawaiian Cogeneration Inc.,
Its general partner
By /s/ Thomas F. Joaquin
-------------------------------------
Its Vice President - Power Supply
By /s/ Paul Oyer By______________________________
------------------------------------- Its
Its Financial Vice President &
Treasurer
|
CONSENT
PSEG KALAELOA,INC., a Delaware corporation formerly known as CEA Kalaeloa, Inc., consents to the foregoing Amendment No. 4 to Power Purchase Agreement, and agrees that upon becoming the general partner of Kalaeloa Partners, L.P., it shall be bound thereby.
PSEG KALAELOA INC.
By_________________________________
Its
EXHIBIT A
IN WITNESS WHEREOF, the parties have executed this Amendment by their respective duly-authorized officers as of the date first stated above.
HAWAIIAN ELECTRIC COMPANY, INC. KALAELOA PARTNERS, L.P.
By ABB Hawaiian Cogeneration Inc.,
Its general partner
By_____________________________________
Its
By_____________________________________ By /s/ Lynn D. Dorsey
Its ------------------------------
Its President
|
CONSENT
PSEG KALAELOA,INC., a Delaware corporation formerly known as CEA Kalaeloa, Inc., consents to the foregoing Amendment No. 4 to Power Purchase Agreement, and agrees that upon becoming the general partner of Kalaeloa Partners, L.P., it shall be bound thereby.
PSEG KALAELOA INC.
By_________________________________
Its
EXHIBIT A
IN WITNESS WHEREOF, the parties have executed this Amendment by their respective duly-authorized officers as of the date first stated above.
HAWAIIAN ELECTRIC COMPANY, INC. KALAELOA PARTNERS, L.P.
By ABB Hawaiian Cogeneration Inc.,
Its general partner
By_____________________________________
Its
By_____________________________________ By______________________________
Its Its
|
CONSENT
PSEG KALAELOA,INC., a Delaware corporation formerly known as CEA Kalaeloa, Inc., consents to the foregoing Amendment No. 4 to Power Purchase Agreement, and agrees that upon becoming the general partner of Kalaeloa Partners, L.P., it shall be bound thereby.
PSEG KALAELOA INC.
By /s/ Jeffrey W. Moore --------------------------------- Its Vice President |
[MECO letterhead]
CONT 9
IC/G
December 27, 1999
CERTIFIED - RETURN RECEIPT
Mr. G. Stephen Holaday
Plantation General Manager
Hawaiian Commercial & Sugar Company
P. O. Box 266
Puunene, HI 96784
Dear Mr. Holaday:
Subject: Termination Notice for Amended and Restated Power Purchase Agreement between A&B Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company ("HC&S"), and Maui Electric Company, Limited ("MECO"), dated November 30, 1989 (the "Amended PPA"), as amended by the First Amendment to Amended and Restated Power Purchase Agreement, dated November 1, 1990 ("Amendment No. 1") (which are together referred to as the "PPA")
I would like to thank you and John Krieg for our recent discussion on the long term generation needs for the island of Maui and the future role that HC&S may play in meeting those needs. MECO and HC&S have had a long term, mutually beneficial relationship. I fully expect that we will be able to continue this relationship as our companies evolve to meet the challenges of the changing business environment on Maui.
Due to these changing business conditions, it is appropriate to review the terms and conditions under which MECO purchases electrical capacity and energy from HC&S. Consequently, pursuant to Article XVII titled TERM OF AGREEMENT of the subject PPA; MECO hereby provides written notice of termination of said PPA. The termination will be effective at the end of the day on December 31, 2001./1/ Mr. G. Stephen Holaday
/1/ Pursuant to Article XVII of the Amended PPA, the PPA "shall continue in effect through December 31, 1999, and from year to year thereafter, subject to termination on or after January 1, 2000, on not less than two (2) years' prior written notice by either party." As was provided in letter agreements dated December 11, 1997 and October 22, 1998, no notice of termination was given prior to the end of 1997 or 1998. As a result, the PPA remains in full force and effect through December 31, 2001, and from year to year thereafter, subject to termination on or after January 1, 2002, on not less than two (2) years' written notice by either party. This letter provides such two (2) years' written notice of termination.
December 27, 1999
I am optimistic that we will be able to negotiate a new, mutually acceptable Power Purchase Agreement by December 2000. This would provide time to obtain approval from the Public Utilities Commission of the new PPA prior to the expiration of the existing agreement. The Hawaiian Electric Company, Inc. ("HECO") Power Purchase Division will lead the negotiations for MECO. Dan Ching is the Director of this group, and he is available to begin the negotiation process at your earliest convenience. Mr. Ching may be contacted at 808/543- 4340.
Again, I remain optimistic about our ability to complete successfully and in a timely manner the negotiations for a new PPA and look forward to continuation of our relationship.
Sincerely,
/s/ William S. Bonnet |
Hawaiian Electric Industries, Inc. and subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
Nine months ended Nine months ended
September 30, September 30,
--------------------------------- -------------------------------
(dollars in thousands) 2000 (1) 2000 (2) 1999 (1) 1999 (2)
--------------------------------------------------------------------------------------------------------------------------
Fixed charges
Total interest charges (3)......................... $ 147,273 $ 234,593 $ 115,616 $ 208,055
Interest component of rentals...................... 3,304 3,304 3,315 3,315
Pretax preferred stock dividend requirements of
subsidiaries...................................... 2,556 2,556 2,626 2,626
Preferred securities distributions of
trust subsidiaries.............................. 12,026 12,026 12,016 12,016
------------ ------------ ------------ ------------
Total fixed charges................................ $ 165,159 $ 252,479 $ 133,573 $ 226,012
============ ============ ============ ============
Earnings
Pretax income from continuing operations........... $ 120,140 $ 120,140 $ 106,322 $ 106,322
Fixed charges, as shown............................ 165,159 252,479 133,573 226,012
Interest capitalized............................... (2,387) (2,387) (2,171) (2,171)
------------ ------------ ------------ ------------
Earnings available for fixed charges............... $ 282,912 $ 370,232 $ 237,724 $ 330,163
============ ============ ============ ============
Ratio of earnings to fixed charges................. 1.71 1.47 1.78 1.46
============ ============ ============ ============
|
(1) Excluding interest on ASB deposits.
(2) Including interest on ASB deposits.
(3) Interest on nonrecourse debt from leveraged leases is not included in total interest charges nor in interest expense in HEI's consolidated statements
of income.
Hawaiian Electric Company, Inc. and subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
Nine months ended
September 30,
-------------------------------
(dollars in thousands) 2000 1999
-------------------------------------------------------------------------------------------------------------
Fixed charges
Total interest charges.................................................... $ 36,585 $ 36,756
Interest component of rentals............................................. 535 574
Pretax preferred stock dividend requirements of subsidiaries.............. 1,083 1,120
Preferred securities distributions of trust subsidiaries.................. 5,756 5,746
------------- -------------
Total fixed charges....................................................... $ 43,959 $ 44,196
============= =============
Earnings
Income before preferred stock dividends of HECO........................... $ 73,569 $ 57,528
Income taxes (see note below)............................................. 46,264 36,120
Fixed charges, as shown................................................... 43,959 44,196
AFUDC for borrowed funds.................................................. (2,220) (1,955)
------------- -------------
Earnings available for fixed charges...................................... $161,572 $135,889
============= =============
Ratio of earnings to fixed charges........................................ 3.68 3.07
============= =============
Note:
Income taxes is comprised of the following
Income tax expense relating to income from regulated activities.......... $ 46,222 $ 36,208
Income tax expense (benefit) relating to income (loss) from
nonregulated activities............................................... 42 (88)
------------- --------------
$ 46,264 $ 36,120
============= ==============
|
| ARTICLE 5 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC INDUSTRIES, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2000 AND CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| CIK: 0000354707 |
| NAME: HAWAIIAN ELECTRIC INDUSTRIES, INC. |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | 9 MOS |
| FISCAL YEAR END | DEC 31 2000 |
| PERIOD START | JAN 01 2000 |
| PERIOD END | SEP 30 2000 |
| CASH | 179,653 |
| SECURITIES | 2,193,189 |
| RECEIVABLES | 174,551 |
| ALLOWANCES | 0 |
| INVENTORY | 0 |
| CURRENT ASSETS | 0 |
| PP&E | 3,286,645 |
| DEPRECIATION | 1,208,339 |
| TOTAL ASSETS | 8,513,560 |
| CURRENT LIABILITIES | 0 |
| BONDS | 1,080,324 |
| PREFERRED MANDATORY | 100,000 |
| PREFERRED | 134,406 |
| COMMON | 680,814 |
| OTHER SE | 192,057 |
| TOTAL LIABILITY AND EQUITY | 8,513,560 |
| SALES | 0 |
| TOTAL REVENUES | 1,260,878 |
| CGS | 0 |
| TOTAL COSTS | 1,075,040 |
| OTHER EXPENSES | 7,209 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 58,489 |
| INCOME PRETAX | 120,140 |
| INCOME TAX | 50,019 |
| INCOME CONTINUING | 70,121 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 70,121 |
| EPS BASIC | 2.16 |
| EPS DILUTED | 2.15 |
| ARTICLE UT |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2000 AND CONSOLIDATED STATEMENT OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| CIK: 0000046207 |
| NAME: HAWAIIAN ELECTRIC CO. INC. |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | 9 MOS |
| FISCAL YEAR END | DEC 31 2000 |
| PERIOD START | JAN 01 2000 |
| PERIOD END | SEP 30 2000 |
| BOOK VALUE | PER BOOK |
| TOTAL NET UTILITY PLANT | 1,974,644 |
| OTHER PROPERTY AND INVEST | 0 |
| TOTAL CURRENT ASSETS | 201,458 |
| TOTAL DEFERRED CHARGES | 12,992 |
| OTHER ASSETS | 142,213 |
| TOTAL ASSETS | 2,331,307 |
| COMMON | 85,387 |
| CAPITAL SURPLUS PAID IN | 295,611 |
| RETAINED EARNINGS | 448,208 |
| TOTAL COMMON STOCKHOLDERS EQ | 829,206 |
| PREFERRED MANDATORY | 100,000 |
| PREFERRED | 34,293 |
| LONG TERM DEBT NET | 659,324 |
| SHORT TERM NOTES | 11,519 |
| LONG TERM NOTES PAYABLE | 0 |
| COMMERCIAL PAPER OBLIGATIONS | 70,784 |
| LONG TERM DEBT CURRENT PORT | 0 |
| PREFERRED STOCK CURRENT | 0 |
| CAPITAL LEASE OBLIGATIONS | 0 |
| LEASES CURRENT | 0 |
| OTHER ITEMS CAPITAL AND LIAB | 626,181 |
| TOT CAPITALIZATION AND LIAB | 2,331,307 |
| GROSS OPERATING REVENUE | 930,167 |
| INCOME TAX EXPENSE | 46,222 |
| OTHER OPERATING EXPENSES | 777,240 |
| TOTAL OPERATING EXPENSES | 823,462 |
| OPERATING INCOME LOSS | 106,705 |
| OTHER INCOME NET | 7,671 |
| INCOME BEFORE INTEREST EXPEN | 114,376 |
| TOTAL INTEREST EXPENSE | 40,807 |
| NET INCOME | 73,569 |
| PREFERRED STOCK DIVIDENDS | 810 |
| EARNINGS AVAILABLE FOR COMM | 72,759 |
| COMMON STOCK DIVIDENDS | 49,757 |
| TOTAL INTEREST ON BONDS | 41,982 |
| CASH FLOW OPERATIONS | 154,995 |
| EPS BASIC | 0 |
| EPS DILUTED | 0 |
FIRST AMENDMENT TO TRUST AGREEMENT BETWEEN
HAWAIIAN ELECTRIC INDUSTRIES, INC. AND
FIDELITY MANAGEMENT TRUST COMPANY
THIS FIRST AMENDMENT TO TRUST AGREEMENT, is made and entered into August 1, 2000, 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 (the "Trust Agreement"), with regard tofor the Hawaiian Electric Industries Retirement Savings Plan (the "Plan") which restated the existing trust agreement; and
WHEREAS, the Sponsor wishes to add Fidelity PortfolioPlanner(SM) as a service under the Trust; and
WHEREAS, the Sponsor wishes to add the use of electronic media in providing communications and services, and/or software products as a service under the Trust; and
WHEREAS, in furtherance of the foregoing, the Trustee and the Sponsor desire to amend said Trust Agreement as provided for in Section 13 thereunder;
NOW THEREFORE, in consideration of the above premises, the Trustee and the Sponsor hereby amend the Trust Agreement by:
(1) Amending and restating Section 4(k) as follows:
Special Indemnification for Fidelity PortfolioPlanner(SM). Without
limiting the generality of the foregoing paragraph of this Section
7(e), the Trustee shall indemnify the Sponsor against and hold the
Sponsor harmless from any and all such loss, damage, penalty,
liability, cost, and expense, including without limitation, reasonable
attorney's fees and disbursements, that may be incurred by, imposed
upon, or asserted against the Sponsor solely as a result of a) any
defects
in the investment methodology embodied in the target asset allocation
or model portfolio provided through Fidelity PortfolioPlanner(SM),
except to the extent that any such loss, damage, penalty, liability,
cost or expense arises from information provided by the participant,
the Sponsor or third parties; b) any prohibited transactions resulting
from the provision by the Trustee of Fidelity PortfolioPlanner(SM); or
c) Trustee's failure to perform its obligations under Section 14(c).
(a) The Trustee may provide communications and services ("Electronic Services") and/or software products ("Electronic Products") via electronic media, including, but not limited to Fidelity Plan Sponsor WebStation and Fidelity PortfolioPlanner(SM). (The Plan Sponsor Webstation Agreement, as the same may be amended or terminated in accordance with its terms, is attached as Schedule "I". The Fidelity PortfolioPlanner(SM) and Part II of the ADV for Strategic Advisers, Inc., as the same may be amended from time to time on prior notice by Trustee to Sponsor, is attached as Schedule "J".) The Sponsor and its agents agree to use such Electronic Services and Electronic Products only in the course of reasonable administration of or participation in the Plan and to keep confidential and not publish, copy, broadcast, retransmit, reproduce, commercially exploit or otherwise redisseminate the Electronic Products or Electronic Services or any portion thereof without the Trustee's written consent, except, in cases where Trustee has specifically notified the Sponsor that the Electronic Products or Services are suitable for delivery to Sponsor's Plan participants, for non-commercial personal use by participants or beneficiaries with respect to their participation in the Plan or for their other retirement planning purposes.
(b) The Sponsor shall be responsible for installing and maintaining all Electronic Products, (including any programming required to accomplish the installation) and for displaying any and all content associated with Electronic Services on its computer network and/or Intranet so that such content will appear exactly as it appears when delivered to Sponsor. All Electronic Products and Services shall be clearly identified as originating from the Trustee or its affiliate. The Sponsor shall promptly remove Electronic Products or Services from its computer network and/or Intranet, or replace the Electronic Products or Services with updated products or services provided by the Trustee, upon written notification (including written notification via facsimile) by the Trustee.
(c) The Electronic Services and Products shall perform the functions of the Fidelity PortfolioPlanner(SM) and Part II of the ADV for Strategic Advisers, Inc. without reproducible error. Except for the express warranty of the preceding sentence, all Electronic Products shall be provided to the Sponsor without warranties or acceptance of legal liability by the Trustee, and all Electronic Services shall be provided to the Sponsor without acceptance of legal liability related to or arising out of the electronic
nature of the delivery or provision of such Services. Except as otherwise stated in this Agreement, no rights are conveyed to any property, intellectual or tangible, associated with the contents of the Electronic Products or Services and related material. The Trustee hereby grants to the Sponsor a non-exclusive, non-transferable revocable right and license to use the Electronic Products and Services in accordance with the terms and conditions of this Agreement.
(d) To the extent that any Electronic Products or Services utilize Internet services to transport data or communications, the Trustee will take, and Sponsor agrees to follow, reasonable security precautions, however, the Trustee disclaims any liability for interception of any such data or communications. The Trustee reserves the right not to accept data or communications transmitted via electronic media by the Sponsor or a third party if it determines that the media does not provide adequate data security, or if it is not administratively feasible for the Trustee to use the data security provided. The Trustee shall not be responsible for, and makes no warranties regarding access, speed or availability of Internet or network services, or any other service required for electronic communication. The Trustee shall not be responsible for any loss or damage related to or resulting from any changes or modifications to the Electronic Products or Services after delivering it to the Sponsor.
(4) Amending and restating the "Other" section of Schedule "A", in its entirety, as attached hereto, to reflect the addition of employee communications and Fidelity PortfolioPlanner(SM) under "Other" section.
(5) Amending and restating Schedule "B", in its entirety, as attached hereto, to reflect a revised "Other Fees" section.
(6) Adding a new Schedule "J" as attached.
IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this First 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 COMPANY
BY: HAWAIIAN ELECTRIC INDUSTRIES,
INC. PENSION INVESTMENT COMMITTEE
By: /s/ Peter C. Lewis 7/24/00 By: /s/ Carolyn Redden 8/11/00
------------------------------ -----------------------------
Peter C. Lewis Date Vice President Date
Member
By: /s/ Edwina H. Kawamoto 7/24/00
-------------------------------
Edwina H. Kawamoto Date
Secretary and Member
|
Schedule "A"
* 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 Income Fund
- Spartan U.S. Equity Index Fund
- MAS Value Portfolio Adviser
- Neuberger Berman Partners Trust
- PBHG Emerging Growth Fund
- Fidelity U.S. Bond Index 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.
The Trustee will provide only the recordkeeping and administrative services set forth on this Schedule "A" and no others.
* Weekly processing of contribution data and contributions
* Daily processing of transfers and changes of future allocations via the
telephone exchange system
* Daily processing of withdrawals
* Monthly trial balance
* Monthly loan reports
* Quarterly administrative reports
* Quarterly participant statements
* 1099Rs
* Account segregation for Qualified Domestic Relations Orders ("QDRO") as
directed by Sponsor
* Excess contributions report
* Participant Loans
* 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.
HAWAIIAN ELECTRIC FIDELITY MANAGEMENT TRUST
INDUSTRIES, INC. COMPANY
BY: HAWAIIAN ELECTRIC
INDUSTRIES, INC. PENSION
INVESTMENT COMMITTEE
By: /s/ Peter C. Lewis 7/24/00 By: /s/ Carolyn Redden 8/11/00
------------------------------- ------------------------------
Peter C. Lewis Date Vice President Date
Member
By: /s/ Edwina H. Kawamoto 7/24/00
-------------------------------
Edwina H. Kawamoto Date
Secretary and Member
|
Schedule "B"
* Annual Participation Fee $5.00 per participant** per year, billed and payable quarterly.
* 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.
* NetBenefits All User ID fees waived.
* Other Fees: separate charges for optional non-discrimination 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. The Administrator may withdraw reasonable administrative fees from the Trust by written direction to the Trustee.
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.
HAWAIIAN ELECTRIC FIDELITY MANAGEMENT TRUST
INDUSTRIES, INC. COMPANY
BY: HAWAIIAN ELECTRIC
INDUSTRIES, INC. PENSION
INVESTMENT COMMITTEE
By: /s/ Peter C. Lewis 7/24/00 By: /s/ Carolyn Redden 8/11/00
------------------------------- -----------------------------
Peter C. Lewis Date Vice President Date
Member
By: /s/ Edwina H. Kawamoto 7/24/00
-------------------------------
Edwina H. Kawamoto Date
Secretary and Member
|
Schedule "J"
Important Legal Information
What is Fidelity PortfolioPlanner(SM)?
This product is an educational tool intended to help you meet your retirement goal. The program is divided into three modules: a Savings Need or Retirement Need module (depending on your lifestage) which will help you determine whether you are savings enough to meet your retirement income needs; an Asset Allocation module which uses an Investor Profile Questionnaire to help you assess your risk tolerance, personal financial situation and time horizon and directs you to a target asset mix; and a Model Portfolio module. The model portfolio is provided as an example of an investment strategy consistent with the answers you provide in the Investor Profile questionnaire. The recommended model portfolio represents one of many combinations of investments that may help you reach your retirement goals.
It is important for you to understand that this product does not give you investment advice or recommendations or make any promises about investment returns. Any investment decision that you make is your responsibility alone. All models used in the program are hypothetical and you are solely responsible for the accuracy of any data you input into the program. Be sure to review your investment decisions from time to time to make sure they are still consistent with your goals. You should also consider any assets you may have outside of your employer's retirement plan when applying the model portfolio to your investment decisions.
Are there special considerations for retirement investors?
Fidelity PortfolioPlanner(SM) presents you with one of several model portfolios using investment options available to you through your workplace plan, to match as closely as possible to a particular target asset mix. Fidelity PortfolioPlanner(SM) should not serve as the primary basis for your investment decision. Fidelity PortfolioPlanner(SM) is an educational tool and the model portfolio represents one of several combinations of investments that may be appropriate for you.
In addition, there may be other investments you may consider more appropriate to satisfy your goals. A decision to invest in a particular investment option may be based on a number of factors, including an investor's needs, savings through work and outside a workplace plan, goals and comfort with risk.
Who provides the target asset mixes and model portfolio in Fidelity PortfolioPlanner(SM)?
Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments(R) company provides the model portfolio recommendations and target asset mixes, the investment methodology and certain other information in this product. Fidelity Institutional Retirement Services Company and Fidelity Investments Tax-Exempt Services Company, both divisions of Fidelity Investments Institutional
Services Co., Inc. provide the workplace savings account information in Fidelity PortfolioPlanner(SM) and access to Fidelity PortfolioPlanner(SM) by arrangement with the plan sponsor.
The model portfolio represents Strategic Advisers' investment suggestion only as of the date it is provided. You must return to this application periodically to see if any changes have been made to the model portfolio. You will not be contacted proactively to do so. The investments in the model portfolio, mutual funds and non-mutual funds alike, are selected to provide a diversified portfolio and a risk-adjusted return consistent with your target asset mix. They are not selected to maximize return or predict the highest performing fund or group of funds within each asset class in the model. Your circumstances are unique so you should review your own situation at least annually and consult an investment professional if you need additional information.
There are multiple products and services from Fidelity that provide asset allocation and model portfolio suggestions.
Please note that Fidelity continues to review and may modify the investment analysis that drives the asset allocation and the fund selection, which means that services, products and model portfolios may change over time. These products and services may yield different investment suggestions.
To obtain more information about Strategic Advisers, we provide you with the Part II for Form ADV below.
What additional things should I keep in mind while using Fidelity PortfolioPlanner(SM)?
Any information obtained should not be considered an offer to buy or sell, a solicitation of an offer to buy, or a recommendation of any securities. Neither Fidelity Investments nor its affiliates are responsible for losses incurred on any investment nor does Fidelity guarantee the suitability or potential value of any particular investment.
Past performance is no guarantee of future results. Share price, yield and return may vary and you may have a gain or loss when you sell your shares. The model portfolio may include investment options for which Fidelity will receive payments if you decide to invest. Specifically, model portfolios may include investment options for which Fidelity or its affiliates receive payment for services such as investment management, distribution, transfer agency, or administration. The model portfolios may also include non-Fidelity funds for which Fidelity receives payment for certain recordkeeping or other shareholder services.
Where can I get more information on the investments listed in Fidelity PortfolioPlanner(SM)?
Fidelity Management & Research Company manages Fidelity mutual funds and some non-mutual fund investments. Please be aware that investment managers other than Fidelity Management & Research Company manage certain investment options. Such investment options include, but may not be limited to managed income funds, commingled pools, annuities and non-Fidelity mutual funds.
For more complete information on any mutual fund registered in your state, including expenses and any application charges and fees, please order a free prospectus through Net Benefits? or through your plan sponsor. Read the prospectus carefully before you make your investment decision.
Who provides the investment data?
Fidelity PortfolioPlanner(SM) uses the following types of date about your current investments and plan investment options: performance; underlying holdings; Morningstar investment category; sector and geographic classification.
Performance information for publicly-available mutual funds is obtained monthly from an independent third party vendor. For proprietary mutual funds and non- mutual fund investment options, performance information is provided by Fidelity affiliates, sponsors, or external money managers. Performance for individual securities available through the plan is provided monthly from a separate third party vendor.
Underlying holdings data (including industry sector and geographic classifications) for publicly-available mutual funds is obtained monthly from an independent third party vendor. For proprietary mutual funds and other pooled investment options unique to plans (such as commingled pools, or separate accounts), underlying holdings, if available, are provided by quarterly Fidelity affiliates or plan sponsors or external money managers. On occasion, those third parties will not provide detailed holdings, but may choose to provide aggregate holdings information by asset class and, for stocks, by industry sector and geographic classification.
Investment category for publicly-available mutual funds is provided by Morningstar, Inc. and independent third party, on a monthly basis.
In the case of individual securities held within a plan, Fidelity PortfolioPlanner(SM) determines the industry sector using the same parameters used by the third party vendor providing underlying holdings data for publicly- available mutual funds. In the rare instance where such data is not available from Morningstar, Strategic Advisers, Inc. will determine the industry sector using publicly-available information.
Investment information provided to Strategic Advisers, Inc. is not based on contemporaneous data. Strategic Advisers is not responsible for the accuracy of data provided by third parties.
Part II of ADV - More information about Strategic Advisers, Inc.
Service Overview
Methods of Analysis, Sources of Information, and Investment Strategies
Education and Business Background of Directors of Strategic Advisers, Inc.
Activities and Affiliations of the Adviser
Information on Protecting your Privacy
Investment Methodology
Service Overview
Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments(R) company provides the model portfolios and target asset mixes, the investment methodology and certain other information in Fidelity PortfolioPlanner(SM). The product is designed to help individual investors identify
and meet their retirement goals.
Each Fidelity PortfolioPlanner(SM) session is a one-time, non-discretionary service which means that any model portfolio is based only on the market information obtained by PortfolioPlanner(SM) at that time and it is up to investors to implement the model if they so choose. We suggest that investors re-visit the service from time to time and, in particular, if their financial circumstances change. Strategic Advisers will review the various model portfolios and may update them quarterly. Strategic Advisers will not however, contact investors to inform them that the suggestions have changed.
Fidelity PortfolioPlanner(SM) is made available to individual investors through various Fidelity Investments channels and through participating institutional workplace plan sponsors who use Fidelity's recordkeeping services for their employee savings plans. These Fidelity channels include Fidelity Institutional Retirement Services Company and Fidelity Investments Tax-Exempt Services Company, both divisions of Fidelity Investments Institutional Services Co., Inc. Fidelity PortfolioPlanner(SM) service fees are negotiated with institutional plan sponsors and made payable in arrears.
Methods of Analysis, Sources of Information, and Investment Strategies
Strategic Advisers generally uses both fundamental and technical investment strategies in creating long term investment model portfolios. The model portfolios provided in Fidelity PortfolioPlanner(SM) are based on the user's risk profile and are built using a four-step process.
The investment approach begins with the completion of an Investor Profile Questionnaire which provides an assessment of an investor's time horizon, risk tolerance and financial experience. Through a scoring algorithm, these attributes are mapped to one of four target asset mixes with pre-specified asset class allocations for stocks, bonds and short-term investments. The assigned asset mix becomes the target to which the construction process attempts to match risk levels (volatility), asset class weights (stocks, bonds, and short-term), sector weights (technology, cyclicals, etc.) and foreign stock holdings. (Foreign stock targets are a part of the stock allocation).
The portfolio construction process is comprised of a series of well-defined steps that lead to model portfolios. These steps include: i) fund screening, ii) fund performance evaluation and ranking, iii) additional screening (if necessary), iv) optimization and portfolio construction and v) treatment of stable value securities. Selected investments typically include mutual fund shares but may include equity securities or annuities in a workplace savings plan such as a 401(k) or 403(b) plan or retail investments in a taxable, tax- deferred or tax-free account. This methodology is described in full detail within the PortfolioPlanner(SM) application.
Education and Business Background of Directors of Strategic Advisers, Inc.
Robert M. Gervis is Managing Director and Chief Administrative Officer of Strategic Advisers and has been with Fidelity Investments since July 1994. Previously, Mr. Gervis was a partner with the law firm of Weil, Gotshal & Manges in New York from 1993 to 1994. Born in 1960, Mr. Gervis received his J.D. in 1985 from the National Law Center of George Washington University and his B.S. in Industrial Engineering from Lehigh University in 1982.
William V. Harlow III is a Director, President and Chief Investment Officer of Strategic Advisers and
has been with Fidelity Investments since 1991. Born in 1956, Mr. Harlow holds a Ph.D. in Financial Economics (1986) and a MBA (1980) from the University of Texas as well as a B.A. in Physics (1978) from Rice University. Mr. Harlow is also a CFA.
In addition, the principal officers of Strategic Advisers also may serve as officers or employees of affiliated companies that are engaged in various aspects of the financial services industry.
Activities and Affiliations of the Adviser
Strategic Advisers engages in three general areas of business. First, Strategic provides discretionary investment advisory services to individuals, trusts, investment companies and charitable and other business organizations. Second, Strategic provides non-discretionary advisory services to individuals and financial intermediaries and develops and maintains asset allocation and portfolio modeling methodologies for use by affiliates. Last, Strategic offers educational products concerning investment and personal finance.
Strategic Advisers is a wholly owned subsidiary of FMR Corp. Various direct or indirect subsidiaries of FMR Corp. are engaged in investment advisory, brokerage, banking or insurance businesses. From time to time, Strategic Advisers may have material business relationships with Fidelity Distributors Corporation, Fidelity Trust Company, Fidelity Management Trust Company, Fidelity Management & Research Company, Fidelity Brokerage Services, Inc., Fidelity Investments Institutional Services Co., Inc., Fidelity Investments Institutional Operations Company, Inc. and National Financial Services Corporation. While no economic benefit is received by Strategic Advisers from affiliated or unaffiliated entities in connection with providing advice to clients, Fidelity Management & Research Company (FMR) and various affiliates of FMR are compensated for providing services to one or more of the funds: FMR as the investment adviser for the Fidelity funds, Fidelity Distributors Corporation as the underwriter of the funds, Fidelity Service Co. and Fidelity Investments Institutional Operations Company, Inc. as the funds' transfer agent, Fidelity Management Trust Company as the custodian for certain funds. In addition, one or more broker-dealer affiliates of the funds may execute portfolio transactions for the funds. The funds' investment advisers may obtain brokerage or research services, consistent with Section 28(e) of the Securities Exchange Act of 1934, from broker-dealers in connection with the execution of the funds' portfolio security transactions.
Information on Protecting Your Privacy
Throughout this portfolio planning session you will notice that some fields are already filled in. Because you are a valued Fidelity customer, answers to some questions are provided based on your account information. Please note that Fidelity respects your privacy and has provided you with a secure server while you are using this portfolio planner. Your data will not be sold for any purposes. Fidelity recognizes the importance of Internet security. To this end, Fidelity has adopted certain secure measures designed to ensure that personal financial information transmitted for use with Fidelity PortfolioPlanner(SM) is both secure and confidential. First, the Fidelity PortfolioPlanner(SM) has been designed for use with an Internet browser that has 128-bit encryption. While we cannot guarantee that transmissions over the Internet are completely free of risk of interception, Fidelity PortfolioPlanner(SM) has been designed to use a high grade of encryption in order to meet our stringent security standards. Second, personal financial information submitted by a user of Fidelity
PortfolioPlanner(SM) will not be made available to third-parties except Fidelity Investments affiliates. Finally, Fidelity will store your most recent completed Investor Profile Questionnaire in a secure electronic file for five years in order to comply with certain record keeping requirements under the federal securities laws.
Investment Methodology
Overview
The primary objective of Fidelity PortfolioPlanner(SM) is to provide retirement plan participants with a disciplined, risk-controlled approach to their investment decisions. Fidelity PortfolioPlanner(SM) provides participants one of four target asset allocations and a model portfolio customized to the investment options in the plan. In constructing the model portfolio, PortfolioPlanner(SM) employs a process that is independent with respect to fund family. The process aims to build a model portfolio using investments that have demonstrated, over time, consistency in risk characteristics and security selection capabilities. The model portfolio uses a "look-through" methodology to most closely match the risk characteristics of a target asset mix while at the same time providing an opportunity for enhanced returns.
The investment approach begins with the completion of an Investor Profile Questionnaire (IPQ) which provides an assessment of an investor's time horizon, risk tolerance and financial experience. Through a scoring algorithm, these attributes are mapped to one of four target asset mixes with pre-specified asset class allocations for stocks, bonds and short-term investments. Strategic Advisers, Inc. has created these target asset mixes based on historical risk and return characteristics for the asset classes listed in the table below. The target asset mixes are four significantly different allocations that offer good risk/return trade-offs for each of the four different investor types listed below on the investment spectrum.
The assigned asset mix becomes the target to which the construction process attempts to match risk levels (volatility), asset class weights (stocks, bonds, and short-term), sector weights (technology, cyclicals, etc.) and foreign stock holdings. (Foreign stock targets are a part of the stock allocation).
The Wilshire 5000 is used to determine the target sector weights and other stock risk and return characteristics. The MSCI EAFE Index is used as the foreign stock benchmark. The Lehman Aggregate Index is the bond asset class benchmark and the 3-Month U.S. Treasury Bill Index is the short-term asset class benchmark.
The portfolio construction process is comprised of a series of well-defined steps that lead to model portfolios. These steps include: i) screening of investment options, ii) performance evaluation and ranking, iii) additional screening (if necessary), and iv) optimization and portfolio construction. Each of these steps is discussed below.
Step I: Screening of Investment Options
The first step in the portfolio construction process is the identification of those investment options that are appropriate for use as building blocks for the model portfolio. PortfolioPlanner(SM) uses the following criteria:
For mutual funds
. Funds with at least 3 years of return history
. Funds classified according to Morningstar as adhering to a core investment objective:
. Morningstar core investment objectives include Equity Income, Growth & Income, Growth, Aggressive Growth, Small Company, Balanced, Government Bond, Corporate Bond, Foreign Stock and World Stock.
These objectives are further classified by the type of Morningstar category to which the fund belongs.
For domestic stock funds, these categories are: Large Value, Large Blend, Large Growth, Mid-Cap Value, Mid-Cap Blend, Mid-Cap Growth, Small Value, Small Blend and Small Growth.
For the Balanced objective, the fund must belong to the Domestic Hybrid category.
For fixed-income objectives, these categories are: Short Government, Intermediate Government, Long Government, Short-term Bond, Intermediate-term Bond, Long-term Bond and High Yield Bond.
Finally, for the Foreign Stock and World Stock objectives, the fund must also belong to Foreign Stock and World Stock categories.
Separate classes of shares in a mutual fund are generally evaluated separately for length of performance history. For certain funds that do not meet the above criteria (such as a new institutional class of shares, a new index fund or a clone of an established fund), Fidelity may substitute the characteristics of a very similar fund (such as the retail class of shares in the same fund, the index that a new fund seeks to track, or the established fund which the clone seeks to emulate). In this way, the fund can be evaluated for potential inclusion in the model portfolio.
In situations where there is more than one fund representing short-term/money market securities, a single fund will be selected, and if available, a money market fund offered by Fidelity Investments will be used. This is the only bias for any specific Fidelity Investments product in the Fidelity PortfolioPlanner(SM).
For other investment options
Often employer sponsored workplace savings plans include non-mutual fund investments. These investments, for instance separately managed accounts, managed income pools, fixed annuities, and proprietary funds, are not reported by Morningstar so we rely on the information provided by Fidelity affiliates, third party sources, or the plan sponsor to evaluate the underlying holdings. Generally, the returns history screening criteria stated for mutual funds above also gets applied to these non-mutual fund investments.
Company Stock: 401(k) investors
We do not make recommendations on company stock in your 401(k) portfolio. Rather the model portfolio is constructed taking the company stock holdings into account, and is solely for the portion of your savings outside of your company stock holdings. We analyze the volatility, historical performance (a minimum of 24 months of data) and industry sector of the company stock you hold in conjunction with the other savings in your workplace savings plan. We do this in order to help diversify the holdings in your overall workplace plan portfolio.
Exclusions
Certain investments are automatically excluded from the model portfolios (for example investment strategies). These "Ready-Mix" investment solutions, such as asset allocation funds and "lifestyle" funds, are designed for investors who want to diversify their savings through a single investment vehicle. Consequently, we do not include them in the investment universe for model portfolios. We also exclude specialty-type funds like sector or regional funds, as defined by Morningstar or separately managed accounts with similar investment objectives.
Lastly, the investment methodology does not look for extraordinary circumstances which might rule out a certain investment. However, to the extent Strategic Advisers becomes aware of these circumstances and believes they may have possible deleterious effects on the portfolio, the methodology will consider them.
Step II. Performance Evaluation and Ranking
Once the universe of plan investment options (or "investments") has been screened, PortfolioPlanner(SM) evaluates the historical performance of the investments. Through a proprietary statistical approach in which Strategic Advisers uses the last three years of monthly return data, each investment's total return is adjusted based on its exposure to the overall market and different types of securities and risks within the market. In this way, the investment's "alpha" or "excess return" can be identified. In other words, the investment's return is adjusted for the performance of the average security in the market, and any return left over, positive or negative, is a measure of the risk-adjusted return. The alpha, or risk-adjusted excess return, is used as the best assessment of the ability of a particular investment to enhance returns over time through security selection. Depending on the weights of the asset classes in the investment, Fidelity PortfolioPlanner(SM) uses one of three different multifactor analysis engines to evaluate the three years of performance.
Each of these models produces a number of specific evaluations for each
investment. Specifically,
. Alpha (risk-adjusted excess return)
. Factor loadings for risk exposures
. Significance tests on all alphas and parameters
. Consistency of risk characteristics
These parameters are used in the subsequent screening and portfolio construction steps of the methodology.
Step III. Additional Screening (if necessary)
With a large plan investment universe, a screening process further narrows the
set of candidate investment options to a workable number of approximately 50 to
60. To accomplish this and to further focus the analysis on investment options
with the most potential of adding value, the following screening criteria are
employed:
. Information from the returns-based performance evaluation (Alpha, Risk Exposure Factors, Significance Tests)
. Holdings-based characteristics (equity sector, foreign stock weighting, price-to-book, price-to-cashflow, price-to-equity)
. Investment management data (Morningstar fund core objective, Morningstar sub-category classification, asset class percents, portfolio turnover, median market capitalization).
Additional screening identifies those investment options having the most consistent risk characteristics over the last three years. This allows the building of a model portfolio that is diversified with investment options which tend to consistently focus their investments within a specific segment of the market or use a consistent type of investment discipline or approach to security selection. Consistent investment management reduces the likelihood that the investment options selected for the model portfolio will change from month to month or from quarter to quarter.
The screening criteria designed to meet this objective are:
. Consistency of risk characteristics as measured by an R2 of greater than 90% from the performance evaluation models
. Historical and current cash levels for domestic and global stock investments of no more than 10%
Step IV. Optimization & Portfolio Construction
The portfolio construction process uses an optimization approach to select and weight a set of candidate investment options whose overall risk characteristics, when viewed as a portfolio, are similar to those of the target asset mix. After applying the techniques above, the optimization process identifies the portfolio of investments which has the best risk-adjusted return for the least amount of tracking error relative to the benchmark. All performance and risk evaluations for all candidate investment options are considered simultaneously in the decision process. The model's tracking error is judged relative to the target asset mix.
We require that the weight of any one pooled stock investment is no more than 25% and is no less than 5% of a participant's total assets. The 25% maximum stock weight constraint provides portfolio manager and investment option diversification. The 5% minimum limits the total number of investment options in a model portfolio so each position has a meaningful impact on the recommended model portfolio. A similar philosophy applies to the bond asset class. However, since bonds historically have been less volatile than stocks, Strategic Advisers does not consider it necessary to diversify in the same way. Furthermore, often there are only one or two bond investment options available in the plan. This makes diversification all the more difficult within the bond asset class. Therefore, the amount allocated to investment options in the bond asset class must be at least 5% of a participant's total assets, and generally may not exceed 50%, depending on plan options.
Risk control is integrated into the portfolio construction process using two important and different data dimensions - returns-based and holdings-based. These two alternative types of risk control provide critical cross checks.
Returns-based risk control is conducted using tracking error and alpha. Tracking error, based on periodic returns, provides a full covariance matrix control of all underlying systematic risk factors. Alpha and its tradeoffs with risk are directly incorporated into the portfolio construction process.
Holdings-based risk control is conducted using asset, foreign equity and equity industry sector analysis coupled with investment style analysis. Asset allocation is the percentage of holdings in stock, bond and short-term investments. Foreign equity holdings is the percentage of foreign stocks held in the fund. Equity industry sector weightings are the percentage of the stock holdings in certain industry sectors (utilities, energy, financial, industrial cyclicals, consumer durables, services, retail, health and technology). Finally, investment style analysis allows diversification along value-growth and small- large cap dimensions.
Treatment of Stable Value Investments (if available)
Stable value investment options are generally analyzed in the same way as other investment options, with three important differences: 1) instead of using a look-through analysis for a stable value option, the investment methodology makes certain assumptions about the nature and character of the underlying assets; 2) unique fund screening criteria are applied to stable value options; and 3) the methodology provides a limited preference to appropriate stable value options, through the use of minimum allocations ("floors").
Assumptions about underlying holdings. The return volatility of stable value investment options is not observable because of book-value accounting and insurance wrap guarantees on the principal and interest of the underlying investments. Thus, Fidelity PortfolioPlanner(SM) makes the following assumptions about stable value investment options:
. A stable value investment option is comprised of 20% short-term instruments
and 80% investment-grade bonds
. The alpha of a stable value option is zero (neutral)
. Stable value investment options have the volatility characteristics of the
Lehman 1-3 Year Government/Corporate Index.
Fund screening. The investment methodology will apply two screening criteria to stable value options. First, although we will not apply look-through methodology to the underlying holdings, we will exclude the stable value option from consideration if we have information that the quality and characteristics of underlying holdings are not consistent with the investment-grade assumption for the bond portion. For example, a stable value option will be screened out if the investment policy permits, or any holdings include equities or high-yield bonds. Second, as with any other investment option, we will exclude the stable value option if we learn of any extraordinary circumstances which may, in our judgment, have possible deleterious effects on the overall portfolio.
Minimum Allocations ("Floors"). Fidelity PortfolioPlanner(SM) gives a limited preference to stable value options for two reasons. First, it is important to achieve some consistency in allocations to stable value options in order to avoid unfavorable impacts on participant pricing. Second, it is important that the stable value option not be unduly disadvantaged by the use of assumptions concerning alpha and volatility. For these reasons, Fidelity PortfolioPlanner(SM) employs the minimum allocations or "floors". If a stable value option meets the screening criteria, Fidelity PortfolioPlanner(SM) will construct a model portfolio for the Growth, Balanced and Conservative target asset mixes that includes a minimum allocation to the stable value option. For the Growth target asset mix, the minimum allocation to the stable value option will be 5% of the total portfolio; for Balanced, 25% of the total portfolio; and for Conservative, 50% of the total portfolio. There is no minimum allocation to the stable value option for the Aggressive Growth target asset mix.
As with any portfolio construction, Fidelity PortfolioPlanner(SM) will attempt to come as close as possible to the target asset mix, but may not meet the target asset mix exactly. In general, the tolerance for the two categories of fixed-income investments is greater than the tolerance for stocks. For example, in the Conservative target asset mix, the program seeks to allocate 20% to stocks, 50% to bonds and 30% to short-term investments. In a plan that has no short-term option (other than a stable value investment option), there is likely to be relatively more allocated to bonds and relatively less allocated to short- term investments in the Conservative model portfolio, because the stable value option will be divided in a 4-to-1 ratio across those two asset classes.
Updates to the Models
The model portfolios are reviewed, and if warranted, updated quarterly. They may be reviewed more often if Strategic Advisers determines in its discretion that more frequent reviews are necessary.
Note for investors in employer sponsored retirement plans: Changes in the options available in your plan will cause Fidelity to review and update the recommended model portfolios associated with that plan. Fidelity however will not proactively contact you about any such changes.
SECOND AMENDMENT TO TRUST AGREEMENT BETWEEN
HAWAIIAN ELECTRIC INDUSTRIES, INC. AND
FIDELITY MANAGEMENT TRUST COMPANY
THIS SECOND AMENDMENT TO TRUST AGREEMENT, is made and entered into November 1, 2000, 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 (the "Trust Agreement"), for the Hawaiian Electric Industries Retirement Savings Plan (the "Plan") which restated the existing trust agreement; and
WHEREAS, the Sponsor wishes to add the INVESCO Dynamics Fund and Fidelity Freedom 2040 Fund as investment options under the Trust; and
WHEREAS, in furtherance of the foregoing, the Trustee and the Sponsor desire to amend said Trust Agreement as provided for in Section 13 thereunder;
NOW THEREFORE, in consideration of the above premises, the Trustee and the Sponsor hereby amend the Trust Agreement by:
(1) Amending and restating Schedules "A", "B" and "C", in their entirety, as attached.
IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Second 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 COMPANY
BY: HAWAIIAN ELECTRIC INDUSTRIES,
INC. PENSION INVESTMENT COMMITTEE
By: /s/ Peter C. Lewis 9/28/00 By: /s/ Carolyn Redden 10/10/00
------------------------------- -----------------------------
Peter C. Lewis Date Vice President Date
Member
By: /s/ Edwina H. Kawamoto 9/28/00
-------------------------------
Edwina H. Kawamoto Date
Secretary and Member
|
Schedule "A"
* 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
- MAS Value Portfolio Adviser
- Neuberger Berman Partners Trust
- 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.
The Trustee will provide only the recordkeeping and administrative services set forth on this Schedule "A" and no others.
* Weekly processing of contribution data and contributions
* Daily processing of transfers and changes of future allocations via the
telephone exchange system
* Daily processing of withdrawals
* Monthly trial balance
* Monthly loan reports
* Quarterly administrative reports
* Quarterly participant statements
* 1099Rs
* Account segregation for Qualified Domestic Relations Orders ("QDRO") as
directed by Sponsor
* Excess contributions report
* Participant loans
* 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.
HAWAIIAN ELECTRIC FIDELITY MANAGEMENT TRUST
INDUSTRIES, INC. COMPANY
BY: HAWAIIAN ELECTRIC
INDUSTRIES, INC. PENSION
INVESTMENT COMMITTEE
By: /s/ Peter C. Lewis 9/28/00 By: /s/ Carolyn Redden 10/10/00
------------------------------- ------------------------------
Peter C. Lewis Date Vice President Date
Member
By: /s/ Edwina H. Kawamoto 9/28/00
-------------------------------
Edwina H. Kawamoto Date
Secretary and Member
|
Schedule "B"
* Annual Participation Fee: $5.00 per participant** per year, billed and payable quarterly.
* 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.
* NetBenefits: 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:
MAS Value Portfolio Adviser; Neuberger
Berman Partners Trust and the PBHG
Emerging Growth Fund; .25% annual
administration fee plus an $8.00 per
participant fee on all INVESCO Dynamics
Fund assets (to be paid by the Non-
Fidelity Mutual Fund vendor).
* Other Fees: separate charges for optional non-discrimination 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.
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.
HAWAIIAN ELECTRIC FIDELITY MANAGEMENT TRUST
INDUSTRIES, INC. COMPANY
BY: HAWAIIAN ELECTRIC
INDUSTRIES, INC. PENSION
INVESTMENT COMMITTEE
By: /s/ Peter C. Lewis 9/28/00 By: /s/ Carolyn Redden 10/10/00
------------------------------- -------------------------------
Peter C. Lewis Date Vice President Date
Member
By: /s/ Edwina H. Kawamoto 9/28/00
-------------------------------
Edwina H. Kawamoto Date
Secretary and Member
|
Schedule "C"
In accordance with Section 4(b), the PIC 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
- MAS Value Portfolio Adviser
- Neuberger Berman Partners Trust
- 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.
BY: HAWAIIAN ELECTRIC
INDUSTRIES, INC. PENSION
INVESTMENT COMMITTEE
By: /s/ Peter C. Lewis 9/28/00
-------------------------------
Peter C. Lewis Date
Member
By: /s/ Edwina H. Kawamoto 9/28/00
-------------------------------
Edwina H. Kawamoto Date
Secretary and Member
|