-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I7IcHYpqCvsCenFsy6TmiXYmpiZ4cowStBtwwQIoB3t5sxKnuSir8LGFuNyEndro ylQ7aDhao6NsaA6WrXVOlQ== 0000898430-98-001092.txt : 19980330 0000898430-98-001092.hdr.sgml : 19980330 ACCESSION NUMBER: 0000898430-98-001092 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC INDUSTRIES INC CENTRAL INDEX KEY: 0000354707 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990208097 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08503 FILM NUMBER: 98575031 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085435662 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC CO INC CENTRAL INDEX KEY: 0000046207 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990040500 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04955 FILM NUMBER: 98575032 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085437771 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FORMER COMPANY: FORMER CONFORMED NAME: HAWAIIAN ELECTRIC CO LTD DATE OF NAME CHANGE: 19670212 10-K 1 ANNUAL REPORT FOR THE YEAR ENDING DECEMBER 31, 1997 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION REGISTRANT; STATE OF INCORPORATION; I.R.S. EMPLOYER FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO. - ----------- ----------------------------------- ------------------ 1-8503 HAWAIIAN ELECTRIC INDUSTRIES, INC. 99-0208097 (A Hawaii Corporation) 900 Richards Street Honolulu, Hawaii 96813 Telephone (808) 543-5662 1-4955 HAWAIIAN ELECTRIC COMPANY, INC. 99-0040500 (A Hawaii Corporation) 900 Richards Street Honolulu, Hawaii 96813 Telephone (808) 543-7771 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE REGISTRANT TITLE OF EACH CLASS ON WHICH REGISTERED - ---------- ------------------- -------------------- Hawaiian Electric Industries, Inc. Common Stock, New York Stock Without Par Value Exchange Hawaiian Electric Industries, Inc. Guarantee with New York Stock respect to 8.36% Exchange Trust Originated Preferred Securities (SM) (TOPrS (SM)) Hawaiian Electric Industries, Inc. Preferred Stock New York Stock Purchase Rights Exchange Hawaiian Electric Company, Inc. Guarantee with New York Stock respect to 8.05% Exchange Cumulative Quarterly Income Preferred Securities Series 1997 (QUIPS(SM)) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: REGISTRANT TITLE OF EACH CLASS - ---------- ------------------- Hawaiian Electric Industries, Inc. None Hawaiian Electric Company, Inc. Cumulative Preferred Stock ================================================================================ Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] ================================================================================ ================================================================================
AGGREGATE MARKET VALUE NUMBER OF SHARES OF OF THE VOTING STOCK HELD COMMON STOCK OUT- BY NONAFFILIATES OF THE STANDING OF THE REGISTRANTS ON MARCH 13, REGISTRANTS ON 1998 MARCH 13, 1998 ------------------------ ------------------- Hawaiian Electric Industries, Inc. $1,300,041,000 32,001,007 (Without par value) Hawaiian Electric Company, Inc. N/A 12,805,843 ($6 2/3 par value)
================================================================================ DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K INTO WHICH THE DOCUMENT IS DOCUMENT INCORPORATED - ------------------------------------------------------------------------ ------------------------- Portions of Annual Reports to Stockholder(s) of the following registrants for the fiscal year ended December 31, 1997: Hawaiian Electric Industries, Inc.................................... Parts I, II, III, and IV Hawaiian Electric Company, Inc....................................... Parts I, II, III, and IV Portions of Proxy Statement of Hawaiian Electric Industries, Inc., dated March 13, 1998, for the Annual Meeting of Stockholders Part III
================================================================================ THIS COMBINED FORM 10-K REPRESENTS SEPARATE FILINGS BY HAWAIIAN ELECTRIC INDUSTRIES, INC. AND HAWAIIAN ELECTRIC COMPANY, INC. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY EACH REGISTRANT ON ITS OWN BEHALF. NEITHER REGISTRANT MAKES ANY REPRESENTATIONS AS TO THE INFORMATION RELATING TO THE OTHER REGISTRANT. ================================================================================ TABLE OF CONTENTS
Page Glossary of Terms........................................................................ ii PART I Item 1. Business.................................................................... 1 Item 2. Properties.................................................................. 42 Item 3. Legal Proceedings........................................................... 44 Item 4. Submission of Matters to a Vote of Security Holders......................... 44 PART II Item 5. Market for Registrants' Common Equity and Related Stockholder Matters....... 45 Item 6. Selected Financial Data..................................................... 46 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 46 Item 7a. Quantitative and Qualitative Disclosures About Market Risk.................. 46 Item 8. Financial Statements and Supplementary Data................................. 46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................. 46 PART III Item 10. Directors and Executive Officers of the Registrants......................... 47 Item 11. Executive Compensation...................................................... 49 Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 53 Item 13. Certain Relationships and Related Transactions.............................. 54 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 54 Independent Auditors' Report - HEI....................................................... 56 Independent Auditors' Report - HECO...................................................... 57 Index to Exhibits........................................................................ 62 Signatures............................................................................... 79
i GLOSSARY OF TERMS Defined below are certain terms used in this report: TERMS DEFINITIONS - -------- ----------- 1935 ACT Public Utility Holding Company Act of 1935 AES Applied Energy Services, Inc. AES-BP AES Barbers Point, Inc. (now known as AES Hawaii, Inc.) ARM Adjustable rate mortgage ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corporation, ASB Service Corporation, AdCommunications, Inc. and American Savings Mortgage Co., Inc. BoA Bank of America, FSB BHP BHP Petroleum Americas Refining Inc., a fuel oil supplier BIF Bank Insurance Fund BPPI Baldwin Pacific Properties, Inc., a limited partner of Baldwin*Malama (a limited partnership in which Malama Development Corp. is the general partner) Btu British thermal unit CDUP Conservation District Use Permit CERCLA Comprehensive Environmental Response, Compensation and Liability Act CHEVRON Chevron Products Company, a fuel oil supplier COMPANY Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc., Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I, HEI Investment Corp., Malama Pacific Corp. and its subsidiaries, Hawaiian Tug & Barge Corp., Young Brothers, Limited, HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, HEIDI Real Estate Corp., Pacific Energy Conservation Services, Inc., HEI Power Corp. and its subsidiaries, Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II and Hawaiian Electric Industries Capital Trust III CONSUMER Division of Consumer Advocacy, Department of Commerce and Consumer ADVOCATE Affairs of the State of Hawaii CT Combustion turbine DOH Department of Health of the State of Hawaii DOT Department of Transportation of the State of Hawaii DSM Demand-side management ENCOGEN Encogen Hawaii, L.P. ENSERCH Enserch Development Corporation EPA Environmental Protection Agency - federal EPCRA Emergency Planning and Community Right-to-Know Act ERL Environmental Response Law of the State of Hawaii FASB Financial Accounting Standards Board FDIC Federal Deposit Insurance Corporation FDICIA Federal Deposit Insurance Corporation Improvement Act of 1991 FEDERAL U.S. Government FERC Federal Energy Regulatory Commission FHLB Federal Home Loan Bank FIRREA Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ii GLOSSARY OF TERMS (continued)
TERMS DEFINITIONS - -------- ----------- HCPC Hilo Coast Processing Company HC&S Hawaiian Commercial & Sugar Company, a division of A&B-Hawaii, Inc. HECO Hawaiian Electric Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited, Hawaii Electric Light Company, Inc. and HECO Capital Trust I HECO'S Hawaiian Electric Company, Inc.'s Consolidated Financial CONSOLIDATED Statements, incorporated into Parts I, II and IV of this FINANCIAL Form 10-K by reference to pages 12 to 34 of Hawaiian STATEMENTS Electric Company, Inc's 1997 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13 HECO'S MD&A Hawaiian Electric Company, Inc.'s Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated into Parts I, II and IV of this Form 10-K by reference to pages 3 to 11 of Hawaiian Electric Company, Inc.'s 1997 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13 HEI Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., HEI Investment Corp., Malama Pacific Corp., Hawaiian Tug & Barge Corp., HEI Diversified, Inc., Pacific Energy Conservation Services, Inc., HEI Power Corp., Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II and Hawaiian Electric Industries Capital Trust III HEI'S Hawaiian Electric Industries, Inc.'s Consolidated Financial CONSOLIDATED Statements, incorporated into Parts I, II and IV of this FINANCIAL Form 10-K by reference to pages 26 and 40 to 65 of STATEMENTS Hawaiian Electric Industries, Inc.'s 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13 HEI'S MD&A Hawaiian Electric Industries, Inc.'s Management's Discussion and Analysis of Financial Condition, Results of Operations and Market Risk incorporated into Parts I, II and IV of this Form 10-K by reference to pages 27 to 39 of Hawaiian Electric Industries, Inc.'s 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13 HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B. and HEIDI Real Estate Corp. HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several subsidiaries HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. HERS Hawaiian Electric Renewable Systems, Inc., formerly a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and formerly parent company of Lalamilo Ventures, Inc. HIG The Hawaiian Insurance & Guaranty Company, Limited, an insurance company which was placed in state rehabilitation proceedings. HEI Diversified, Inc. was the holder of record of HIG's common stock prior to August 16, 1994
iii GLOSSARY OF TERMS (continued)
TERMS DEFINITIONS - -------- ----------- HIRI Hawaiian Independent Refinery, Inc., a fuel oil refinery HITI Hawaiian Interisland Towing, Inc. HP Horsepower HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power Corp. HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of Young Brothers, Limited IBEW International Brotherhood of Electrical Workers IBU Inlandboatmen's Union of the Pacific, Marine Division, an affiliate of the International Longshoremen's and Warehousemen's Union, Hawaii Division ILWU International Longshoremen's and Warehousemen's Union IPP Independent power producer IRP Integrated resource plan IRR Interest rate risk JCC Jones Capital Corporation KALAELOA Kalaeloa Partners, L.P. KCP Kawaihae Cogeneration Partners KWH Kilowatthour LSFO Low sulfur fuel oil LVI Lalamilo Ventures, Inc., formerly a wholly owned subsidiary of Hawaiian Electric Renewable Systems, Inc. and formerly a wholly owned subsidiary of Hawaiian Electric Industries, Inc. LVI was merged into HELCO on December 23, 1996 MBtu Million British thermal unit MD&A Management's Discussion and Analysis of Financial Condition and Results of Operations MDC Malama Development Corp., a wholly owned subsidiary of Malama Pacific Corp. MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. MMO Malama Mohala Corp., a wholly owned subsidiary of Malama Pacific Corp. MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several real estate subsidiaries MSFO Medium sulfur fuel oil MW Megawatt NA Not applicable NAE North American Environmental, Inc. NOI Notice of intent NOV Notice of Violation NPDES National Pollutant Discharge Elimination System OPA Federal Oil Pollution Act of 1990 OTS Office of Thrift Supervision, Department of Treasury PCB Polychlorinated biphenyls PECS Pacific Energy Conservation Services, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. PGV Puna Geothermal Venture PSD PERMIT Prevention of Significant Deterioration/Covered Source Permit PUC Public Utilities Commission of the State of Hawaii PURPA Public Utility Regulatory Policies Act of 1978
iv GLOSSARY OF TERMS (continued)
TERMS DEFINITIONS - -------- ----------- QTL Qualified Thrift Lender RCRA Resource Conservation and Recovery Act of 1976 REGISTRANT Hawaiian Electric Industries, Inc. or Hawaiian Electric Company, Inc. ROACE Return on average common equity ROR Return on rate base SAIF Savings Association Insurance Fund SARA Superfund Amendments and Reauthorization Act SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards ST Steam turbine STATE State of Hawaii TSCA Toxic Substance Control Act of 1976 UIC Underground Injection Control UST Underground storage tank YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian Tug & Barge Corp.
v Forward-looking information This report and other presentations made by HEI, HECO and their subsidiaries contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Except for historical information contained herein, the matters set forth are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include, but are not limited to, such factors as the effect of international, national and local economic conditions, including the condition of the Hawaii tourist and construction industries and the Hawaii housing market; the effects of weather and natural disasters; product demand and market acceptance risks; increasing competition in the electric utility industry; capacity and supply constraints or difficulties; new technological developments; governmental and regulatory actions, including decisions in rate cases and on permitting issues; the results of financing efforts; the timing and extent of changes in interest rates; and the results of integration of the acquired Bank of America, FSB (BoA) - Hawaii operations with the operations of ASB. Investors are also directed to consider other risks and uncertainties discussed in other periodic reports previously and subsequently filed by HEI and/or HECO with the SEC. PART I ------ ITEM 1. BUSINESS HEI - --- HEI was incorporated in 1981 under the laws of the State of Hawaii and is a holding company with subsidiaries engaged in the electric utility, savings bank, freight transportation, real estate development and other businesses, primarily in the State of Hawaii, and in the pursuit of independent power projects in Asia and the Pacific. HEI's predecessor, HECO, was incorporated under the laws of the Kingdom of Hawaii (now the State of Hawaii) on October 13, 1891. As a result of a 1983 corporate reorganization, HECO became an HEI subsidiary and common shareholders of HECO became common shareholders of HEI. HECO and its operating subsidiaries, MECO and HELCO, are regulated electric public utilities providing the only electric public utility service on the islands of Oahu, Maui, Lanai, Molokai and Hawaii. HECO also owns all the common securities of HECO Capital Trust I. HECO Capital Trust I (a Delaware statutory business trust in which HECO owns all the common securities) was formed to effect the issuance of $50 million of 8.05% cumulative quarterly income preferred securities in March 1997 for the benefit of HECO, MECO and HELCO. Besides HECO, HEI also owns directly or indirectly the following subsidiaries which comprise its diversified companies: HEIDI and its subsidiaries, HEIDI Real Estate Corp. and ASB, and the subsidiaries of ASB; HTB and its subsidiary; MPC and its subsidiaries; HEIIC; PECS; HEIPC and its subsidiaries; Hycap Management, Inc. and its subsidiary; Hawaiian Electric Industries Capital Trust I; and Hawaiian Electric Industries Capital Trust II and III (inactive entities). ASB, acquired in 1988, was the third largest financial institution in the State of Hawaii as of December 31, 1997, and had 69 retail branches as of December 31, 1997. On December 6, 1997, ASB acquired substantially all of the Hawaii deposits of BoA, most of its Hawaii branches and certain of its Hawaii- based loans. The acquisition increased ASB's assets by $1.8 billion and its deposits by $1.7 billion. HEIDI Real Estate Corp. was formed in February 1998 to own and manage real estate assets. HTB was acquired in 1986 and provides ship assist and charter towing services and owns YB, a regulated intrastate public carrier of waterborne freight among the Hawaiian Islands. MPC was formed in 1985 and directly or through subsidiaries develops and invests in real estate. HEIIC was formed in 1984 and is a passive investment company which primarily holds investments in leveraged leases. PECS was formed in August 1994 and is a contract services company primarily providing limited support services in Hawaii. HEIPC was formed in March 1995 to pursue, directly or through its subsidiaries or affiliates, independent power projects in Asia and the Pacific. Hycap Management, Inc., including subsidiary HEI Preferred Funding, LP (a limited partnership in which Hycap Management, Inc. is the sole general partner), and Hawaiian Electric Industries Capital Trust I (a Delaware statutory business 1 trust in which HEI owns all the common securities) were formed to effect the issuance of $100 million of 8.36% HEI-obligated trust preferred securities in February 1997. Prior to August 16, 1994, HEIDI was the holder of record of the common stock of HIG, which was acquired in 1987 and provided property and casualty insurance primarily in Hawaii. For information about the discontinued operations of HIG, see Note 20 to HEI's Consolidated Financial Statements which is incorporated herein by reference to page 63 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. The financial information about the Company's industry segments is incorporated herein by reference to page 26 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. For additional information about the Company, reference is made to Item 7 and Item 7A -"HEI's Management's Discussion and Analysis of Financial Condition, Results of Operations and Market Risk" (HEI's MD&A) and to Item 14-HEI's Consolidated Financial Statements, incorporated herein by reference to pages 27 to 39 and to page 26 and pages 40 to 65, respectively, of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. ELECTRIC UTILITY - ---------------- HECO and subsidiaries and service areas HECO, MECO and HELCO are regulated operating electric public utilities engaged in the production, purchase, transmission, distribution and sale of electricity on the islands of Oahu; Maui, Lanai and Molokai; and Hawaii, respectively. HECO was incorporated under the laws of the Kingdom of Hawaii (now State of Hawaii) on October 13, 1891. HECO acquired MECO in 1968 and HELCO in 1970. In 1997, the electric utilities' revenues and operating income amounted to approximately 76% and 83%, respectively, of HEI's consolidated revenues and operating income. For additional information about HECO, see HEI's MD&A and Note 3, incorporated herein by reference to pages 27 to 39 and 47 to 50, respectively, in HEI's 1997 Annual Report to Stockholders, and HECO's MD&A and HECO's consolidated financial statements incorporated by reference to pages 3 to 11 and 12 to 34, respectively, of HECO's 1997 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. The islands of Oahu, Maui, Lanai, Molokai and Hawaii have a combined population estimated at 1,130,000, or approximately 95% of the population of the State of Hawaii, and comprise a service area of 5,766 square miles. The principal communities served include Honolulu (on Oahu), Wailuku and Kahului (on Maui) and Hilo and Kona (on Hawaii). The service areas also include numerous suburban communities, resorts, U.S. Armed Forces installations and agricultural operations. HECO, MECO and HELCO have nonexclusive franchises from the state covering certain areas, which authorize them to construct, operate and maintain facilities over and under public streets and sidewalks. HECO's franchise covers the City & County of Honolulu, MECO's franchises cover the County of Maui and the County of Kalawao, and HELCO's franchise covers the County of Hawaii. Each of these franchises will continue in effect for an indefinite period of time until forfeited, altered, amended or repealed. Sales of electricity HECO, MECO and HELCO provide the only electric public utility service on the islands they serve. The following table sets forth the number of their electric customer accounts as of December 31, 1997, 1996 and 1995 and their electric sales revenues for each of the years then ended:
1997 1996 1995 ------------------------------------------------------------------------------------- Electric Electric Electric (dollars in Customer sales Customer sales Customer sales thousands) accounts revenues accounts revenues accounts revenues - --------------------------------------------------------------------------------------------------- HECO................. 271,801 $ 779,425 271,602 $ 767,264 269,307 $712,380 MECO................. 54,605 151,625 53,763 144,434 53,339 127,284 HELCO................ 60,220 160,332 59,349 152,312 58,515 135,110 ------------------------------------------------------------------------------ 386,626 $1,091,382 384,714 $1,064,010 381,161 $974,774 ==============================================================================
2 Revenues from the sale of electricity in 1997 were from the following types of customers in the proportions shown:
HECO MECO HELCO Total - ---------------------------------------------------------------------------------------------------------------- Residential...................................... 32% 36% 41% 34% Commercial....................................... 30 34 37 32 Large light and power............................ 37 29 22 34 Other............................................ 1 1 -- -- --------------------------------------------------------------- 100% 100% 100% 100% ===============================================================
HECO and its subsidiaries derived approximately 10% of their operating revenues from the sale of electricity to various federal government agencies in 1997, 1996 and 1995. One of HECO's larger customers, the Naval Base at Barbers Point, Oahu, is expected to be closed in 1999 with redevelopment of the base occurring through 2020. HECO anticipates that the base closure will ultimately result in little, if any, loss in aggregate KWH sales, if, as anticipated, the Navy continues to occupy portions of Barbers Point and much of the surplus facilities and land currently not utilized by the Navy is occupied by state agencies and others. On March 8, 1994, President Clinton signed an Executive Order which mandates that each federal agency develop and implement a program with the intent of reducing energy consumption by 30% by the year 2005 to the extent that these measures are cost-effective. The 30% reductions will be measured relative to the agency's 1985 energy use. HECO is working with various federal government agencies such as the Department of Defense to implement demand-side management programs which will help them achieve their energy reduction objectives. In November 1995, HECO and the U.S. General Services Administration entered into a Basic Ordering Agreement under which HECO will arrange for financing and installation of energy conservation projects at federal facilities in Hawaii. Under the Basic Ordering Agreement, HECO undertook an air conditioning upgrade project at the federal office building in downtown Honolulu, which project was completed in 1997. Further, HECO commenced design work for solar water heating in this federal office building. Another project underway is with the Postal Service. HECO also signed an umbrella Basic Ordering Agreement with the Department of Defense in October 1996. There are currently seven projects underway for the Navy. Neither HEI nor HECO management can predict with certainty the impact of President Clinton's Executive Order on the Company's or consolidated HECO's future financial condition, results of operations or liquidity. 3 SELECTED CONSOLIDATED ELECTRIC UTILITY OPERATING STATISTICS
1997 1996 1995 1994 1993 ------------------------------------------------------------------ KWH SALES (MILLIONS) Residential............................... 2,531.0 2,540.4 2,471.3 2,427.5 2,340.3 Commercial................................ 2,676.8 2,662.4 2,624.7 2,451.2 2,284.6 Large light and power..................... 3,700.7 3,733.0 3,655.1 3,658.6 3,646.2 Other..................................... 54.7 55.4 55.4 55.8 54.1 ------------------------------------------------------------------ 8,963.2 8,991.2 8,806.5 8,593.1 8,325.2 ================================================================== NET ENERGY GENERATED AND PURCHASED (MILLIONS OF KWH) Net generated............................. 5,885.9 5,994.3 5,850.6 5,727.6 5,789.6 Purchased................................. 3,622.8 3,565.3 3,511.6 3,437.8 3,101.0 ------------------------------------------------------------------ 9,508.7 9,559.6 9,362.2 9,165.4 8,890.6 ================================================================== Losses and system uses (%)................ 5.5 5.7 5.7 6.0 6.1 ENERGY SUPPLY (YEAREND) Generating capability--MW................. 1,634 1,636 1,637 1,637 1,638 Firm purchased capability--MW............. 474 474 469 465 473 ------------------------------------------------------------------ 2,108 2,110 2,106 2,102 2,111 ================================================================== Gross peak demand--MW (1)................. 1,573 1,561 1,537 1,527 1,496 Btu per net KWH generated................. 10,799 10,781 10,762 10,746 10,846 Average fuel oil cost per MBtu (cents).... 405.9 388.8 329.7 304.4 340.5 CUSTOMER ACCOUNTS (YEAREND) Residential............................... 336,094 333,807 330,508 325,495 320,987 Commercial................................ 48,671 49,069 48,585 47,916 48,008 Large light and power..................... 582 586 580 601 628 Other..................................... 1,279 1,252 1,488 1,480 1,475 ------------------------------------------------------------------ 386,626 384,714 381,161 375,492 371,098 ==================================================================
ELECTRIC REVENUES (THOUSANDS) Residential............................... $ 367,432 $ 355,669 $324,923 $297,984 $283,662 Commercial................................ 347,308 338,785 313,909 281,664 262,751 Large light and power..................... 369,878 362,823 329,598 314,931 317,816 Other..................................... 6,764 6,733 6,344 5,927 5,786 ------------------------------------------------------------------- $1,091,382 $1,064,010 $974,774 $900,506 $870,015 =================================================================== AVERAGE REVENUE PER KWH SOLD (CENTS) Residential............................... 14.52 14.00 13.15 12.28 12.12 Commercial................................ 12.97 12.73 11.96 11.49 11.50 Large light and power..................... 9.99 9.72 9.02 8.61 8.72 Other..................................... 12.38 12.16 11.46 10.62 10.69 Average revenue per KWH sold.............. 12.18 11.83 11.07 10.48 10.45 RESIDENTIAL STATISTICS Average annual use per customer account (KWH).................................... 7,559 7,649 7,514 7,482 7,367 Average annual revenue per customer account.................................. $ 1,097 $ 1,071 $ 988 $ 918 $ 893 Average number of customer accounts....... 334,811 332,138 328,912 324,458 317,657 - ------------------------------------------------------------------------------------------------------------------
(1) Sum of the peak demands on all islands served, noncoincident and nonintegrated. 4 GENERATION STATISTICS The following table contains certain generation statistics as of December 31, 1997, and for the year ended December 31, 1997. The capability available for operation at any given time may be less than the generating capability shown because of capability restrictions or temporary outages for inspection, maintenance, repairs or unforeseen circumstances.
Generating and firm purchased KWH net capability generated (MW) at Gross peak Annual and December 31, demand Reserve load purchased Systems 1997 (1) (MW) (2) margin factor (2) (millions) - ------------------------------------------------------------------------------------------------------------------- ISLAND OF OAHU-HECO Conventional oil-fired steam units... 1,160.0 Combustion turbines (peaking units).. 103.0 Firm contract power (3).............. 406.0 ------------------------------------------------------------------------------ 1,669.0 1,220.0 36.8% 72.1% 7,424.2 ------------------------------------------------------------------------------ ISLAND OF MAUI-MECO Conventional oil-fired steam units... 37.6 Combined-cycle unit.................. 58.0 Diesel............................... 95.9 Firm contract power (4).............. 16.0 ------------------------------------------------------------------------------ 207.5 174.7 18.8% 70.2% 1,039.0 ------------------------------------------------------------------------------ ISLAND OF LANAI-MECO Diesel............................... 10.4 5.0 110.1% 65.6% 27.9 ------------------------------------------------------------------------------ ISLAND OF MOLOKAI-MECO Diesel............................... 9.9 Combustion turbine................... 2.2 ---------------------------------------------------------------------------- 12.1 6.6 83.3% 66.5% 37.1 ---------------------------------------------------------------------------- ISLAND OF HAWAII-HELCO Conventional oil-fired steam units... 71.2 Combustion turbines.................. 48.2 Diesel............................... 38.0 Firm contract power (4).............. 52.0 ---------------------------------------------------------------------------- 209.4 166.7 25.6% 69.3% 980.5 ---------------------------------------------------------------------------- Total................................ 2,108.4 1,573.0 34.0% 71.6% 9,508.7 ============================================================================
(1) HECO units at normal ratings, and MECO and HELCO units at reserve ratings. (2) Noncoincident and nonintegrated. (3) Independent power producers-180 MW (Kalaeloa), 180 MW (AES-BP) and 46 MW (refuse-fired plant). (4) Nonutility generation-MECO: 16 MW (HC&S); HELCO: 30EMW (PGV) and 22 MW (HCPC). INTEGRATED RESOURCE PLANNING AND REQUIREMENTS FOR ADDITIONAL GENERATING CAPACITY As a result of a proceeding initiated in January 1990, the PUC issued an order in March 1992 (and revised it in May 1992) requiring the energy utilities in Hawaii to develop integrated resource plans (IRPs). The goal of integrated resource planning is the identification of demand-side and supply-side resources and the integration of these resources for meeting near- and long-term consumer energy needs in an efficient and reliable manner at the lowest reasonable cost. In its May 1992 order, the PUC adopted a "framework", which establishes both the process for developing IRPs and guidelines for the development of such plans. The PUC's framework directs that each plan cover a 20-year planning horizon with a five-year program implementation schedule and states that the planning cycle will be 5 repeated every three years. Under the framework, the PUC may approve, reject or require modifications of the utilities' IRPs. The framework also states that utilities are entitled to recover all appropriate and reasonable integrated resource planning and implementation costs, including the costs of planning and implementing demand-side management (DSM) programs. Under appropriate circumstances, the utilities may recover net lost revenues resulting from DSM programs and earn shareholder incentives. The PUC has approved IRP cost recovery provisions for HECO, MECO and HELCO. Pursuant to the cost recovery provisions, the electric utilities may recover through a surcharge the costs for approved DSM programs (including DSM program lost margins and shareholder incentives), and other IRP costs incurred and approved by the PUC, to the extent the costs are not included in their base rates. The utilities have characterized their proposed IRPs as planning strategies, rather than fixed courses of action, and the resources ultimately added to their systems may differ from those included in their 20-year plans. Under the IRP framework, the utilities are required to submit annual evaluations of their plans (including a revised five-year program implementation schedule) and to submit new plans on a three-year cycle. Prior to proceeding with the DSM programs, separate PUC approval proceedings must be completed, in which the PUC further reviews the details of the proposed programs and the utilities proposals for the recovery of DSM program expenditures net lost revenues and shareholder incentives. HECO's IRP. HECO filed its second IRP with the PUC in January 1998, and a schedule for the PUC proceeding in which it will be considered has not yet been determined. The second IRP identified changes in key forecasts and assumptions since the development of HECO's initial IRP, which was filed in July 1993, modified in January 1994 and approved by the PUC as modified in its March 1995 final decision and order (D&O). HECO's second IRP includes IRP strategy options related to the transition to a more competitive environment in the electric utility industry. The IRP is a flexible resource strategy that allows the utility to make major decisions regarding the incremental implementation of program options for both supply-side and demand-side resources, based on HECO's IRP objectives and the best information available at the time decisions must be made. On the supply-side, HECO's second IRP focuses on the planning for the next generating unit addition in the 2009 time frame -- a 107-MW simple cycle diesel fired combustion turbine, which would be part of a 318-MW diesel fired 2-on-1 combined-cycle unit. Phases 2 and 3 of the combined-cycle unit would be installed in 2013 and 2016, respectively. In addition, pursuant to HECO's generation asset management program, all existing generation units are reasonably expected to operate (future environmental considerations permitting) beyond the 20-year IRP planning period (1998-2017). HECO's second IRP includes five energy efficiency DSM programs, which are designed to reduce the rate of increase in Oahu's energy use, defer construction of new generating units, reduce the state's dependence on oil, and achieve savings for utility customers who participate in the programs. The DSM energy efficiency programs include incentives for customers to install efficient lighting, refrigeration, water-heating and air-conditioning equipment and industrial motors. The PUC issued its final D&Os approving all five of HECO's original energy efficiency DSM programs in 1996, and HECO began implementing these programs in the third quarter of 1996. HECO filed applications with the PUC for a commercial and industrial (C&I) load management program in June 1996, and a residential load control program in September 1997. HECO expects that these two load management DSM programs will be reviewed in concept by the PUC in conjunction with HECO's second IRP. HECO plans to continue the planning and implementation of DSM load management and energy efficiency programs that are cost-effective and also minimize rate impacts to all customers. MECO's IRP. The PUC issued its final D&O in MECO's IRP proceeding in May 1996. MECO's 20-year IRP includes four energy efficiency DSM programs similar to those developed for HECO. The supply-side resources proposed by MECO, as updated in its June 1997 evaluation, include installing approximately 214 MW of additional generation through the year 2013 on the island of Maui, including 58 MW of generation at its Maalaea power plant site in three increments from 1998-2001, and approximately 8 MW through the year 2013 on each of the islands of Lanai and Molokai. The PUC approved MECO's DSM water heating program in July 1996, and MECO's C&I DSM programs in September 1996. MECO began DSM program implementation in late 1996. MECO's first IRP annual evaluation was filed with the PUC in June 1997, and its second IRP annual evaluation is scheduled to be filed with the PUC in June 1998. MECO's next IRP filing is scheduled for September 1999. 6 In 1997, MECO's generation reserve margins were less than the margin specified by its capacity planning criteria (which are based on having enough reserve generation to cover for the unexpected loss of the largest unit taking into account projected peak loads and scheduled maintenance). This condition will probably continue, particularly in view of the recent reduction in the generation capacity being supplied by HC&S (see below under "Nonutility generation--MECO and HELCO power purchase agreements"), until Maalaea unit 17 begins commercial operations. HELCO's IRP. The PUC issued its final D&O in HELCO's IRP proceeding in May 1996. HELCO's 20-year IRP includes four energy efficiency DSM programs similar to those developed for HECO. The supply-side resources proposed in HELCO's five- year plan include installing 58 MW of generation at a West Hawaii site (see "HELCO power situation" below), undertaking transmission and distribution efficiency improvement projects and conducting alternate energy generation resource studies. HELCO's 20-year plan includes adding another diesel-fired dual-train combined-cycle unit at a West Hawaii site. HELCO received interim approval for its four DSM programs in October 1995 and final approval in September 1996. HELCO began implementing its DSM programs in December 1995. HELCO filed an application with the PUC for a C&I pilot load management program in October 1996. HELCO's first IRP annual evaluation was filed with the PUC in June 1997. HELCO's next IRP filing is scheduled for September 1998. HELCO POWER SITUATION For a description of regulatory and judicial proceedings that have delayed HELCO's efforts to install additional generation in order to ease potential power supply constraints on the island of Hawaii, see the "HELCO power situation" section in Note 12 to HECO's Consolidated Financial Statements. Background. In 1991, HELCO identified the need, beginning in 1994, for additional generation to provide for forecast load growth while maintaining a satisfactory generation reserve margin, to address uncertainties about future deliveries of power from existing firm power producers and to permit the retirement of older generating units. Accordingly, HELCO proceeded with plans to install at its Keahole power plant site two 20-megawatt (MW) combustion turbines (CT-4 and CT-5), followed by an 18-MW heat steam recovery generator (ST-7), at which time these units would be converted to a 56-MW (net) combined-cycle unit. In January 1994, the PUC approved expenditures for CT-4, which HELCO had planned to install in late 1994. Installation of HELCO's phased combined-cycle unit at the Keahole power plant site has been revised due to delays in (a) obtaining approval from the Hawaii Board of Land and Natural Resources (BLNR) of a Conservation District Use Permit (CDUP) amendment and (b) obtaining from the Department of Health of the State of Hawaii (DOH) and the U.S. Environmental Protection Agency (EPA) a PSD permit for the Keahole power plant site. Subject to satisfactory resolution of the CDUP amendment and PSD permit matters, HELCO's current plan continues to be to have CT-4 and CT-5 be the next generating units added to its system. ST-7 is currently planned to be deferred to approximately 2006 unless the Encogen facility (described below) is not placed in service as planned. CDUP amendment. On July 10, 1997, the Third Circuit Court of the State of Hawaii issued its Amended Findings of Fact, Conclusions of Law, Decision and Order on HELCO's appeal of an order of the BLNR, along with other civil cases relating to HELCO's application for a CDUP amendment. This decision allows HELCO to use its Keahole property as requested in its application. An amended order to the same effect was issued on August 18, 1997. Two final judgments have been entered, disposing of all but one of the consolidated cases. HELCO has submitted a form of final judgment to dispose of the last case pending pursuant to the court's directions. Opposing parties have appealed each of the final judgments and have also filed motions to stay the effectiveness of the judgments pending resolution of the appeals. A hearing on these motions was held on March 9, 1998, at which time the judge took the matter under advisement. Management believes that HELCO will ultimately prevail with regard to any appeals which may be taken and that the amended decision of the Third Circuit Court will be upheld. Declaratory judgment actions. In February 1997, the Keahole Defense Coalition and three individuals filed a lawsuit in the Third Circuit Court of the State of Hawaii against HELCO, the director of the DOH, and the BLNR, seeking declaratory rulings that, with regard to the Keahole project, one or more of the defendants had violated, or could not allow the plant to operate without violating, the State Clean Air Act, the State Noise Pollution Act, conditions of HELCO's conditional use permit, covenants of HELCO's land patent and Hawaii administrative rules regarding standard conditions applicable to land permits. In March 1998, an individual filed a complaint for declaratory judgment against HELCO, BLNR and Department of Land and Natural Resources (DLNR). The complaint basically alleges a violation of her constitutional due process rights because the issue of which, if any, land use conditions apply to HELCO's use of the Keahole site was determined administratively by DLNR (through a letter issued in January 1998) rather than being decided by BLNR in a contested case. Also filed with the complaint was a motion to stay enforcement of the DLNR letter. HELCO intends to vigorously defend against the claims raised and management believes the allegations are without merit. 7 IPP complaints. Two independent power producers (IPPs), Kawaihae Cogeneration Partners (KCP) and Enserch Development Corporation (Enserch), filed separate complaints against HELCO with the PUC in 1993 and 1994, respectively, alleging that they are entitled to power purchase contracts to provide HELCO with additional capacity, which they claimed would be a substitute for HELCO's planned 56-MW combined-cycle unit at Keahole. Under HELCO's current estimate of generating capacity requirements, there is a near term need for capacity in addition to the capacity which might be provided by either of the proposed IPP units. In September 1995, the PUC allowed HELCO to continue to pursue construction of and commit expenditures for the second combustion turbine (CT-5) and the steam recovery generator (ST-7) for its planned combined-cycle unit, stating in its order that "no part of the project may be included in HELCO's rate base unless and until the project is in fact installed, and is used and useful for utility purposes." The PUC also ordered HELCO to continue negotiating with the IPPs and directed that the facility to be built (i.e., either HELCO's or one of the IPP's) should be the one that can be most expeditiously put into service at "allowable cost." In April 1997, Hilo Coast Processing Company (HCPC) filed a complaint against HELCO with the PUC, requesting an immediate hearing on HCPC's offer for a new 20-year power purchase contract for its existing facility, which is proposed to be expanded from 22 MW to 32 MW. HCPC's existing power purchase agreement is scheduled to terminate at the end of 1999. Enserch complaint. In January 1998, HELCO filed with the PUC an application ----------------- for approval of a power purchase agreement for a 60-MW facility and an interconnection agreement with Encogen dated October 22, 1997. The agreements were entered into following a settlement agreement between Enserch and HELCO and are subject to PUC approval. The parties to the proceeding include HELCO, Encogen and the Consumer Advocate. Motions to intervene filed by KCP, HCPC and one other IPP were denied by the PUC. KCP complaint. In January 1996, the PUC ordered HELCO to continue in good ------------- faith to negotiate a power purchase agreement with KCP. In May 1997, KCP filed a motion for unspecified "sanctions" against HELCO for allegedly failing to negotiate in good faith. In June 1997, KCP filed a motion asking the PUC to designate KCP's facility as the next generating unit on the HELCO system and to determine the "allowable cost" which would be payable by HELCO to KCP. HELCO filed memoranda in opposition to KCP's motions. An evidentiary hearing was held and briefs were filed by both parties. Action by the PUC is pending. HCPC complaint. The PUC converted the HCPC complaint into a purchased power -------------- contract negotiation proceeding. An evidentiary hearing is scheduled for April 1998. Management cannot determine at this time whether the negotiations with KCP and HCPC and related PUC proceedings will result in the execution and/or PUC approval of a power purchase agreement or impact management's plans with regard to installation of HELCO's combined-cycle unit at the Keahole power plant site. NONUTILITY GENERATION The Company has supported state and federal energy policies which encourage the development of alternate energy sources that reduce dependence on fuel oil. Alternate energy sources range from wind, geothermal and hydroelectric power, to energy produced by the burning of bagasse (sugarcane waste). Other nonoil projects include a generating unit burning municipal waste and a fluidized bed unit burning coal. HECO power purchase agreements. HECO currently has three major power purchase agreements. In March 1988, HECO entered into a power purchase agreement with AES Barbers Point, Inc. (AES-BP, now known as AES Hawaii, Inc.), a Hawaii-based cogeneration subsidiary of The AES Corporation (formerly known as Applied Energy Services, Inc.) of Arlington, Virginia. The agreement with AES-BP, as amended in August 1989, provides that, for a period of 30 years, HECO will purchase 180 MW of firm capacity. The AES-BP 180-MW coal-fired cogeneration plant, which became operational in September 1992, utilizes a "clean coal" technology. The facility is designed to sell sufficient steam to be a "Qualifying Facility" under the Public Utility Regulatory Policies Act of 1978 (PURPA). 8 In October 1988, HECO entered into an agreement with Kalaeloa Partners, L.P. (Kalaeloa), a limited partnership whose sole general partner is an indirect, wholly owned subsidiary of ASEA Brown Boveri, Inc. (ABB), which has guaranteed certain of Kalaeloa's obligations and, through affiliates, has contracted to design, build, operate and maintain the facility. The agreement with Kalaeloa, as amended, provides that HECO will purchase 180 MW of firm capacity for a period of 25 years beginning May 23, 1991. The Kalaeloa facility, which was completed in the second quarter of 1991, is a combined-cycle operation, consisting of two oil-fired combustion turbines burning LSFO and a steam turbine which utilizes waste heat from the combustion turbines. The facility is designed to sell sufficient steam to be a "Qualifying Facility" under PURPA. As of February 28, 1997, the ownership of Kalaeloa was restructured such that 1% is now owned by the ABB subsidiary as the general partner and 99% is owned by Kalaeloa Investment Partners (KIP) as the limited partner. KIP is a limited partnership comprised of CEA Hawaiian Management, Inc. and CEA Investment, Inc. (nonregulated affiliates of Public Service Enterprise Group Incorporated) and Harbert Power Corporation. A second phase of the February 28, 1997 transaction, which is still pending, would transfer the general partner interest from the ABB subsidiary to an entity affiliated with the owners of KIP. A modification of the existing ABB Guarantee of Kalaeloa obligations may be part of the second phase. HECO must consent to any changes in the ABB Guarantee. HECO also entered into a power purchase contract in March 1986 and a firm capacity amendment in April 1991 with the City and County of Honolulu, which has built a 64-MW refuse-fired plant (H-Power). The H-Power facility began to provide firm energy in 1990 and currently supplies HECO with 46 MW of firm capacity. The firm capacity amendment provides that HECO will purchase firm capacity until mid-2015. The PUC has approved and allowed rate recovery for the costs related to HECO's three major power purchase agreements which provide a total of 406 MW of firm capacity, representing 24% of HECO's total generating and firm purchased capability on the island of Oahu as of December 31, 1997. MECO and HELCO power purchase agreements. As of December 31, 1997, MECO and HELCO had power purchase agreements for 16 MW and 52 MW of firm capacity, respectively, representing 7% and 25% of their respective total generating and firm purchased capabilities. MECO has a power purchase agreement with HC&S for 16 MW of firm capacity through December 31, 1999. In December 1997, MECO entered into a letter agreement with HC&S which extends the power purchase agreement through December 31, 2000, and year-to-year thereafter, subject to termination on or after January 1, 2001, on not less than two years prior written notice by either party. On March 2, 1998, an HC&S unit failed and HC&S lost 10 MW of generating capacity. It may be several months before HC&S is able to replace the unit, during which time HC&S may not be able to supply MECO with the full contracted capacity. HELCO has a power purchase agreement with Puna Geothermal Venture (PGV) for 30 MW of firm capacity. On February 12, 1996, HELCO and PGV executed an amendment to the power purchase agreement for 5 MW of firm capacity in addition to the 25 MW then being supplied. In August 1996, the PUC approved the amendment and, in September 1996, PGV began supplying 5 MW of additional firm power. In December 1994, at a time when the Hilo Coast Processing Company (HCPC) contract was for delivery of 18 MW, HCPC filed a Chapter 11 bankruptcy petition. In July 1995, the bankruptcy court approved an amended and restated power purchase agreement with HCPC for 22 MW of firm capacity and the dismissal of HCPC from bankruptcy. Also, see the "HELCO power situation" section above and in Note 12 to HECO's Consolidated Financial Statements. In October 1997, HELCO entered into an agreement with Encogen, a limited partnership whose general partners are wholly-owned special-purpose subsidiaries of Enserch and Jones Capital Corporation (JCC). Enserch Corporation and J.A. Jones, Inc., the parent companies of Enserch and JCC, respectively, have guaranteed certain of Encogen's obligations, and an affiliate of Enserch will be contracted to operate and maintain the facility. The agreement provides that HELCO will purchase 60 MW of firm capacity for a period of 30 years. The facility will consist of two oil-fired combustion turbines and a steam turbine which utilizes waste heat from the combustion turbines. The facility will be designed to sell sufficient steam to be a "Qualifying Facility" under PURPA. The agreement was submitted to the PUC for approval in January 1998. See "HELCO Power Situation" above. 9 FUEL OIL USAGE AND SUPPLY All rate schedules of the Company's electric utility subsidiaries contain energy cost adjustment clauses whereby the charges for electric energy (and consequently the revenues of the electric utility subsidiaries generally) automatically vary with changes in the weighted average price paid for fuel oil and certain components of purchased energy costs, and the relative amounts of company-generated power and purchased power. Accordingly, under these clauses, changes in fuel oil and certain purchased energy costs are passed on to customers. In the December 30, 1997 D&Os approving HECO and its subsidiaries' fuel supply contracts, the PUC noted that, in light of the length of the fuel supply contracts and the relative stability of fuel prices, the need for the continued use of energy cost adjustment clauses will be the subject of investigation in a generic docket or in a future rate case. In their rate increase applications based on 1999 test years, MECO and HELCO stated that they believe that their energy cost adjustment clauses continue to be necessary. See discussion below under "Rates" and the "Energy cost adjustment clauses" section in HECO's MD&A. HECO's steam power plants burn low sulfur fuel oil (LSFO). HECO's combustion turbine peaking units burn Number 2 diesel fuel (diesel). MECO's and HELCO's steam power plants burn medium sulfur fuel oil (MSFO) and their combustion turbine and diesel engine generating units burn diesel. The LSFO supplied to HECO is primarily derived from Indonesian and other Far East crude oils processed in Hawaii refineries. The MSFO supplied to MECO and HELCO is derived from U.S. domestic crude oil processed in Hawaii refineries. In December 1997, HECO executed new contracts for the purchase of LSFO and use of certain fuel distribution facilities with Chevron Products Company (Chevron) and BHP Petroleum Americas Refining Inc. (BHP). These fuel supply and facilities operations contracts have a term of seven years commencing January 1, 1998. The PUC approved the contracts and issued a final decision and order in December 1997 that permits the inclusion of costs incurred under these contracts in HECO's energy cost adjustment clause. HECO pays market-related prices for fuel supplies purchased under these agreements. HECO, MECO, HELCO and affiliates, HTB and YB, executed new joint fuel supply contracts with Chevron and BHP for the purchase of diesel and MSFO supplies and for the use of certain petroleum distribution facilities for a period of seven years commencing January 1, 1998. The PUC subsequently approved these contracts and issued a final decision and order in December 1997 that permitted the electric utilities to include fuel costs incurred under these contracts in their respective energy cost adjustment clauses. The electric utilities and HTB and YB pay market-related prices for diesel and MSFO supplied under these agreements. The diesel supplies acquired by the Lanai Division of MECO are purchased under a contract with a local Chevron-brand wholesaler, Lanai Oil Co., Inc., executed on February 13, 1997. The PUC issued a final D&O approving the contract in June 1997. The original term of the contract, which provides for the delivery of fuel to MECO's Lanai power plants, expired December 31, 1997. The contract continues under a provision for extension on an "evergreen" basis cancelable by either party on 180 days advance notice. See the fuel oil commitments information set forth in the "Fuel contracts and other purchase commitments" section in Note 12 to HECO's Consolidated Financial Statements. The following table sets forth the average cost of fuel oil used to generate electricity in the years 1997, 1996 and 1995:
HECO MECO HELCO Consolidated -------------------------------------------------------------------------------------------------------- $/Barrel c/MBtu $/Barrel c/MBtu $/Barrel c/MBtu $/Barrel c/MBtu - ----------------------------------------------------------------------------------------------------------------------- 1997........... 23.88 380.9 30.13 503.9 25.76 418.1 25.19 405.9 1996........... 22.57 361.2 29.33 490.6 25.47 413.8 24.08 388.8 1995........... 19.19 306.1 24.78 414.4 21.94 355.1 20.47 329.7
The average per-unit cost of fuel oil consumed to generate electricity for HECO, MECO and HELCO reflects a different volume mix of fuel types and grades. In 1997, 99.8% of HECO's generation fuel consumption consisted of LSFO. The balance of HECO's fuel consumption was diesel. Diesel made up approximately 73% of MECO's and 32% of HELCO's fuel consumption. The remainder of the fuel consumption of MECO and HELCO consisted of MSFO. In general, MSFO is the least costly fuel, 10 diesel is the most expensive fuel and the price of LSFO falls between the two on a per barrel basis. The average prices of LSFO, MSFO and diesel in 1997 were approximately the same as the respective average price levels prevailing in 1996 and 1996 average prices were higher than the respective average prices in 1995. In December 1997, HELCO and MECO exercised an option to extend for two years their existing contracts with Hawaiian Interisland Towing, Inc. for the shipment of MSFO and diesel supplies from their fuel supplier's facilities on Oahu to storage locations on the islands of Hawaii and Maui, respectively. The PUC approved these contracts and issued a final order in June 1994 that permitted HELCO and MECO to include the fuel transportation and related costs incurred under the original contracts in their respective energy cost adjustment clauses. Freight rates charged under the contracts are related to published indices for industrial commodities prices and labor costs. These contracts each include options for one additional two-year extension. In 1998, the Company estimates that 76% of the net energy generated and purchased by HECO and its subsidiaries will be generated from the burning of oil. Increases in fuel oil prices are passed on to customers through the electric utility subsidiaries' energy cost adjustment clauses. Failure by the Company's oil suppliers to provide fuel pursuant to the supply contracts and/or substantial increases in fuel prices could adversely affect consolidated HECO's and the Company's financial condition, results of operations and/or liquidity. HECO, however, maintains an inventory of fuel oil in excess of one month's supply, which may be used in the event fuel suppliers are not able to provide fuel pursuant to the contracts for this period of time. RATES HECO, MECO and HELCO are subject to the regulatory jurisdiction of the PUC with respect to rates, issuance of securities, accounting and certain other matters. See "Regulation and other matters--Electric utility regulation." All rate schedules of HECO and its subsidiaries contain energy cost adjustment clauses as described previously. Under current law and practices, specific and separate PUC approval is not required for each rate change pursuant to automatic rate adjustment clauses previously approved by the PUC. Rate increases, other than pursuant to such automatic adjustment clauses, require the prior approval of the PUC after public and contested case hearings. PURPA requires the PUC to periodically review the energy cost adjustment clauses of electric and gas utilities in the state, and such clauses, as well as the rates charged by the utilities generally, are subject to change. See the "Regulation of electric utility rates," "Recent rate requests" and "Energy cost adjustment clauses" sections in HECO's MD&A. RECENT RATE REQUEST In March 1998, HELCO filed a request with the PUC to increase rates 11.5%, or $17.3 million in annual revenues, based on a 1999 test year and a 12.5% return on average common equity, primarily to recover the cost of two power generation projects--an agreement to buy power from Encogen's 60-megawatt plant in Hamakua and the cost of adding generating units at HELCO's Keahole power plant. Under HELCO's request, the portion of the rate increase related to Encogen's generators would not go into effect until the facilities are completed and providing electric service to customers. PUC SHOW CAUSE ORDER See the "PUC show cause order for HECO" section in Note 12 to HECO's Consolidated Financial Statements. HECO filed a motion to close the proceeding in March 1998, based on the fact that the actual returns for 1997--a 10.26% ROACE and a 8.75% ROR--were below the returns the PUC found to be fair and reasonable in the last rate proceeding. The Consumer Advocate has filed with the PUC a statement that it does not oppose HECO's request to close the proceedings. Management cannot predict what future PUC action, if any, may be taken in this proceeding. 11 COMPETITION Legislation has been introduced in Congress that would restructure the electric utility industry with a view toward increasing competition by, for example, requiring retail wheeling and allowing customers to choose their generation supplier. In addition, the PUC has instituted a proceeding to identify and examine the issues surrounding electric competition and to determine the impact of competition on the electric utility infrastructure in Hawaii. See the "Competition" section in HECO's MD&A. In March 1998, the parties agreed to adopt a collaborative process and schedule whereby they will submit initial position papers and final position papers to the collaborative group in June 1998 and September 1998, respectively, and a collaborative report to the PUC by December 1998. A resolution has been introduced in the Hawaii Legislature, which, if adopted in its current form, would request that the Hawaii Department of Business, Economic Development, and Tourism examine the impediments to electric competition in the State of Hawaii and provide specific recommendations to the Legislature by December 31, 1998, for legislation to expedite the PUC proceedings on competition in the electric utility industry in Hawaii. Management cannot predict what changes, if any, may result from these efforts or any impact they may have on the Company's or HECO's consolidated financial condition, results of operations or liquidity. SAVINGS BANK--AMERICAN SAVINGS BANK, F.S.B. - --------------------------------------------- GENERAL ASB was granted a federal savings bank charter in January 1987. Prior to that time, ASB had operated since 1925 as the Hawaii division of American Savings & Loan Association of Salt Lake City, Utah. As of December 31, 1997, ASB was the third largest financial institution in the State of Hawaii with total assets of $5.5 billion and deposits of $3.9 billion. HEI agreed with the Office of Thrift Supervision's (OTS) predecessor regulatory agency that ASB's regulatory capital would be maintained at a level of at least 6% of ASB's total liabilities, or at such greater amount as may be required from time to time by regulation. Under the agreement, HEI's obligation to contribute additional capital was limited to a maximum aggregate amount of approximately $65.1 million. At December 31, 1997, HEI's maximum obligation to contribute additional capital has been reduced to approximately $28.3 million because of additional capital contributions of $36.8 million by HEI to ASB since the acquisition, exclusive of capital contributions made in connection with ASB's acquisition of most of the Hawaii operations of BoA. ASB is subject to OTS regulations on dividends and other distributions applicable to financial institutions regulated by the OTS. ASB's earnings depend primarily on its net interest income--the difference between the interest income earned on interest-earning assets (loans receivable, mortgage-backed securities and investments) and the interest expense incurred on interest-bearing liabilities (deposit liabilities and borrowings). Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. ASB also derives funds from receipt of interest and principal on outstanding loans receivable, borrowings from the Federal Home Loan Bank (FHLB) of Seattle, securities sold under agreements to repurchase and other sources. In recent years, securities sold under agreements to repurchase and advances from the FHLB of Seattle have become significant sources of funds. On September 30, 1996, President Clinton signed into law the Deposit Insurance Funds Act of 1996, which authorized a one-time deposit-insurance premium assessment by the Federal Deposit Insurance Corporation (FDIC) of 65.7 cents per $100 of deposits insured by the Savings Association Insurance Fund (SAIF) and held as of March 31, 1995. ASB's assessment was $8.3 million after tax and was accrued in September 1996. The assessment resulted in a reduction of ASB's deposit-insurance premiums from 23 cents to 6.48 cents per $100 of deposits, effective January 1, 1997. With the reduction in deposit-insurance premiums, ASB's annual after-tax savings was approximately $2 million for 1997. For additional information about ASB, including ASB's acquisition of most of the Hawaii operations of BoA in December 1997, see the "Savings Bank" sections under HEI's MD&A and Note 4 to HEI's Consolidated Financial Statements. 12 The following table sets forth selected data for ASB for the years indicated:
Years ended December 31, ----------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Common equity to assets ratio Average common equity divided by average total assets..... 6.09% 6.21% 6.23% Return on assets Net income divided by average total assets (1)............ 0.67 (2) 0.43 (3) 0.71 Return on common equity Net income divided by average common equity (1)........... 11.0 (2) 6.8 (3) 11.5
(1) Net income includes amortization of goodwill and core deposit intangibles. Average balances for each year have been calculated using the average month-end balances during the year, with the average balances for 1997 reflecting the effect of the acquisition of most of BoA's Hawaii operations on December 6, 1997. (2) Excluding the BoA - Hawaii one-time acquisition expenses, the return on assets and return on common equity ratios would have been 0.70% and 12.1%, respectively. (3) Excluding the FDIC special assessment of $8.3 million after taxes, the return on assets and return on common equity ratios would have been 0.70% and 10.6%, respectively. CONSOLIDATED AVERAGE BALANCE SHEET The following table sets forth average balances of ASB's major balance sheet categories for the years indicated. Average balances for each year have been calculated using the average month-end or daily average balances during the year, with the average balances for 1997 reflecting the effect of the acquisition of most of BoA's Hawaii operations on December 6, 1997.
Years ended December 31, --------------------------------------------------- (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- ASSETS Investment securities................................ $ 114,981 $ 83,163 $ 80,633 Mortgage-backed securities........................... 1,449,570 1,402,165 1,251,192 Loans receivable, net................................ 2,143,106 1,868,489 1,751,729 Other................................................ 213,124 167,894 173,895 -------------------------------------------- $3,920,781 $3,521,711 $3,257,449 ============================================ LIABILITIES AND STOCKHOLDER'S EQUITY Deposit liabilities.................................. $2,324,426 $2,210,058 $2,149,229 Other borrowings..................................... 1,261,511 1,023,223 835,310 Other................................................ 90,300 69,677 69,903 Stockholder's equity................................. 244,544 218,753 203,007 -------------------------------------------- $3,920,781 $3,521,711 $3,257,449 ============================================
ASSET/LIABILITY MANAGEMENT Interest rate sensitivity refers to the relationship between market interest rates and net interest income resulting from the repricing of interest-earning assets and interest-bearing liabilities. Interest rate risk arises when an interest-earning asset matures or when its interest rate changes in a time frame different from that of the supporting interest-bearing liability. Maintaining an equilibrium between rate sensitive interest-earning assets and interest-bearing liabilities will reduce some interest rate risk but it will not guarantee a stable net interest spread because yields and rates may change simultaneously or at different times and such changes may occur in differing increments. Market rate fluctuations could materially affect the overall net interest spread even if interest-earning assets and interest-bearing liabilities were perfectly matched. The difference between the amounts of interest-earning assets and interest-bearing liabilities that reprice during a given period is called "gap." An asset-sensitive position or "positive gap" exists when more assets than liabilities reprice within a given period; a liability-sensitive position or "negative gap" exists when more liabilities than assets reprice within a given period. A positive gap generally produces more net interest income in periods of rising interest rates and a negative gap generally produces more net interest income in periods of falling interest rates. 13 As of December 31, 1997, the gap in the near term (0-6 months) was a negative 7.3% of total assets as compared to a cumulative one-year negative gap position of 2.1% of total assets. The difference between the near-term and one-year negative gap positions is primarily due to reduced amounts of repricing of interest-bearing liabilities such as in short-term certificates of deposits and other borrowings to support investment activities. The following table shows ASB's interest rate sensitivity at December 31, 1997:
Cumulative amounts at December 31, 1997 subject to repricing within ----------------------------------------------------------------------- 6 months 6 months 1-5 Over 5 (dollars in millions) or less to 1 year years years Total (1) - -------------------------------------------------------------------------------------------------------------- Interest-earning assets - ----------------------- Real estate loans and mortgage- backed securities Balloon and adjustable rate......... $ 869 $ 828 $ 243 $ 3 $1,943 Fixed rate 1-4 unit residential..... 180 153 880 1,090 2,303 Other............................... 54 35 95 49 233 Consumer and other loans............. 230 11 55 54 350 Commercial loans..................... 44 4 16 8 72 Other interest-earning assets........ 122 42 -- -- 164 --------------------------------------------------------------------- Total interest-earning assets........ 1,499 1,073 1,289 1,204 5,065 --------------------------------------------------------------------- Interest-bearing liabilities - ---------------------------- Certificate accounts................. 1,087 393 238 66 1,784 Money market accounts................ 56 47 213 32 348 Negotiable Order of Withdrawal accounts 66 59 334 169 628 Passbook accounts.................... 175 67 440 475 1,157 FHLB advances........................ 246 105 197 188 736 Other borrowings..................... 274 113 -- -- 387 ---------------------------------------------------------------------------- Total interest-bearing liabilities... 1,904 784 1,422 930 5,040 ---------------------------------------------------------------------------- Interest rate sensitivity gap (2)... $ (405) $ 289 $ (133) $ 274 $ 25 ============================================================================ Cumulative interest rate sensitivity gap.................... $ (405) $ (116) $ (249) $ 25 ============================================================ Cumulative interest rate sensitivity gap over total assets.............. (7.30)% (2.09)% (4.49)% 0.45% - ---------------------------------------------------------------------------------------------------------------------
(1) The table does not include $483 million of noninterest-earning assets and $112 million of noninterest-bearing liabilities. (2) The difference between the total interest-earning assets and the total interest-bearing liabilities. 14 INTEREST INCOME AND INTEREST EXPENSE The following table sets forth average balances, interest and dividend income, interest expense and weighted average yields earned and rates paid, for certain categories of interest-earning assets and interest-bearing liabilities for the years indicated. Average balances for each year have been calculated using the average month-end or daily average balances during the year, with the average balances for 1997 reflecting the effect of the acquisition of most of BoA's Hawaii operations on December 6, 1997.
Years ended December 31, ----------------------------------------------------------- (dollars in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------- Loans Average balances.......................... $2,143,106 $1,868,489 $1,751,729 Interest income........................... $ 174,489 $ 155,865 $ 146,046 Weighted average yield.................... 8.14% 8.34% 8.34% Mortgage-backed securities Average balances.......................... $1,449,570 $1,402,165 $1,251,192 Interest income........................... $ 95,990 $ 94,561 $ 85,727 Weighted average yield.................... 6.62% 6.74% 6.85% Investments (1) Average balances.......................... $ 114,981 $ 83,163 $ 80,633 Interest and dividend income.............. $ 7,139 $ 5,288 $ 4,921 Weighted average yield.................... 6.21% 6.36% 6.10% Total interest-earning assets Average balances.......................... $3,707,657 $3,353,817 $3,083,554 Interest and dividend income.............. $ 277,618 $ 255,714 $ 236,694 Weighted average yield.................... 7.49% 7.62% 7.68% Deposits Average balances.......................... $2,324,426 $2,210,058 $2,149,229 Interest expense.......................... $ 89,099 $ 91,164 $ 89,296 Weighted average rate..................... 3.83% 4.12% 4.15% Borrowings Average balances.......................... $1,261,511 $1,023,223 $ 835,310 Interest expense.......................... $ 75,563 $ 62,500 $ 53,409 Weighted average rate..................... 5.99% 6.11% 6.39% Total interest-bearing liabilities Average balances.......................... $3,585,937 $3,233,281 $2,984,539 Interest expense.......................... $ 164,662 $ 153,664 $ 142,705 Weighted average rate..................... 4.59% 4.75% 4.78% Net balance, net interest income and interest rate spread Net balance.............................. $ 121,720 $ 120,536 $ 99,015 Net interest income...................... $ 112,956 $ 102,050 $ 93,989 Interest rate spread..................... 2.90% 2.87% 2.90%
(1) Investments include stock in the Federal Home Loan Bank of Seattle. 15 The following table shows the effect on net interest income of (1) changes in interest rates (change in weighted average interest rate multiplied by prior year average portfolio balance) and (2) changes in volume (change in average portfolio balance multiplied by prior period rate). Any remaining change is allocated to the above two categories on a pro rata basis.
Increase (decrease) due to ---------------------------------------------- (in thousands) Rate Volume Total - --------------------------------------------------------------------------------------------------------- Year ended December 31, 1997 vs. 1996 - ----------------------------------------------------------- Income from interest-earning assets Loan portfolio............................................ $(3,813) $22,437 $18,624 Mortgage-backed securities................................ (1,712) 3,141 1,429 Investments............................................... (128) 1,979 1,851 -------------------------------------- (5,653) 27,557 21,904 -------------------------------------- Expense from interest-bearing liabilities Deposits.................................................. (6,622) 4,557 (2,065) FHLB advances and other borrowings........................ (1,249) 14,312 13,063 -------------------------------------- (7,871) 18,869 10,998 -------------------------------------- Net interest income........................................ $ 2,218 $ 8,688 $10,906 ======================================
Year ended December 31, 1996 vs. 1995 - ----------------------------------------------------------- Income from interest-earning assets Loan portfolio............................................ $ -- $ 9,819 $ 9,819 Mortgage-backed securities................................ (1,391) 10,225 8,834 Investments............................................... 212 155 367 ---------------------------------------- (1,179) 20,199 19,020 ---------------------------------------- Expense from interest-bearing liabilities Deposits.................................................. (647) 2,515 1,868 FHLB advances and other borrowings........................ (2,434) 11,525 9,091 ---------------------------------------- (3,081) 14,040 10,959 ---------------------------------------- Net interest income........................................ $ 1,902 $ 6,159 $ 8,061 ========================================
OTHER INCOME In addition to net interest income, ASB has various sources of other income, including fee income from servicing loans, fees on deposit accounts, rental income from premises and other income. Other income totaled approximately $16.5 million in 1997, $15.7 million in 1996 and $17.9 million in 1995. The decrease in other income during 1996 was primarily due to a $3.9 million one- time gain on sale of trading account securities in 1995. Excluding the one-time gain on sale of approximately $49.5 million of trading account securities in 1995, other income for 1996 increased $1.7 million over 1995 due to increases in fee income from servicing loans. LENDING ACTIVITIES General. ASB's net loan and mortgage-backed securities portfolio increased to approximately $4.9 billion at December 31, 1997 primarily due to the purchase of $0.9 billion of Hawaii-based BoA loans and the purchase, primarily in anticipation of the BoA acquisition, of $0.8 billion in mortgage-backed securities. Loans and mortgage-backed securities represent 88.3% of total assets at December 31, 1997, compared to $3.3 billion, or 93.1%, and $3.1 billion, or 91.8%, at December 31, 1996 and 1995, respectively. ASB's loan portfolio consists primarily of conventional residential mortgage loans which are not insured by the Federal Housing Administration or guaranteed by the Veterans Administration. 16 The following tables set forth the composition of ASB's loan and mortgage-backed securities portfolio:
December 31, ------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------------------------------------------------------------------- (dollars in thousands) Balance % of total Balance % of total Balance % of total - -------------------------------------------------------------------------------------------------------------------------- Real estate loans (1) Conventional................... $2,631,298 53.69% $1,800,365 53.87% $1,495,955 47.75% Construction and development... 32,569 0.67 29,964 0.89 29,650 0.95 ---------------------------------------------------------------------------------------- 2,663,867 54.36 1,830,329 54.76 1,525,605 48.70 Less Deferred fees and discounts.... (16,055) (0.33) (17,759) (0.53) (15,244) (0.49) Undisbursed loan funds......... (13,724) (0.28) (14,532) (0.43) (10,422) (0.33) Allowance for losses........... (20,450) (0.42) (15,792) (0.47) (10,837) (0.34) ---------------------------------------------------------------------------------------- Total real estate loans, net... 2,613,638 53.33 1,782,246 53.33 1,489,102 47.54 ---------------------------------------------------------------------------------------- Other loans Loans on deposits.............. 17,473 0.36 15,441 0.46 15,688 0.50 Consumer and other loans....... 342,146 6.98 192,315 5.75 170,743 5.45 Commercial loans............... 88,315 1.80 18,548 0.56 20,560 0.66 ---------------------------------------------------------------------------------------- 447,934 9.14 226,304 6.77 206,991 6.61 Less Deferred fees and discounts.... (14) (0.00) (23) (0.00) (38) (0.00) Undisbursed loan funds......... (16,211) (0.33) (3,086) (0.09) (6,175) (0.20) Allowance for losses........... (9,500) (0.19) (3,413) (0.10) (2,079) (0.07) ---------------------------------------------------------------------------------------- Total other loans, net......... 422,209 8.62 219,782 6.58 198,699 6.34 ---------------------------------------------------------------------------------------- Mortgage-backed securities, net of discounts.............. 1,865,027 38.05 1,340,073 40.09 1,444,832 46.12 ---------------------------------------------------------------------------------------- Total loans and mortgage-backed securities, net.......................... $4,900,874 100.00% $3,342,101 100.00% $3,132,633 100.00% =========================================================================================
(1) Includes renegotiated loans. 17
December 31, -------------------------------------------------------------- 1994 1993 -------------------------------------------------------------- (dollars in thousands) Balance % of total Balance % of total - ---------------------------------------------------------------------------------------------------------------------- Real estate loans (1) Conventional..................................... $1,657,935 57.34% $1,587,615 67.12% Construction and development..................... 36,184 1.25 26,526 1.12 -------------------------------------------------------------- 1,694,119 58.59 1,614,141 68.24 Less Deferred fees and discounts..................... (21,159) (0.73) (26,728) (1.13) Undisbursed loan funds.......................... (16,056) (0.56) (13,142) (0.55) Allowance for losses............................ (7,259) (0.25) (3,962) (0.17) -------------------------------------------------------------- Total real estate loans, net..................... 1,649,645 57.05 1,570,309 66.39 -------------------------------------------------------------- Other loans Loans on deposits................................ 15,378 0.53 15,015 0.63 Consumer and other loans......................... 144,505 5.00 129,961 5.49 Commercial loans................................. 18,369 0.64 24,494 1.04 -------------------------------------------------------------- 178,252 6.17 169,470 7.16 Less Deferred fees and discounts..................... (52) (0.00) (156) (0.01) Undisbursed loan funds.......................... (2,256) (0.08) (3,173) (0.13) Allowance for losses............................ (1,534) (0.05) (1,352) (0.06) -------------------------------------------------------------- Total other loans, net........................... 174,410 6.04 164,789 6.96 -------------------------------------------------------------- Mortgage-backed securities, net of discounts..... 1,067,287 36.91 630,156 26.65 -------------------------------------------------------------- Total loans and mortgage-backed securities, net.............................. $2,891,342 100.00% $2,365,254 100.00% ==============================================================
(1) Includes renegotiated loans. Origination, purchase and sale of loans. Generally, loans originated and purchased by ASB are secured by real estate located in Hawaii. As of December 31, 1997, approximately $84.3 million of loans purchased from other lenders were secured by properties located in the continental United States. For additional information, including information concerning the geographic distribution of ASB's mortgage-backed securities portfolio and the geographic concentration of credit risk, see Note 19 to HEI's Consolidated Financial Statements. The amount of loans originated during 1997, 1996, 1995, 1994 and 1993 were $327 million, $498 million, $382 million, $523 million and $564 million, respectively. The decreases in loans originated in 1997 from 1996, in 1995 from 1994 and in 1994 from 1993 were due in part to the slow Hawaii real estate market. The increase in loans originated in 1996 from 1995 was due primarily to higher refinancings of residential mortgage loans from other financial institutions. Residential mortgage lending. During 1997 and 1996 the demand for adjustable rate mortgage (ARM) loans over fixed rate loans decreased compared with 1995. ARM loans carry adjustable interest rates which are typically set according to a short-term index. Payment amounts may be adjusted periodically based on changes in interest rates. ARM loans represented approximately 7.7% of the total originations of first mortgage loans in 1997, compared to 12.6% and 27.7% in 1996 and 1995, respectively. ASB intends to continue to emphasize the origination and purchase of ARM loans to further improve its asset/liability structure. ASB is permitted to lend up to 100% of the appraised value of the real property securing a loan. Its general policy is to require private mortgage insurance when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase price at origination. For nonowner-occupied residential properties, the loan-to-value ratio may not exceed 90% of the lower of the appraised value or purchase price at origination. 18 Construction and development lending. ASB provides both fixed and adjustable rate loans for the construction of one-to-four residential unit and commercial properties. Construction and development financing generally involves a higher degree of credit risk than long-term financing on improved, occupied real estate. Accordingly, all construction and development loans are priced higher than loans secured by completed structures. ASB's underwriting, monitoring and disbursement practices with respect to construction and development financing are designed to ensure sufficient funds are available to complete construction projects. As of December 31, 1997, 1996 and 1995, construction and development loans represented 1.0%, 1.5% and 1.2%, respectively, of ASB's gross loan portfolio. See "Loan portfolio risk elements." Multi-family residential and commercial real estate lending. Permanent loans secured by multi-family properties (generally apartment buildings), as well as commercial and industrial properties (including office buildings, shopping centers and warehouses), are originated by ASB for its own portfolio as well as for participation with other lenders. In 1997, 1996 and 1995, loans on these types of properties accounted for approximately 2.7%, 3.2% and 5.9%, respectively, of ASB's total mortgage loan originations. The objective of commercial real estate lending is to diversify ASB's loan portfolio to include sound, income-producing properties. Consumer lending. ASB offers a variety of secured and unsecured consumer loans. Loans secured by deposits are limited to 90% of the available account balance. ASB also offers VISA cards, automobile loans, general purpose consumer loans, second mortgage loans, home equity lines of credit, checking account overdraft protection and unsecured lines of credit. In 1997, 1996 and 1995, loans of these types accounted for approximately 9.0%, 8.0% and 11.5%, respectively, of ASB's total loan originations. Corporate banking/commercial lending. ASB is authorized to make both secured and unsecured corporate banking loans to business entities. This lending activity is designed to diversify ASB's asset structure, shorten maturities, provide rate sensitivity to the loan portfolio and attract business checking deposits. ASB acquired $56.9 million of corporate banking loans from BoA. As of December 31, 1997, 1996 and 1995, corporate banking loans represented 2.8%, 0.8% and 0.9%, respectively, of ASB's total net loan portfolio. Loan origination fee and servicing income. In addition to interest earned on loans, ASB receives income from servicing of loans, for late payments and from other related services. Servicing fees are received on loans originated and subsequently sold by ASB through a securitization process and also on loans for which ASB acts as collection agent on behalf of third-party purchasers. ASB acquired the servicing rights for approximately $305 million of residential loans from BoA. ASB generally charges the borrower at loan settlement a loan origination fee ranging from 2% to 3% of the amount borrowed. See the "Loan origination and commitment fees" section in Note 1 to HEI's Consolidated Financial Statements. Loan portfolio risk elements. When a borrower fails to make a required payment on a loan and does not cure the delinquency promptly, the loan is classified as delinquent. If delinquencies are not cured promptly, ASB normally commences a collection action, including foreclosure proceedings in the case of secured loans. In a foreclosure action, the property securing the delinquent debt is sold at a public auction in which ASB may participate as a bidder to protect its interest. If ASB is the successful bidder, the property is classified in a real estate owned account until it is sold. ASB's real estate acquired in settlement of loans represented 0.07% of total assets at December 31, 1997 and 1996 and 0.08% of total assets at December 31, 1995. In addition to delinquent loans, other significant lending risk elements include: (1) accruing loans which are over 90 days past due as to principal or interest, (2) loans accounted for on a nonaccrual basis (nonaccrual loans), and (3) loans on which various concessions are made with respect to interest rate, maturity, or other terms due to the inability of the borrower to service the obligation under the original terms of the agreement (renegotiated loans). ASB has no loans which are over 90 days past due on which interest is being accrued for the years presented in the table below. The level of nonaccrual and renegotiated loans represented 2.4%, 2.5%, 1.7%, 1.4% and 0.5%, of ASB's total net loans outstanding 19 at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. The following table sets forth certain information with respect to nonaccrual and renegotiated loans as of the dates indicated:
December 31, ----------------------------------------------------------------- (in thousands) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------- Nonaccrual loans- Real estate 1-4 unit residential..................... $36,643 $23,585 $11,533 $ 8,773 $5,006 Income property.......................... 29,955 19,832 13,820 14,224 220 ----------------------------------------------------------------- Total real estate......................... 66,598 43,417 25,353 22,997 5,226 Commercial................................ 776 937 11 25 38 Consumer.................................. 4,435 2,701 1,702 793 460 ----------------------------------------------------------------- Total nonaccrual loans.................... $71,809 $47,055 $27,066 $23,815 $5,724 ================================================================= Renegotiated loans not included above- Real estate 1-4 unit residential..................... $ 2,264 $ 3,211 $ 1,053 $ 1,004 $ 381 Income property.......................... -- -- -- -- 1,486 Commercial............................... -- -- -- -- 324 ----------------------------------------------------------------- Total renegotiated loans.................. $ 2,264 $ 3,211 $ 1,053 $ 1,004 $2,191 =================================================================
ASB's policy generally is to place mortgage loans on a nonaccrual status (interest accrual is suspended) when the loan becomes more than 90 days past due or on an earlier basis when there is a reasonable doubt as to its collectability. Loans on nonaccrual status amounted to $71.8 million (2.3% of total loans), $47.1 million (2.3% of total loans), $27.1 million (1.6% of total loans), $23.8 million (1.3% of total loans) and $5.7 million (0.3% of total loans) at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. Since 1994, the increases in nonaccrual loans were a result of Hawaii's weak economy. In 1994, a rising trend of delinquencies resulted in a $3.8 million increase in nonaccrual residential loans, and the $14.0 million increase in nonaccrual income property loans was primarily due to three commercial real estate loans with principal balances totaling $11.8 million that were renegotiated. In 1996, the $20.0 million increase in nonaccrual real estate loans can be attributed primarily to a single real estate developer with residential, commercial real estate and commercial loans totaling approximately $16.5 million that were restructured during 1996. In 1997, the $24.7 million increase in nonaccrual loans includes a $13.1 million increase in smaller balance residential loans and a $10.1 million increase in income property real estate loans. Allowance for loan losses. The provision for loan losses is dependent upon management's evaluation as to the amount required to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of future losses inherent in the loan portfolio. While management attempts to use the best information available to make evaluations, future adjustments may be necessary as circumstances change and additional information becomes available. 20 The following table presents the changes in the allowance for loan losses for the years indicated.
Years ended December 31, ---------------------------------------------------------------- (dollars in thousands) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------- Allowance for loan losses, beginning of year...... $19,205 $12,916 $ 8,793 $5,314 $5,157 Additions to provisions for losses................ 6,934 7,631 4,887 3,983 779 Allowance for losses on loans acquired from BoA... 6,445 -- -- -- -- NET CHARGE-OFFS Real estate loans................................. 992 390 69 109 -- Other loans....................................... 1,642 952 695 395 622 ---------------------------------------------------------------- Total net charge-offs............................. 2,634 1,342 764 504 622 ---------------------------------------------------------------- Allowance for loan losses, end of year............ $29,950 $19,205 $12,916 $8,793 $5,314 ================================================================ Ratio of net charge-offs during the year to average loans outstanding.................... 0.12% 0.07% 0.04% 0.03% 0.04% ======================================================================
ASB's ratio of provisions for loan losses during the year to average loans outstanding was 0.32%, 0.41%, 0.28%, 0.21% and 0.05% for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. In 1997, a nonspecific allowance for loan losses amounting to approximately $6.4 million was recorded in assigning acquisition cost to the loans receivable acquired from BoA. In 1997, 1996 and 1995, to establish additional specific loss allowances and in response to a rising trend of delinquencies caused by Hawaii's weak economy, ASB increased its loss reserve by $4.3 million, $6.3 million and $4.1 million, respectively. INVESTMENT ACTIVITIES In recent years, ASB's investment portfolio has consisted primarily of stock of the FHLB of Seattle, federal agency obligations and mortgage-backed securities. In response to the then increasing interest rate environment, management decided in 1994 to liquidate ASB's portfolio of securities held for trading and the liquidation was completed in October 1994. ASB recognized a one-time gain on sale of trading account securities in 1995 in accordance with implementation guidance provided in a FASB special report. ASB did not maintain a portfolio of securities held for trading during 1996 or 1997. ASB's investment portfolio, excluding mortgage-backed securities to be held-to- maturity, consisted of a $42.1 million investment in U.S. Treasury securities and a $63.5 million investment in FHLB stock as of December 31, 1997. Investment in FHLB stock amounted to $37.5 million and $34.7 million as of December 31, 1996 and 1995, respectively. The weighted average rate on investments during 1997, 1996 and 1995 was 7.57%, 7.80% and 6.03%, respectively. The amount that ASB invests in FHLB stock is determined by regulatory requirements. See "Regulation and other matters--Savings bank regulation--Federal Home Loan Bank System." DEPOSITS AND OTHER SOURCES OF FUNDS General. Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. ASB also derives funds from receipt of interest and principal on outstanding loans receivable and mortgage-backed securities, borrowings from the FHLB of Seattle, securities sold under agreements to repurchase and other sources. ASB borrows on a short-term basis to compensate for seasonal or other reductions in deposit flows. ASB also may borrow on a longer-term basis to support expanded lending or investment activities. In the last few years, securities sold under agreements to repurchase and advances from the FHLB have become significant sources of funds as the demand for deposits has decreased. Using higher cost sources of funds puts downward pressure on ASB's net interest income. Deposits. ASB's deposits are obtained primarily from residents of Hawaii. In 1997, ASB had average deposits of $2.3 billion, with a net savings inflow of $21.9 million, excluding interest credited to deposit accounts and excluding $1.7 billion in deposits assumed from BoA. The net savings outflow for 1996 of $152 million was due to competition from the equity market and management's decision not to pursue high-priced certificates of deposits. In 1995, ASB had average deposits of $2.1 billion, with a net 21 savings inflow of $15 million, excluding interest credited to deposit accounts. In the three years ended December 31, 1997, ASB had no deposits placed by or through a broker. The following table illustrates the distribution of ASB's average deposits and average daily rates by type of deposit for the years indicated. Average balances for a year have been calculated using the average of month-end balances during the year, with the average balances for 1997 reflecting the effect of the acquisition of most of BoA's Hawaii operations on December 6, 1997.
Years ended December 31, ------------------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------------------------------------------------------------------------------------- % of Weighted % of Weighted % of Weighted Average total average Average total average Average total average (dollars in thousands) balance deposits rate % balance deposits rate % balance deposits rate % --------------------------------------------------------------------------------------------------------------------------------- Passbook accounts....... $ 899,368 38.7% 2.98% $ 922,129 41.7% 3.41% $ 978,858 45.5% 3.48% Negotiable Order of Withdrawal accounts.... 305,626 13.2 1.19 271,696 12.3 1.60 264,996 12.4 2.09 Money market accounts... 93,425 4.0 3.76 65,494 3.0 3.51 66,634 3.1 3.43 Certificate accounts.... 1,026,007 44.1 5.38 950,739 43.0 5.59 838,741 39.0 5.66 ------------------------------------------------------------------------------------------------------- Total deposits......... $2,324,426 100.0% 3.83% $2,210,058 100.0% 4.12% $2,149,229 100.0% 4.15% ========================================================================================================== At December 31, 1997, ASB had $741 million in certificate accounts of $100,000 or more, maturing as follows: (in thousands) Amount - ----------------------------------------------------------------------------------------------- Three months or less.......................................................... $373,741 Greater than three months through six months.................................. 217,072 Greater than six months through twelve months................................. 94,704 Greater than twelve months.................................................... 55,187 -------- $740,704 ========
Borrowings. ASB obtains advances from the FHLB of Seattle provided certain standards related to creditworthiness have been met. Advances are secured under a blanket pledge of the common stock ASB owns in the FHLB, mortgage-backed securities and certain notes held by ASB and the mortgages securing them. FHLB advances generally are available to meet seasonal and other withdrawals of deposit accounts, to expand lending and to assist in the effort to improve asset and liability management. FHLB advances are made pursuant to several different credit programs offered from time to time by the FHLB of Seattle. At December 31, 1997, 1996 and 1995, advances from the FHLB amounted to $736 million, $684 million and $501 million, respectively. The weighted average rates on the advances from the FHLB outstanding at December 31, 1997, 1996 and 1995 were 6.26%, 6.42% and 6.52%, respectively. The maximum amount outstanding at any month-end during 1997, 1996 and 1995 was $941 million, $691 million and $618 million, respectively. Advances from the FHLB averaged $701 million, $560 million and $559 million during 1997, 1996 and 1995, respectively, and the approximate weighted average rate thereon was 6.32%, 6.49% and 6.55%, respectively. During 1995, advances decreased as securities sold under agreements to repurchase provided a lower cost funding source. During 1996, the increase in advances supported investment activities as management decided not to pursue high-priced certificates of deposits. During 1997, increased advances from the FHLB were needed to support investment activities. In anticipation of the BoA acquisition, ASB acquired approximately $0.8 billion in mortgage-backed securities which were temporarily funded in part by advances from the FHLB. At December 31, 1997 and 1996, securities sold under agreements to repurchase consisted of mortgage-backed securities sold to brokers/dealers under fixed- coupon agreements. The agreements are treated as financings and the obligations to repurchase securities sold are reflected as a liability in the consolidated balance sheets. The dollar amount of securities underlying the agreements remains in the asset accounts. At December 31, 1997, 1996 and 1995, $375 million (including accrued interest of $0.9 million), $480 million (including accrued interest of $1.6 million) and $413 million (including accrued interest of $2.5 million) of the agreements were to repurchase identical securities, respectively. The weighted average rates on securities sold under agreements to repurchase outstanding at December 31, 1997, 1996 22 and 1995 were 5.71%, 5.50% and 5.84%, respectively. The maximum amount outstanding at any month-end during 1997, 1996 and 1995 was $765 million, $480 million and $413 million, respectively. Securities sold under agreements to repurchase averaged $560 million, $463 million and $277 million during 1997, 1996 and 1995, respectively, and the approximate weighted average interest rate thereon was 5.58%, 5.65% and 6.08%, respectively. During 1997, increased securities sold under agreements to repurchase were needed to temporarily fund the purchase of mortgage-backed and investment securities in anticipation of the BoA acquisition. During 1996 and 1995, increased securities sold under agreements to repurchase were needed to support investment activities as the demand for deposits decreased. Other borrowings as of December 31, 1997 represents cash management repurchase transactions. ASB sweeps selected commercial customers' excess deposit balances into an overnight repurchase transaction. Subject to obtaining certain approvals from the FHLB of Seattle, ASB may offer collateralized medium-term notes due from nine months to 30 years from the date of issue and bearing interest at a fixed or floating rate established at the time of issue. At December 31, 1997, 1996 and 1995, ASB had no outstanding collateralized medium-term notes. The following table sets forth information concerning ASB's advances from FHLB and other borrowings at the dates indicated:
December 31, ----------------------------------------------------- (dollars in thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------- Advances from FHLB.................................... $ 736,474 $ 684,274 $501,274 Securities sold under agreements to repurchase........ 375,366 479,742 412,521 Other borrowings...................................... 11,326 -- -- ----------------------------------------------------- Total borrowings...................................... $1,123,166 $1,164,016 $913,795 ===================================================== Weighted average rate................................. 6.06% 6.04% 6.21% =====================================================
COMPETITION The primary factors in competing for deposits are interest rates, the quality and range of services offered, marketing, convenience of locations, hours and perceptions of the institution's financial soundness and safety. Competition for deposits comes primarily from other savings institutions, commercial banks, credit unions, money market and mutual funds and other investment alternatives. In Hawaii, there were 3 thrifts, 16 FDIC-insured banks and 117 credit unions at December 31, 1997. Additional competition for deposits comes from various types of corporate and government borrowers, including insurance companies. To meet the competition, ASB offers a variety of savings and checking accounts at competitive rates, convenient business hours, convenient branch locations with interbranch deposit and withdrawal privileges at each branch and approximately 150 convenient automated teller machines. ASB also conducts advertising and promotional campaigns. The primary factors in competing for first mortgage and other loans are interest rates, loan origination fees and the quality and range of lending services offered. Competition for origination of first mortgage loans comes primarily from other savings institutions, mortgage banking firms, commercial banks, insurance companies and real estate investment trusts. ASB believes that it is able to compete for such loans primarily through the interest rates and loan fees it charges, the type of mortgage loan programs it offers and the efficiency and quality of the services it provides its borrowers and the real estate business community. In recent years, there's been significant bank and thrift merger activity in Hawaii. Management cannot predict the impact, if any, of these mergers on the Company's future competitive position, results of operations, financial condition or liquidity. Recent Supreme Court ruling. The 1934 Federal Credit Union Act says membership "shall be limited to groups having a common bond of occupation or association" or to groups in a well-defined geographical area. In 1982, the National Credit Union Administration expanded its definition of "common bond." Small businesses that lacked enough workers to form their own credit unions were allowed to join existing credit unions, so long as each group of employees had its own "bond." Government officials say 23 that rule has let credit unions add about 15 million people to their membership rolls. A group of North Carolina banks and the American Bankers Association sued the government, saying the 1934 law required all members of a credit union to share a single common bond. A federal appeals court ruled in the bankers' favor in July 1997, and the Supreme Court ruled in the bankers' favor in February 1998. Although this ruling could result in increased deposits for ASB, legislation has been proposed in Congress to retroactively authorize such expansions in credit union membership. OTHER - ----- FREIGHT TRANSPORTATION -- HAWAIIAN TUG & BARGE CORP. AND YOUNG BROTHERS, LIMITED - -------------------------------------------------------------------------------- GENERAL HTB and its wholly owned subsidiary, YB, were acquired in 1986. A substantial portion of the state's commodities are imported. HTB provides marine transportation services in Hawaii and the Pacific area, including charter tug and barge and harbor tug operations. YB, which is a regulated interisland cargo carrier, transports general freight and containerized cargo by barge on a regular schedule between all major ports in Hawaii. YB moved 3.5 million revenue tons of cargo between the islands in 1997, compared to 3.3 million revenue tons in 1996. YB has a nonexclusive Certificate of Public Convenience and Necessity from the PUC to operate as an intrastate common carrier by water. The Certificate will remain in effect for an indefinite period unless suspended or terminated by the PUC. YB encounters competition from, among others, interstate carriers and unregulated contract carriers. YB RATES YB generally must accept for transport all cargo offered. YB rates and charges must be approved by the PUC and the PUC has broad discretion in its regulation of the rates charged by YB. See the "Other" section of HEI's MD&A for additional information about YB's rate increases. REAL ESTATE--MALAMA PACIFIC CORP. - -------------------------------- GENERAL MPC was incorporated in 1985 and engages in real estate development activities, both directly and through joint ventures. MPC's real estate development investments and residential projects are targeted for Hawaii's owner-occupant market. MPC is currently involved in the development of four residential projects (Kua' Aina Ridge, Westhills at Makakilo Heights, Piilani Village Phase 1 and Sunrise Estates) on approximately 268 acres of land on the islands of Oahu, Maui and Hawaii encompassing approximately 450 homes or lots, of which approximately 375 have been completed and sold. MPC and its joint ventures own approximately 424 acres of land for future residential development. Residential development generally requires a long lead time to obtain necessary zoning changes, building permits and other required approvals. MPC's projects are subject to the usual risks of real estate development, including fluctuations in interest rates, the receipt of timely and appropriate state and local zoning and other necessary approvals, possible cost overruns and construction delays, adverse changes in general commerce and local market conditions, compliance with applicable environmental and other regulations, and potential competition from other new projects and resales of existing residences. JOINT VENTURE DEVELOPMENTS Sunrise Estates. In 1990, MDC and HSC, Inc. formed Sunrise Estates Joint Venture to develop and sell 165 one-acre house lots in Hilo, Hawaii (island of Hawaii). Through 1993, sales of 156 lots closed. Subdivision approval for the remaining nine lots was received in 1995. In 1996 and 1997, sales of five lots closed. In 1991, HSC, Inc. and Malama Elua Corp., a wholly owned subsidiary of MPC, formed Sunrise Estates II Joint Venture to develop and sell approximately 146 one-acre house lots in Hilo, Hawaii, adjacent to the Sunrise Estates Joint Venture project. Rezoning was completed in 1993 and the joint venture has submitted the subdivision map for approval. Baldwin*Malama. In 1990, MDC acquired a 50% general partnership interest in Baldwin*Malama, a partnership with Baldwin Pacific Properties, Inc. (BPPI), established to acquire approximately 172 acres 24 of land for potential development of about 780 single and multi-family residential units in Kihei on the island of Maui. In 1994, the project received approval to increase density to approximately 1,000 units. The first phase of 100 single family units is complete, and as of December 31, 1997, 99 units were sold. In May 1993, Baldwin*Malama was reorganized as a limited partnership in which MDC is the sole general partner and BPPI is the sole limited partner. Beginning in May 1993, MDC consolidated the accounts of Baldwin*Malama. Previously, MDC accounted for its investment in Baldwin*Malama under the equity method. In conjunction with the dissolution of the Baldwin*Malama general partnership and formation of the limited partnership, MPC agreed to loan $1.6 million to BPPI and up to $15 million to the limited partnership. Through 1997, MPC agreed to increase the maximum loan amount to Baldwin*Malama up to $39.0 million. As of December 31, 1997, the outstanding balances on MPC's loans to BPPI and Baldwin*Malama were $0.8 million and $25.1 million, respectively. Palailai Associates. Malama Mohala Corp. (MMO) owns a 50% interest in Palailai Associates. In 1993, Palailai Associates completed the development and sale of the first increment of 107 homes and lots and completed the bulk sale of its 38.8 acres of multi-family zoned land in Makakilo, Oahu. The second increment of 69 single family homes is also completed and sold. The third increment of 100 single family homes is in progress with 73 homes completed and sold as of December 31, 1997. Palailai Associates owns approximately 47 acres of adjacent land zoned for residential development. MMO PROJECTS Kipona Hills is a 66-unit subdivision located in Waikoloa on the island of Hawaii. As of December 31, 1996, all homes or lots were completed and sold. Kua' Aina Ridge is a 92-lot subdivision in Pukalani, Maui. Sales closings commenced in 1993. As of December 31, 1997, 41 homes or lots were available for sale. Kehaulani Place, consisting of approximately 51 acres of land in Pukalani, Maui, is currently zoned for agriculture. Rezoning and land-use reclassification will be required before development can commence. Land planning and presentations to local community groups commenced in 1993 and are ongoing. PROJECT FINANCING At December 31, 1997, MPC or its subsidiaries were directly liable for $10.0 million of outstanding loans and had additional loan facilities of $0.8 million. See the "Commitments and contingencies" section in Note 5 to HEI's Consolidated Financial Statements. MPC or its subsidiaries may enter into additional commitments in connection with the financing of future phases of development of MPC's projects and HEI may enter into similar agreements regarding the ownership and financial condition of MPC. HEI INVESTMENT CORP. - -------------------- HEIIC was incorporated in May 1984 primarily to make passive, tax-advantaged investments in corporate securities and other long-term investments. HEIIC is not an "investment company" under the Investment Company Act of 1940 and has no direct employees. HEIIC's long-term investments consist primarily of investments in leveraged leases. HEIIC has a 15% ownership interest in an 818-MW coal-fired generating unit in Georgia, which is subject to a leveraged lease agreement. In 1987, HEIIC purchased commercial buildings on leasehold properties located in the continental United States, along with the related lease rights and obligations. These leveraged, purchase-leaseback investments included two major buildings housing operations of Hershey Foods in Pennsylvania and six supermarkets leased to The Kroger Co. in various states. In 1995, HEIIC sold one of the six supermarkets to the lessee pursuant to the provisions of the leveraged lease agreement and recorded a net loss of $1.3 million on the sale. For further information concerning HEIIC's investments in leveraged leases, see Note 7 to HEI's Consolidated Financial Statements. No significant new investments are currently planned by HEIIC. HEI POWER CORP. - --------------- HEIPC was formed in March 1995 and its subsidiaries have been and will be formed from time to time to pursue independent power projects in Asia and the Pacific. In September 1996, HEIPC's subsidiary, HEI Power Corp. Guam (HPG), entered into an energy conversion agreement for approximately 20 years with the Guam Power Authority, pursuant to which 25 HPG has repaired and is operating and maintaining two oil-fired 25-MW (net) units. On October 30, 1996, HEI filed with the SEC a "Notification of Foreign Utility Company Status" on Form U-57 with respect to this project. HEIPC is actively pursuing other projects in Asia and the Pacific. The success of any project undertaken by HEIPC in foreign countries will be dependent on many factors, including the economic, political, technological, regulatory and logistical circumstances surrounding each project and the location of the project. Due to political or regulatory actions or other circumstances, projects may be delayed or even prohibited. There is no assurance that any project undertaken by HEIPC will be successfully completed or that HEIPC's investment in any such project will not be lost, in whole or in part. For further discussion of HEIPC's operating losses and HPG's energy conversion agreement, see the "Other" section in HEI's MD&A. DISCONTINUED OPERATIONS - ----------------------- For information concerning the Company's discontinued property and casualty insurance operations formerly conducted by HIG and a nonutility wind energy business, see Note 20 to HEI's Consolidated Financial Statements and the notes to HEI's Selected Financial Data, incorporated herein by reference to page 25 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. Also see Item 3, "Legal proceedings-Discontinued operations." REGULATION AND OTHER MATTERS - ---------------------------- HOLDING COMPANY REGULATION HEI and HECO are holding companies within the meaning of the Public Utility Holding Company Act of 1935 (1935 Act). However, under current rules and regulations, they are exempt from the comprehensive regulation of the Securities and Exchange Commission (SEC) under the 1935 Act except for Section 9(a)(2) (relating to the acquisition of securities of other public utility companies) through compliance with certain annual filing requirements under the 1935 Act for holding companies which own utility businesses that are intrastate in character. The exemption afforded HEI and HECO may be revoked if the SEC finds that such exemption "may be detrimental to the public interest or the interest of investors or consumers." HEI and HECO may own or have interests in foreign utility operations without adversely affecting this exemption so long as the requirements of other exemptions under the 1935 Act are satisfied. HEI has obtained the PUC certification which is a prerequisite to obtaining an exemption for foreign utility operations and to the Company's maintenance of its exemption under the 1935 Act if it acquires such ownership interests. See the previous discussion of the HPG energy conversion agreement with the Guam Power Authority under "Other-HEI Power Corp." Legislation has been introduced in Congress that would repeal the 1935 Act leaving the regulation of utility holding companies to be governed by other federal and state laws. Management cannot predict if this legislation will be enacted or the final form it might take. HEI is subject to an agreement entered into with the PUC (the PUC Agreement) when HECO became a wholly owned subsidiary of HEI. The PUC Agreement, among other things, requires HEI to provide the PUC with periodic financial information and other reports concerning intercompany transactions and other matters. It prohibits the electric utilities from loaning funds to HEI or its nonutility subsidiaries and from redeeming common stock of the electric utility subsidiaries without PUC approval. Further, the PUC could limit the ability of the electric utility subsidiaries to pay dividends on their common stock. See "Restrictions on dividends and other distributions" and "Electric utility regulation" (regarding the PUC review of the relationship between HEI and HECO). As a result of the acquisition of ASB, HEI and HEIDI are subject to OTS registration, supervision and reporting requirements as savings and loan holding companies. In the event the OTS has reasonable cause to believe that the continuation by HEI or HEIDI of any activity constitutes a serious risk to the financial safety, soundness, or stability of ASB, the OTS is authorized under the Home Owners' Loan Act of 1933, as amended, to impose certain restrictions in the form of a directive to HEI and any of its subsidiaries, or HEIDI and any of its subsidiaries. Such possible restrictions include limiting (i) the payment of dividends by ASB; (ii) transactions between ASB, HEI or HEIDI, and the subsidiaries or affiliates of ASB, HEI or HEIDI; and (iii) the activities of ASB that might create a serious risk that the liabilities of HEI and its other affiliates, or HEIDI and its other affiliates, may be imposed on ASB. Theoretically, this authority would allow the OTS to prohibit 26 dividends, limit affiliate transactions or otherwise restrict activities as a result of losses suffered by HEI, HEIDI or their other subsidiaries, and thus conceivably may be an indirect means of limiting affiliations between ASB and affiliates engaged in nonfinancial activities. See "Restrictions on dividends and other distributions." OTS regulations also generally prohibit savings and loan holding companies and their nonthrift subsidiaries from engaging in activities other than those which are specifically enumerated in the regulations. Such restrictions, if applicable to HEI and HEIDI, would significantly limit the kinds of activities in which HEI and HEIDI and their subsidiaries may engage. However, the OTS regulations provide for an exemption which is available to HEI and HEIDI if ASB satisfies the "qualified thrift lender" test discussed below. See "Savings bank regulation--FDIC Improvement Act of 1991 and implementing regulations-Qualified thrift lender test." ASB currently meets the qualified thrift lender test and must continue to meet the test in order to avoid restrictions on the activities of HEI and HEIDI and their subsidiaries which could result in a need to divest ASB. HEI and HEIDI are prohibited, directly or indirectly, or through one or more subsidiaries, from (i) acquiring control of, or acquiring by merger or purchase of assets, another insured institution or holding company thereof, without prior written OTS approval; (ii) acquiring more than 5% of the voting shares of another savings association or savings and loan holding company which is not a subsidiary; or (iii) acquiring or retaining control of a savings association not insured by the FDIC. No director or officer of HEI or HEIDI, or person beneficially owning more than 25% of such holding company's voting shares, may, except with the prior approval of the OTS, (a) also serve as director, officer, or employee of any insured institution or (b) acquire control of any savings association not a subsidiary of such holding company. On May 26, 1997, ASB entered into a Purchase and Assumption Agreement with BoA to assume substantially all of the Hawaii deposit liabilities of BoA and acquire most of its Hawaii branches and certain of its Hawaii-based loans. On October 29, 1997, the OTS approved the transaction and the transaction closed effective December 6, 1997. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS HEI is a legal entity separate and distinct from its various subsidiaries. As a holding company with no significant operations of its own, the principal sources of its funds are dividends or other distributions from its operating subsidiaries, borrowings and sales of equity. The rights of HEI and, consequently, its creditors and shareholders, to participate in any distribution of the assets of any of its subsidiaries is subject to the prior claims of the creditors and preferred stockholders of such subsidiary, except to the extent that claims of HEI in its capacity as a creditor are recognized. The ability of certain of HEI's subsidiaries to pay dividends or make other distributions to HEI is subject to contractual and regulatory restrictions. Under the PUC Agreement, in the event that the consolidated common stock equity of the electric utility subsidiaries falls below 35% of total electric utility capitalization, the electric utility subsidiaries would be restricted, unless they obtained PUC approval, in their payment of cash dividends to 80% of the earnings available for the payment of dividends in the current fiscal year and preceding five years, less the amount of dividends paid during that period. The PUC Agreement also provides that the foregoing dividend restriction shall not be construed to relinquish any right the PUC may have to review the dividend policies of the electric utility subsidiaries. The consolidated common stock equity of HEI's electric utility subsidiaries was 50% of their total capitalization (including the current maturities of long-term debt and preferred stock sinking fund requirements due within one year but excluding short-term borrowings) as of December 31, 1997. As of December 31, 1997, HECO and its subsidiaries had net assets of $769 million, of which approximately $410 million were not available for transfer to HEI without regulatory approval. The ability of ASB to make capital distributions to HEI and other affiliates is restricted under federal law. Subject to a limited exception for stock redemptions that do not result in any decrease in ASB's capital and would improve ASB's financial condition, ASB is prohibited from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, ASB would be deemed to be under-capitalized, significantly under-capitalized or critically under-capitalized. See "Savings bank regulation--FDIC Improvement Act of 1991 and Implementing Regulations--Prompt corrective action." As a Tier-1 institution (one that meets its capital requirements and has not been notified by the OTS that it is in need of more than normal supervision), ASB may make capital distributions in amounts up to one-half of ASB's surplus capital ratio (the amount of its capital in excess of its capital requirement) at 27 the beginning of a calendar year, plus its year-to-date net income for that calendar year. ASB, as a Tier-1 institution, may exceed the foregoing limits if ASB provides a thirty-day advance notice to the OTS and receives no objection within thirty days. Even in the case of distributions within the permissible limits, however, a thirty day advance notice to the OTS is required. HEI and its subsidiaries are also subject to debt covenants, preferred stock resolutions and the terms of guarantees that could limit their respective abilities to pay dividends. The Company does not expect that the regulatory and contractual restrictions applicable to HEI or its direct and indirect subsidiaries will significantly affect the operations of HEI or its ability to pay dividends on its common stock. ELECTRIC UTILITY REGULATION The PUC regulates the rates, issuance of securities, accounting and certain other aspects of the operations of HECO and its electric utility subsidiaries. See the previous discussion under "Electric utility-Rates" and the "Regulation of electric utility rates" and "Recent rate requests" sections in HECO's MD&A. The PUC has ordered the electric utility subsidiaries to develop plans for the integration of demand-side and supply-side resources available to meet consumer energy needs efficiently, reliably and at the lowest reasonable cost. See the previous discussion under "Electric utility-Integrated Resource Planning and requirements for additional generating capacity." In March 1995, the PUC opened a generic docket to investigate whether Hawaii public utilities should be allowed to establish property damage reserves to recover the cost of damage to their facilities and equipment caused by catastrophic disasters. See "Property damage reserve" in HECO's MD&A. In March 1998, the PUC determined that it would not be in the best interests of the ratepayer to allow the utilities to establish a ratepayer funded self-insured property damage reserve. The PUC based its conclusion on: (1) the unknown probability of the occurrence of natural disasters and the uncertain magnitude of the resulting damages; (2) the intergenerational inequity that ratepayer- funded self-insurance programs create; and (3) the unclear tax effects of such reserves. In the order the PUC noted that, in an earlier decision regarding restoration expenses incurred by another electric utility as a result of Hurricane Iniki in 1992, the PUC had determined that the other utility's shareholders should not bear any of the restoration expenses. The PUC observed that one of the factors it considered in its earlier decision was the regulatory compact. The PUC also observed that the utility industry is facing competitive pressures and is undergoing changes, and, in light of this the relative responsibilities of ratepayers and shareholders for the cost of restoration and repair of any damage caused by uninsured catastrophic natural disasters will continue to be judged on the basis of the facts of each situation. Management cannot predict how the PUC might apportion the responsibility for restoration costs with respect to any uninsured catastrophic losses that HECO or its subsidiaries may incur in the future. On December 30, 1996, the PUC issued an order instituting a proceeding to identify and examine the issues surrounding electric competition and to determine the impact of competition on the electric utility infrastructure in Hawaii. See the previous discussion under "Electric utility-Competition." On March 10, 1997, the PUC issued a show cause order to HECO requesting information to assist the PUC in determining if it should reduce HECO's rates and require HECO to refund any excess earnings to its ratepayers. See the previous discussion under "Electric utility-PUC Show Cause Order." Any adverse decision or policy made or adopted by the PUC, or any prolonged delay in rendering a decision, could have a material adverse effect on consolidated HECO's and the Company's financial condition, results of operations or liquidity. Certain transactions between HEI's public utility subsidiaries (HECO, MECO and HELCO) and HEI and affiliated interests, are subject to regulation by the PUC. All contracts (including summaries of unwritten agreements), made on or after July 1, 1988 of $300,000 or more in a calendar year for management, supervisory, construction, engineering, accounting, legal, financial and similar services and for the sale, lease or transfer of property between a public utility and affiliated interests must be filed with the PUC to be effective, and the PUC may issue cease and desist orders if such contracts are not filed. All such affiliated contracts for capital expenditures (except for real property) must be accompanied by comparative price quotations from two nonaffiliates, unless the quotations cannot be 28 obtained without substantial expense. Moreover, all transfers of $300,000 or more of real property between a public utility and affiliated interests require the prior approval of the PUC and proof that the transfer is in the best interest of the public utility and its customers. If the PUC, in its discretion, determines that an affiliated contract was unreasonable or otherwise contrary to the public interest, the utility must either revise the contract or risk disallowance of the payments for rate-making purposes. In rate-making proceedings, a utility must also prove the reasonableness of payments made to affiliated interests under any affiliated contracts of $300,000 or more by clear and convincing evidence. An "affiliated interest" is defined by statute and includes officers and directors of a public utility, every person owning or holding, directly or indirectly, 10% or more of the voting securities of a public utility, and corporations which have in common with a public utility more than one-third of the directors of that public utility. To address community concerns expressed at the time, HECO proposed by letter dated January 25, 1993, that the PUC initiate a review of the relationship between HEI and HECO and the effects of that relationship on the operations of HECO. By an order dated January 26, 1993, the PUC opened a docket and initiated such a review to determine whether the HEI-HECO relationship, HEI's diversified activities, and HEI's policies, operations and practices had resulted in or were having any negative effects on HECO, its electric utility subsidiaries and ratepayers. In May 1994, a consultant, Dennis Thomas and Associates, was selected by the PUC to perform the review. In early 1995, Dennis Thomas and Associates issued its report to the PUC. The report concluded that "on balance, diversification has not hurt electric ratepayers." Other major findings of the study were that no utility assets have been used to fund HEI's nonutility investments or operations, HEI has not denied needed capital to the electric utilities and management processes within the electric utilities operate without interference from HEI. The report also included a number of recommendations, most of which the Company has implemented. In December 1996, the PUC issued an order that adopted the Dennis Thomas and Associates report, ordered HECO to continue to provide the PUC with status reports on its compliance with the PUC agreement (pursuant to which HEI became the holding company of HECO) and closed the investigation and proceeding. In the order, the PUC stated that it adopted the recommendation that HECO, MECO and HELCO present a comprehensive analysis of the impact that the holding company structure and investments in nonutility subsidiaries have on a case-by-case basis on the cost of capital to each utility in future rate cases and remove such effects from the cost of capital. See also "Holding company regulation." HECO and its subsidiaries are not subject to regulation by the Federal Energy Regulatory Commission (FERC) under the Federal Power Act, except under Sections 210 through 212 (added by Title II of PURPA and amended by the Energy Policy Act of 1992), which permit the FERC to order electric utilities to interconnect with qualifying cogenerators and small power producers, and to wheel power to other electric utilities. Title I of PURPA, which relates to retail regulatory policies for electric utilities, also applies to HECO and its subsidiaries. Title VII of the Energy Policy Act of 1992, which creates "exempt wholesale generators" (EWGs) as a category that is exempt from the 1935 Act and which addresses transmission access, also applies to HECO and its subsidiaries. The Company cannot predict the extent to which cogeneration, EWGs, or transmission access, will reduce its electrical loads, reduce its current and future generating and transmission capability requirements, or affect its financial condition, results of operations or liquidity. Because they are located in the State of Hawaii, HECO and its subsidiaries are exempt by statute from limitations set forth in the Powerplant and Industrial Fuel Act of 1978 on the use of petroleum as a primary energy source. SAVINGS BANK REGULATION ASB, a federally chartered savings bank, and its holding companies are subject to the regulatory supervision of the OTS and, in certain respects, the Federal Deposit Insurance Corporation (FDIC). In addition, ASB must comply with Federal Reserve Board reserve requirements and OTS liquidity requirements. See "Liquidity and capital resources--Savings bank" in HEI's MD&A. For a discussion of the disparity in the deposit insurance assessment rates and Financing Corporation assessment rates that ASB and other thrifts have paid in relation to the rates that most commercial banks have paid, the special assessment made by the FDIC on ASB and other thrifts in 1996 to provide adequate funding for the SAIF and thereby permit a reduction in deposit insurance assessment rates for 29 thrifts and potential federal legislation affecting financial institutions, see "Deposit insurance premiums and regulatory developments" in Note 4 to HEI's Consolidated Financial Statements. Deposit insurance coverage. The FDIC Improvement Act of 1991 (FDICIA) amended various provisions of the Federal Deposit Insurance Act governing deposit insurance coverage. FDICIA, as further implemented by amendments to the FDIC's deposit insurance regulations, made certain significant changes relating to pro rata or "pass through" insurance coverage for employee benefit plan participants and beneficiaries, and insurance coverage for certain retirement accounts and trust funds. (The term "pass-through" insurance means that the insurance coverage passes through to each owner/beneficiary of the applicable deposit.) Although the vast majority of the FDIC's deposit insurance regulations remain unchanged (such as the basic rules providing that individual accounts are insured to $100,000 separately from qualifying joint accounts), several important changes were made. Effective December 19, 1993, an individual's interest in deposits at the same institution in any combination of certain retirement accounts will be added together and insured up to $100,000 in the aggregate. This is a reduction from the maximum of $400,000 in insurance coverage formerly provided if deposits were made in four different types of retirement plan accounts. "Pass-through" insurance coverage for the deposits of most employee benefit plans (i.e., $100,000 per individual participating, not $100,000 per plan) generally continues only for institutions that are "well-capitalized" under the FDIC's prompt corrective action regulations. The FDIC has amended its deposit insurance regulations to require financial institutions to provide employee benefit plan depositors information, not otherwise available, on the institution's capital category and whether "pass-through" deposit insurance is available. As of December 31, 1997, ASB was "well-capitalized". Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and - ------------------------------------------------------------------------ implementing regulations - ------------------------ Capital requirements. Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), the OTS set three capital standards for thrifts, each of which must be no less stringent than those applicable to national banks. As of December 31, 1997, ASB was in compliance with all of the minimum standards with a core capital ratio of 5.1% (compared to a 3% requirement), a tangible capital ratio of 5.0% (compared to a 1.5% requirement) and risk-based capital ratio of 11.9% (based on risk-based capital of $296 million, $97 million in excess of the 8% requirement). In 1996, the Board of Governors of the Federal Reserve System, the FDIC and the Office of the Comptroller of the Currency issued a joint agency policy statement to bankers to provide guidance on sound practices for managing IRR. Effective June 26, 1996, the joint agency policy statement augments the action taken by the agencies in 1995 to implement the portion of the FDICIA addressing risk- based capital standards for IRR. It also replaces the proposed joint agency policy statement that the agencies issued for comment in 1995 regarding a supervisory framework for measuring and assessing banks' IRR exposures. The agencies have elected not to pursue a standardized measure and explicit capital charge for IRR at this time. This decision reflects concerns about the burden, accuracy and complexity of a standardized measure and recognition that industry techniques for measuring IRR are continuing to evolve. Nonetheless, the agencies will continue to place significant emphasis on the level of a bank's IRR exposure and the quality of its risk management process when evaluating a bank's capital adequacy. Although the OTS has indicated that it will review any differences between its approach and that of the other agencies for the purpose of achieving greater consistency and uniformity among all four agencies, the impact of the joint agency policy statement on the IRR rule adopted by the OTS and ultimately on ASB cannot be predicted at this time. Affiliate transactions. Significant restrictions apply to certain transactions between ASB and its affiliates, including HEI and its direct and indirect subsidiaries. FIRREA significantly altered both the scope and substance of such limitations on transactions with affiliates and provides for thrift affiliate rules similar to, but more restrictive than, those applicable to banks. For example, ASB is prohibited from making any loan or other extension of credit to an entity affiliated with ASB unless the affiliate is engaged exclusively in activities which the Federal Reserve Board has determined to be permissible for bank holding companies. There are also various other restrictions which apply to certain transactions between ASB and certain executive officers, directors and insiders of ASB. ASB is also barred from making a purchase of or any investment in securities issued by an affiliate, other than with respect to shares of a subsidiary of ASB. 30 FDIC Improvement Act of 1991 and implementing regulations - --------------------------------------------------------- FDICIA subjects the banking and thrift industries to heightened regulation and supervision. FDICIA made a number of reforms addressing the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions and improvement of accounting standards. FDICIA also limited deposit insurance coverage, implemented changes in consumer protection laws and called for least-cost resolution and prompt corrective action with regard to troubled institutions. Pursuant to FDICIA, the federal banking agencies have promulgated regulations which may affect the operations of ASB and its holding companies. Such regulations address, for example, standards for safety and soundness, real estate lending, accounting and reporting, transactions with affiliates, and loans to insiders. Prompt corrective action. FDICIA establishes a statutory framework that is triggered by the capital level of a savings association and subjects it to progressively more stringent restrictions and supervision as capital levels decline. The OTS rules implement the system of prompt corrective action. In particular, the rules define the relevant capital measures for the categories of "well-capitalized", "adequately capitalized", "under-capitalized", "significantly under-capitalized" and "critically under-capitalized". A savings association that is under-capitalized or significantly under- capitalized is subject to additional mandatory supervisory actions and a number of discretionary actions if the OTS determines that any of the actions is necessary to resolve the problems of the association at the least possible long- term cost to the SAIF. A savings association that is critically under- capitalized must be placed in conservatorship or receivership within 90 days, unless the OTS and the FDIC concur that other action would be more appropriate. Interest rates. FDIC regulations restrict the ability of financial institutions that are not "Well-capitalized" to offer interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of December 31, 1997, ASB was "well-capitalized" and thus, not subject to these interest rate restrictions. Qualified thrift lender test. The FDICIA amended the qualified thrift lender (QTL) test provisions of FIRREA by reducing the percentage of assets thrifts must maintain in housing-related loans and investments from 70% to 65%, and changing the computation period to require that the percentage be reached on a monthly average basis in nine out of the previous 12 months. Savings associations that fail to satisfy the QTL test by not holding the required percentage of housing-related investments are subject to various penalties, including limitations on their activities and restrictions on their FHLB advances. Failure to satisfy the QTL test would also bring into operation restrictions on the activities that may be engaged in by HEI, HEIDI and their other subsidiaries and could effectively result in the required divestiture of ASB. At all times during 1997, ASB was in compliance with the QTL test. See "Holding company regulation." Federal Home Loan Bank System - ----------------------------- ASB is a member of the FHLB System which consists of 12 regional FHLBs. The FHLB System provides a central credit facility for member institutions. ASB, as a member of the FHLB of Seattle, is required to own shares of capital stock in the FHLB of Seattle in an amount equal to the greater of 1% of ASB's aggregate unpaid residential loan principal at the beginning of each year, 0.3% of total assets or 5% of FHLB advances outstanding. The FHLBs serve as the central liquidity facilities for savings associations and resources of long-term funds for financing housing. Long-term advances may only be made for the purpose of providing funds for financing residential housing. Additionally, at such time as an advance is made or renewed, it must be secured by collateral from one of the following categories: (1) fully disbursed, whole first mortgages on improved residential property, or securities representing a whole interest in such mortgages; (2) securities issued, insured or guaranteed by the U.S. Government or any agency thereof; (3) FHLB deposits; and (4) other real estate-related collateral that has a readily ascertainable value and with respect to which a security interest can be perfected. The aggregate amount of outstanding advances secured by such other real estate-related collateral may not exceed 30% of the member's capital. Other laws. ASB is subject to federal and state consumer protection laws which affect lending activities, such as the Truth-in-Lending Law, the Truth in Savings Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and several federal and state financial privacy acts. 31 These laws may provide for substantial penalties in the event of noncompliance. Management of ASB believes that its lending activities are in compliance with these laws and regulations. The Community Reinvestment Act (CRA) was enacted by Congress in 1977 to ensure that banks and thrifts help meet the credit needs of their communities, including low- and moderate-income areas, consistent with safe and sound lending practices. The OTS will consider ASB's CRA record in evaluating an application for a new deposit facility, including the establishment of a branch, the relocation of a branch or office, or the acquisition of an interest in another bank or thrift. ASB received a verbal CRA rating of "outstanding" from the OTS in December 1997. For a discussion of federal and state interstate branching legislation, see "Liquidity and capital resources--Savings bank" in HEI's MD&A. In August 1996, federal legislation was enacted that repeals the percentage of taxable income method of tax accounting for bad debt reserves used by ASB and other "large" thrift institutions. In place of this bad debt reserve method, ASB is required to use the specific charge-off method used by most other businesses. These rules are generally effective for taxable years beginning after 1995. The related transaction rules eliminate the potential recapture of federal income tax deductions arising from the bad debt reserve created prior to 1988. Only post-1987 reserve net additions are subject to recapture into taxable income ratably over a six-year period, beginning in 1997. ASB has established a deferred tax liability of approximately $4.8 million for its post-1987 reserve. Pending legislation. For a discussion of potential federal legislation addressing the merger of the BIF and SAIF, thrift rechartering and financial modernization, and possible adverse effects on HEI, see "Deposit-insurance premiums and regulatory developments" in Note 4 to HEI's Consolidated Financial Statements. FREIGHT TRANSPORTATION REGULATION The PUC has broad authority in its regulation of the intrastate business and operations of YB. See "Other--Freight transportation--Hawaiian Tug & Barge Corp. and Young Brothers, Limited." In particular, the PUC has the authority to review and modify YB's intrastate rates and charges under the Hawaii Water Carrier Act. In all rate proceedings under such act, YB has the burden of proving the reasonableness of expenditures, contracts, leases or other transactions. An adverse decision or policy adopted by the PUC, or a delay in granting requested rate or other relief, could have a material adverse effect on the financial condition, results of operations or liquidity of YB. ENVIRONMENTAL REGULATION HEI and its subsidiaries are subject to federal and state statutes and governmental regulations pertaining to water quality, air quality and other environmental factors. Water quality controls. As part of the process of generating electricity, water used for condenser cooling of the electric utility subsidiaries' steam electric generating stations is discharged into ocean waters or into underground injection wells. The subsidiaries are required periodically to obtain permits from the DOH in order to be allowed to discharge the water, including obtaining permit renewals for existing facilities and new permits for new facilities. The electric utility subsidiaries must obtain National Pollutant Discharge Elimination System (NPDES) permits from the DOH to allow wastewater and storm water discharges into state waters for their coastal generating stations and Underground Injection Control (UIC) permits for wastewater discharge to underground injection wells for one MECO facility and several HELCO facilities. The Federal Oil Pollution Act of 1990 (OPA) governs actual or threatened oil releases in navigable U.S. waters (inland waters and up to three miles offshore) and waters of the U.S.' exclusive economic zone (up to 200 miles to sea from the shoreline). Responsible parties under OPA are jointly, severally and strictly liable for oil removal costs incurred by the federal government or the state and damages to natural resources and real or personal property. Responsible parties include vessel owners and operators. OPA imposes fines and jail terms ranging in severity depending on how the release was caused. OPA also requires that responsible parties submit certificates of financial responsibility sufficient to meet the responsible party's maximum limited liability. HTB complies with this requirement through coverage with the Water Quality Insurance Syndicate and YB qualifies as a self-insurer. The Coast Guard issued interim guidelines in September 1992, which included the requirement that a spill response plan be submitted by February 18, 1993, and be finalized by August 18, 1993. The EPA and Hawaii Department 32 of Transportation (DOT) also have similar requirements for submission of spill response plans. The EPA issued its proposed rules and guidelines on this matter in February 1993. With HTB exiting the fuel transportation business at the end of 1993, the Company's freight transportation operations subject the Company to significantly lessened environmental risks. HTB's fuel and lubricating oil and the other cargo carried in its barges may be accidentally discharged into ocean waters causing a pollution hazard, but the quantities carried do not pose a major environmental hazard. HTB and YB employees are trained to respond to oil or other spills that occur. HTB and YB filed spill response plans in 1993, 1995 and 1996. The utilities filed preliminary spill response plans in 1993 for certain facilities. Revised Facility Spill Response Plans (FSRPs) and additional FSRPs were filed in 1994 and 1995. Due to a leak in the fuel transfer system, approximately 100 gallons of bunker fuel oil were released to a HELCO Shipman facility drainage well system in November 1996. The release was reported to state and county agencies in December 1996. Although the fuel oil was removed from the well system and the well system was cleaned, oil continued to seep back into the well system from behind the retaining walls until March 1997. Monitoring and removal of this residual oil continued. In March 1997, HELCO received a letter from the DOH concurring with the ongoing cleanup approach and stating that more aggressive cleanup measures should be considered if oil seepage into the drainage wells worsens. Oil seepage into the well system has not been observed since March 1997. Due to leaks in two wastewater treatment system tanks, an estimated 2,000 gallons of boiler cleaning wastewater was released to a HELCO Hill facility drainage well in January 1997. After confirming that the wastewater discharged exhibited characteristics of a hazardous waste, notification was provided to federal, state and county agencies. A post-release drainage well sample collected indicated that well conditions were nonhazardous. The treatment tanks were repaired, the drainage well cleaned and a semiannual well status check was performed by a consultant with satisfactory results. The DOH issued a Notice of Apparent Violation of the UIC permit in February 1997 and will notify HELCO of required compliance action, if any, stemming from this incident. In April 1997, HECO, on behalf of HELCO, notified the DOH that it became aware that industrial oily wastewater was discharging into HELCO's Waimea facilityOs dry well system in noncompliance with the facility's UIC permit. The discharge of oily wastewater was stopped and, in May 1997, a written incident report was submitted to the DOH. The DOH issued a Notice of Apparent Violation. The well was cleaned and in July 1997 a response was submitted to a DOH request for information. The DOH performed a site inspection in September 1997 and, in January 1998, the DOH issued a Notice of Violation (NOV) imposing a civil penalty fine on HELCO of $36,000, which HELCO paid in January 1998. The DOH has closed this case. Air quality controls. The generation stations of the utility subsidiaries operate under air pollution control permits issued by the DOH and, in a limited number of cases, by the EPA. The entire electric utility industry is being affected by the 1990 Amendments to the Clean Air Act. Hawaii utilities may be affected by the air toxics provisions (Title III) when the Maximum Allowable Control Technology (MACT) emission standards are proposed for generation units. Hawaii utilities are affected by the operating permit provisions (Title V). The DOH adopted implementing regulations on November 26, 1993 which required submission of permit applications during 1994 for existing sources. All applications were filed in 1994 as required and supplementary information was filed in 1995, 1996 and 1997. Results of further air quality analyses could trigger requirements to mitigate emission impacts. Reports on emissions of air toxics could trigger requirements to conduct risk assessments. Hawaii utilities are also affected by the enforcement provisions (Title VII) which require the EPA to promulgate new regulations which mandate "enhanced monitoring" of emissions from many generation units. The EPA proposed a rule, called Compliance Assurance Monitoring (CAM), in August 1996, and a final rule was issued in October 1997. The CAM rule may require minor changes in emissions reporting procedures, however, no emission monitor retrofits will be required for HECO, HELCO and MECO. On November 1, 1989, the DOH issued a NOV indicating that Maalaea units X-1 and X-2 had exceeded operating limitations of 12 hours per day at various times in 1988. These incidents resulted from unscheduled unit outages and resulted in no net increase in emissions by MECO. Subsequently, MECO took steps to preclude future violations. An application for a permit modification was submitted to the EPA, revising the operating hour limitation to annual rather than daily. Approval was received from the EPA in July 1992. Units X-1 and X-2 continue to operate in compliance with the revised permit. 33 Following a unit overhaul, emission compliance tests conducted for MECO's Maalaea Unit 14 in late 1995 indicated that particulate emissions were in excess of PSD permit limits. Corrective actions were taken and a retest in February 1996 confirmed that the unit returned to compliance with PSD limits. All test reports were submitted to the DOH. By letter dated July 15, 1996, the DOH indicated that a NOV will be issued for the past violations. By letter dated January 31, 1997, the DOH invited MECO to meet to discuss settlement of this and other open matters. By letter dated March 3, 1998, the DOH transmitted a draft Consent Order to MECO, resolving all open MECO air emission compliance matters which occurred from 1988 through 1996 (including the NOV for Maalaea units X-1 and X-2 described in the previous paragraph and past violations of Maalaea Unit 14). The draft Consent Order will be submitted for public comment. Under the proposed settlement, MECO will contribute $100,000 over the next two years to an environmental education program relating to air quality. Initial source tests in December 1989 and subsequent retesting for HELCO's CT-2 generating unit indicated particulate emissions above permitted levels. Following analysis, HECO (on behalf of HELCO) proposed in November 1990 that the permitted particulate limit be increased. By letter dated April 13, 1992, the EPA concurred that revision is warranted. The DOH issued a NOV on August 17, 1992 for the noncomplying emissions. HECO and HELCO worked with the DOH, the manufacturer and a consultant to determine an appropriate new emission limit for particulates as well as oxides of nitrogen. In accordance with discussions with the DOH, CT-2 continues to operate pending issuance of a revised permit. On January 20, 1998, the DOH issued a NOV to HELCO for noncomplying emissions from March 16, 1993 through December 20, 1994 and from March 22, 1996 through November 6, 1997. HELCO paid fines totaling $22,100 in the settlement of both the 1992 and 1998 NOV's. Unit CT-2 is currently operating within all permit limits by virtue of its having passed its November 1997 source test. Hazardous waste and toxic substances controls. The operations of the electric utility and freight transportation subsidiaries are subject to regulations promulgated by the EPA to implement the provisions of the Resource Conservation and Recovery Act (RCRA), the Superfund Amendments and Reauthorization Act (SARA) and the Toxic Substances Control Act (TSCA). The DOH has been working towards obtaining primacy to operate state-authorized RCRA (hazardous waste) programs. The DOH finalized RCRA administrative rules in mid-June 1994, with the rules becoming effective on June 18, 1994. The DOH's state contingency plan and the State of Hawaii Environmental Response Law (ERL) rules were adopted in August 1995. Whether on a federal or state level, RCRA provisions identify certain wastes as hazardous and set forth measures that must be taken in the transportation, storage, treatment and disposal of these wastes. Some of the wastes generated at steam electric generating stations possess characteristics which make them subject to these EPA regulations. Since October 1986, all HECO generating stations have operated RCRA-exempt wastewater treatment units to treat potentially regulated wastes from occasional boiler waterside and fireside cleaning operations. Steam generating stations at MECO and HELCO also operate similar RCRA-exempt wastewater management systems. In March 1990, the EPA changed RCRA testing requirements used to characterize a waste as hazardous which potentially affected the hazardous waste generating status of all facilities. HECO's continuing program to recharacterize all HECO, MECO and HELCO wastestreams has demonstrated the adequacy of the existing treatment systems and identified other potential compliance requirements. Waste recharacterization studies indicate that treatment facility wastestreams are nonhazardous and no change in RCRA generator status is required. RCRA underground storage tank (UST) regulations require all facilities with USTs used to store petroleum products to comply with costly leak detection, spill prevention and new tank standard retrofit requirements within a specified compliance period based on tank age. On August 5, 1996, EPA conducted an UST Field Citation inspection at the Ward Avenue complex. During the inspection HECO was cited for a minor infraction, which was immediately corrected. HECO expects to receive a NOV and a nominal fine. The Emergency Planning and Community Right-to-Know Act (EPCRA) under SARA Title III requires HECO, MECO and HELCO to report hazardous chemicals present in their facilities in order to provide the public with information on these chemicals so that emergency procedures can be established to protect the public in the event of hazardous chemical releases. All HECO, MECO and HELCO facilities are in compliance with applicable annual reporting requirements to the State Emergency Planning Commission, the Local Emergency Planning Committee and local fire departments. In September 1995, the EPA published a notice of proposed rule making to expand the types of industries required to file 34 annual Toxic Release Inventory reports (i.e., to report facility releases of toxic chemicals). The final rule includes the steam electric category (effective January 1, 1998), which previously was exempt from Toxic Release Inventory reporting requirements. Facilities are implementing actions to comply with reporting requirements. Release reports for 1998 must be filed with the EPA by July 1, 1999. The TSCA regulations specify procedures for the handling and disposal of polychlorinated biphenyls (PCB), a compound found in transformer and capacitor dielectric fluids. HECO and its subsidiaries have instituted procedures to monitor compliance with these regulations. In addition, HECO has implemented a program to identify and replace PCB transformers and capacitors in the HECO system. All HECO, MECO and HELCO facilities are currently believed to be in compliance with PCB regulations. In December 1994, the EPA published in the Federal Register a Proposed Rule to amend PCB disposal regulations. The proposed rule calls for changes in determining PCB concentrations, and in marking, storage and disposal requirements. A final rule is pending. By letter dated August 21, 1992, the EPA provided MECO with a notice of potential liability and request for information relating to a federal Superfund closure investigation at the North American Environmental, Inc. (NAE) storage facility in Clearfield, Utah. MECO was identified by the EPA as a potentially responsible party for three PCB capacitors originally contracted for disposal by Westinghouse. Although Westinghouse has already disposed of the capacitors, MECO was obligated to comply with the information requests attached to the EPA notice. A preliminary response to the EPA's information request was submitted to the EPA on October 5, 1992. MECO has since received confirmation from Westinghouse that the three capacitors were removed from the NAE facility and incinerated at Aptus (an EPA-approved facility in Kansas) on September 16, 1992. By letter dated December 2, 1992, the EPA notified MECO that a draft Administrative Order on Consent (AOC) for the cleanup of the NAE facility had been sent to potentially responsible parties that have waste remaining at the NAE site and to parties that have expressed a desire to participate in the cleanup. MECO did not receive a draft AOC because the three PCB capacitors were removed from the NAE facility and incinerated. By letter dated February 8, 1993, Westinghouse confirmed that it would indemnify MECO pursuant to its contract for this matter. In early 1995, the EPA issued an AOC to the Freeport Center and the Defense Logistics Agency. Both parties are initiating corrective actions. Recovery of cleanup costs may fall back on other potentially responsible parties once cleanup is completed and costs have been determined. The Environmental Response Law of the State of Hawaii (ERL), as amended, governs releases of hazardous substances, including oil, in areas within the state's jurisdiction. Responsible parties under the ERL are jointly, severally and strictly liable for a release of a hazardous substance into the environment. Responsible parties include owners or operators of a facility where a hazardous substance comes to be located and any person who at the time of disposal of the hazardous substance owned or operated any facility at which such hazardous substance was disposed. The DOH issued final rules (or State Contingency Plan) implementing the ERL on August 17, 1995. Potential exposure to liability under the ERL/State Contingency Plan is associated with the release of regulated substances, including oil, to the environment. For information regarding the investigation of the Honolulu Harbor area, see Note 22 to HEI's Consolidated Financial Statements and Note 12 to HECO's Consolidated Financial Statements. Both HTB and YB generate small quantities of hazardous wastes as a result of operations and equipment maintenance activities and have contracted with a firm to dispose of these wastes in compliance with the EPA regulations and the RCRA provisions. YB, as a public carrier, also moves hazardous wastes and explosives for customers. Employees are trained in the applicable handling methods to assist in the safe movement of these cargoes. Both HTB and YB are subject to the jurisdiction of the Coast Guard which monitors ocean activities to ensure compliance with federal regulations. ASB may be subject to the provisions of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and regulations promulgated thereunder. CERCLA imposes liability for environmental cleanup costs on certain categories of responsible parties, including the current owner and operator of a facility and prior owners or operators who owned or operated the facility at the time the hazardous substances were released or disposed. CERCLA exempts persons whose ownership in a facility is held primarily to protect a security interest, provided that they do not participate in the management of the facility. Although there may be some risk of liability for ASB for environmental 35 cleanup costs, the Company believes the risk is not as great for ASB, which specializes in residential lending, as it may be for other depository institutions which have a larger portfolio of commercial loans. For information about HPG, see the "Other" section in HEI's MD&A. SECURITIES RATINGS - ------------------ As of March 17, 1998, the Standard & Poor's (S&P), Moody's Investors Service (Moody's) and Duff & Phelps Credit Rating Co.'s (Duff & Phelps) ratings of HEI's and HECO's securities were as follows:
S&P Moody's Duff & Phelps - ------------------------------------------------------------------------------------------------------------ HEI - --- Medium-term notes............................... BBB Baa2 BBB+ Commercial paper................................ A-2 P-2 Duff 2 HEI-obligated preferred securities of trust subsidiaries........................... BBB- baa3 BBB HECO - ---- First mortgage bonds............................ A- A3 A Revenue bonds and medium-term notes............. BBB+ Baa1 A- Cumulative preferred stock...................... BBB baa1 BBB+ Commercial paper................................ A-2 P-2 Duff 1- HECO-obligated preferred securities of trust subsidiary............................. BBB baal BBB+
These ratings reflect only the view of the applicable rating agency at the time the ratings are issued, from whom an explanation of the significance of such ratings may be obtained. Each rating should be evaluated independently of any other rating. There is no assurance that any such credit rating will remain in effect for any given period of time or that such rating will not be lowered, suspended or withdrawn entirely by the applicable rating agency if, in such rating agency's judgment, circumstances so warrant. Any such lowering, suspension or withdrawal of any rating may have an adverse effect on the market price or marketability of HEIO's and/or HECO's securities, which could increase the cost of capital of HEI and HECO. Neither HEI nor HECO management can predict future rating agency actions or their effects on the future cost of capital of HEI or HECO. RESEARCH AND DEVELOPMENT - ------------------------ HECO and its subsidiaries expensed approximately $2.3 million, $2.1 million and $2.2 million in 1997, 1996 and 1995, respectively, for research and development. Contributions to the Electric Power Research Institute accounted for most of the expenses. There were also expenses in the areas of energy conservation, environmental and emissions controls, and expenses for studies relative to technologies that are applicable to HECO, its subsidiaries and their customers. EMPLOYEE RELATIONS - ------------------ At December 31, 1997, the Company had 3,672 full-time employees, compared with 3,327 at December 31, 1996. The increase in employees was primarily due to the acquisition of most of the BoA Hawaii operations. At December 31, 1997 and 1996, HEI had 50 full-time employees. HECO At December 31, 1997, HECO and its subsidiaries had 2,115 full-time employees, compared with 2,152 at December 31, 1996. The current collective bargaining agreement between the International Brotherhood of Electrical Workers (IBEW), Local 1260, and HECO, MECO and HELCO, covering approximately 63% of the total employees of these companies, was extended in November 1995 for a two-year period from November 1, 1996 through October 31, 1998. The extension provided for noncompounded wage increases of 3% on November 1 of each year during the term of the agreement. The IBEW and HECO, MECO and HELCO are currently in negotiations. The current benefits agreement between IBEW, Local 1260 and HECO, MECO and HELCO was also extended for a two-year period and will be in effect until October 31, 1998. 36 HTB HTB and YB have a collective bargaining agreement with the Inlandboatmen's Union of the Pacific (IBU) effective from July 26, 1995 through July 25, 1998. A 2.5% across-the-board wage increase was effective for the first year, with 3% in the second and third years. Journeyman craftsmen were not included in this new contract but were covered in YB's contract with the International Longshoremen's and Warehousemen's Union (ILWU), Hawaii Division, Local 142. The agreement covers all unionized employees of HTB and YB employed on ocean, interisland and harbor tug operations and dispatchers. It excludes office clerical employees, professional and management employees, guards and watchmen. YB has a collective bargaining agreement covering the period of July 1, 1996 through June 30, 1999 with the ILWU, Hawaii Division, Local 142. The agreement provides for a 13.4% wage increase over the three-year period. The agreement covers all regularly scheduled employees, receiving and delivery clerks on the dock loading and discharging vessels, all maintenance personnel, documentation clerks and customer service representatives employed by YB in the state. The agreement excludes professional employees, supervisory employees, guards and other clerical personnel. OTHER The employees of HEI and its direct and indirect subsidiaries are not covered by any collective bargaining agreement, except as identified above. DESCRIPTION OF HEI CAPITAL STOCK - -------------------------------- The following supplements and restates the description of HEI's Common Stock and Preferred Stock, the related rights of stockholders under the Stockholder Rights Plan adopted by the Board of Directors of HEI on October 28, 1997, and other related matters, for the purpose of updating the description thereof in registration statements filed by HEI under the Securities Exchange Act of 1934 and the Securities Act of 1933. Under HEI's Restated Articles of Incorporation (the "Articles"), HEI is authorized to issue 100,000,000 shares of Common Stock without par value ("Common Stock") and 10,000,000 shares of Preferred Stock without par value ("Preferred Stock"). The Board of Directors has authorized and designated only one series of Preferred Stock, being 500,000 shares of the Series A Junior Participating Preferred Stock, but no shares of such series have been issued, and no shares of such series are expected to be issued, unless the Rights described below under "Stockholder Rights Plan" become exercisable and are exercised. Upon issuance of any shares of the Series A Junior Preferred Stock, the rights of the holders of Common Stock of HEI will be affected as described below in the description of the Series A Junior Participating Preferred Stock. COMMON STOCK General. The outstanding shares of HEI's Common Stock are fully paid and nonassessable. Additional shares of Common Stock, when issued, will be fully paid and nonassessable when the consideration for which HEI's Board of Directors authorizes their issuance has been received. The holders of Common Stock have no preemptive rights and there are no conversion, redemption or sinking fund provisions applicable thereto. The Common Stock is listed on the New York Stock Exchange and is traded under the symbol HE. HEI's Common Stock is transferable at the Stock Transfer Office of HEI, 900 Richards Street, Honolulu, Hawaii 96813, and at the office of Continental Stock Transfer & Trust Company, Co- Transfer Agent and Registrar, 2 Broadway, New York, New York 10004. Dividend rights. Stock and cash dividends may be paid to the holders of Common Stock as and when declared by the Board of Directors, provided that, after giving effect thereto, HEI is able to pay its debts as they become due in the usual course of its business and HEI's total assets are not less than the sum of its total liabilities plus the maximum amount that would be payable in any liquidation in respect to all outstanding shares having preferential rights in liquidation. All shares of Common Stock will participate equally with respect to dividends. HEI's ability to pay dividends is now and in the future may be limited by the restrictions and limitations now and hereafter to be set forth in debt instruments, guarantees and resolutions creating series of Preferred Stock. Liquidation rights. In the event of any liquidation, dissolution, receivership, bankruptcy, disincorporation or winding up of the affairs of the Company, voluntarily or involuntarily, holders of HEI's Common Stock are entitled to any assets of HEI available for distribution to HEI's stockholders 37 after the payment in full of any preferential amounts to which holders of any Preferred Stock may be entitled. All shares of Common Stock will rank equally in the event of liquidation. Voting rights. Holders of Common Stock are entitled to one vote per share, subject to such limitation or loss of right as may be provided in resolutions which may be adopted from time to time creating issues of Preferred Stock or otherwise. At annual and special meetings of stockholders, a majority of the outstanding shares of Common Stock constitute a quorum and the affirmative vote of a majority of such quorum so present is sufficient to approve of any action except as otherwise required by law, except with respect to the amendment of certain provisions of HEI's By-laws and except as may be provided in resolutions which may be adopted from time to time creating series of Preferred Stock. Under HEI's current By-laws, one-third (as nearly as possible) of the total number of directors is elected at each annual meeting of stockholders and no holder of Common Stock is entitled to cumulate votes in an election of directors so long as HEI shall have a class of securities registered pursuant to the Exchange Act which are listed on a national securities exchange or traded over- the-counter on the National Association of Securities Dealers, Inc. Automated Quotation System. Under HEI's By-laws, directors may be removed from office only for cause. An amendment to the provisions in the By-laws relating to (1) matters which may be brought before an annual meeting, (2) matters which may be brought before a special meeting, (3) cumulative voting, (4) the number and staggered terms of members of the Board of Directors, (5) removal of directors and (6) amendment of the By-laws must in each case be approved either (a) by the affirmative vote of 80% of the shares entitled to vote generally with respect to election of directors voting together as a single class, or (b) by the affirmative vote of a majority of the entire Board of Directors plus a concurring vote of a majority of the "continuing directors" (as that term is defined in Article XVIII of the By-laws) voting separately and as a subclass of directors. The provisions of HEI's By-laws referred to in the foregoing two paragraphs, and the Stockholder Rights Plan and statutory provisions referred to below, may have the effect of delaying, deferring or preventing a change in control of HEI. Stockholder Rights Plan. On October 28, 1997, the Board of Directors of HEI adopted a Stockholder Rights Plan and declared a dividend of one Right for each share of Common Stock of HEI to stockholders of record on November 10, 1997 (the "Record Date"). As of the Record Date there were 31,734,028 shares of Common Stock outstanding. A Right will also attach to each share of Common Stock issued between the Record Date and the Distribution Date (as such term is defined below). Each Right will entitle the registered holder to purchase from HEI a unit (a "Unit") consisting of one one-hundredth of a share of Series A Junior Participating Preferred Stock without par value (the "Series A Preferred Stock"), at a purchase price of $112 per Unit (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in the Rights Agreement (the "Rights Agreement"), dated as of October 28, 1997, between HEI and Continental Stock Transfer & Trust Company, as Rights Agent (the "Rights Agent"). HEI's rights plan is designed to deter coercive or unfair takeover tactics, including the gradual accumulation of shares in the open market, partial or two-tiered tender offers, and private transactions through which an acquiror gains control of HEI without offering fair value to all of HEI's stockholders. Until the Distribution Date (as defined below), (i) no separate Rights Certificates will be distributed and the Rights will be evidenced by the Common Stock certificates and will be transferred with and only with such Common Stock certificates, (ii) new Common Stock certificates will contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. The Rights will separate from the Common Stock upon the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock other than as a result of repurchases of stock by HEI (the "Stock Acquisition Date") or (ii) 10 days following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person (the earlier of (i) and (ii), the "Distribution Date"). As soon as practicable after the Distribution Date, Rights Certificates will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and, thereafter, the separate Rights Certificates alone will represent the Rights. 38 Except as otherwise determined by the Board of Directors, only shares of Common Stock issued prior to the Distribution Date will have Rights attached. The Rights are not exercisable until the Distribution Date and will expire at the close of business on November 1, 2007 unless earlier redeemed by HEI as described below. At no time will the Rights have any voting power. In the event a person becomes an Acquiring Person, each holder of a Right will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of HEI), having a value equal to two times the Exercise Price of the Right. Notwithstanding any of the foregoing, following the occurrence of the event set forth in this paragraph (the "Flip-in Event"), all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. However, Rights are not exercisable following the occurrence of the Flip-in Event set forth above until such time as the Rights are no longer redeemable by HEI as set forth below. In the event that following the Stock Acquisition Date, (i) HEI engages in a merger or business combination transaction in which HEI is not the surviving corporation; (ii) HEI engages in a merger or business combination transaction in which HEI is the surviving corporation and the Common Stock of HEI is changed or exchanged; or (iii) 50% or more of HEI's assets or earning power is sold or transferred (all deemed "Flip-Over Events"), each holder of a Right (except Rights which have previously been voided as set forth above) shall thereafter have the right to receive, upon exercise of the Right, Common Stock of the acquiring company having a value equal to two times the Exercise Price of the Right. The Purchase Price payable, and the number of Units of Series A Preferred Stock or other securities or property issuable upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Series A Preferred Stock, (ii) if holders of the Series A Preferred Stock are granted certain rights or warrants to subscribe for preferred stock or convertible securities at less than the current market price of the Series A Preferred Stock, or (iii) upon the distribution to holders of the Series A Preferred Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above). At any time until ten days following the Stock Acquisition Date, HEI may redeem the Rights in whole, but not in part, at a price of $0.01 per Right. Immediately upon the action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the redemption price of $0.01 per Right. Until a Right is exercised, the holder thereof, as such, will have no rights as a preferred stockholder of HEI, including, without limitation, the right to vote or to receive dividends. Prior to the Distribution Date, HEI may supplement or amend any provision of the Rights Agreement. After the Distribution Date, the provisions of the Rights Agreement may be supplemented or amended by the Board in order to cure any ambiguity, to make changes which do not materially adversely affect the interests of holders of Rights (excluding the interest of any Acquiring Person), to correct or supplement any defective or inconsistent provision in the Rights Agreement, or to shorten or lengthen any time period under the Rights Agreement; provided, however, that from and after the Distribution Date, no amendment to lengthen the time period governing redemption shall be made unless such lengthening is for the purpose of protecting, enhancing or clarifying the rights of, and/or the benefits to, the holders of Rights. The Rights Agreement may not be amended at a time when the Rights are not redeemable. Restriction on Purchases of Shares and Consequences of Substantial Holdings of Shares under Certain Hawaii and Federal Laws. Provisions of Hawaii and Federal law, some of which are described below, place restrictions on the acquisition of beneficial ownership of 5% or more of the voting power of HEI. The following does not purport to be a complete enumeration of all such provisions, nor does it purport to be a complete description of the statutory provisions that are enumerated. Persons contemplating the acquisition of 5% or more of the issued and outstanding shares of HEI's Common Stock should consult with their legal and financial advisors concerning statutory and other restrictions on such acquisitions. The Hawaii Control Share Acquisition Act places restrictions on the acquisition of ranges of voting power (starting at 10% and at 10% intervals up to a majority) for the election of directors of HEI unless 39 the acquiring person obtains approval of the acquisition, in the manner specified in the Act, by the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote, exclusive of the shares beneficially owned by the acquiring person, and consummates the proposed control share acquisition within 180 days after shareholder approval. If such approval is not obtained, the statute provides that the shares acquired may not be voted for a period of one year from the date of acquisition, the shares will be nontransferable on HEI's books for one year after acquisition and HEI, during the one-year period, shall have the right to call the shares for redemption either at the prices at which the shares were acquired or at book value per share as of the last day of the fiscal quarter ended prior to the date of the call for redemption. Under provisions of the Hawaii Business Corporation Act, subject to certain exceptions, HEI may not be a party to a merger or consolidation unless the merger or consolidation is approved by the holders of at least 75% of all of the issued and outstanding voting stock of HEI. Under provisions of Hawaii law regulating public utilities, not more than 25% of the issued and outstanding voting stock of certain public utility corporations, including Hawaiian Electric Company, Inc. ("HECO") and its wholly owned electric utility subsidiaries, may be held, directly or indirectly, by any single foreign corporation or any single nonresident alien, or held by any person, without the prior approval of the PUC. The acquisition of more than 25% of the issued and outstanding voting stock of HEI in one or more transactions might be deemed to result in the holding of more than 25% of the voting stock of HECO and its electric utility subsidiaries. In addition, HEI is subject to an agreement ("the PUC Agreement") entered into with the PUC when HECO became a wholly owned subsidiary of HEI. The PUC Agreement provides that the acquisition of HEI by a third party, whether by purchase, merger, consolidation or otherwise, requires the prior written approval of the PUC. Under the Hawaii Environmental Disclosure Law, a person and that person's affiliates who in the aggregate beneficially own 10% or more but less than 50% of the securities entitled to vote for the election of directors of HEI may not acquire more than 5% of such securities during any 12-month period without first filing an environmental disclosure statement with the Hawaii Office of Environmental Quality Control. Under the Public Utility Holding Company Act of 1935 (the "1935 Act"), any company (as defined in the 1935 Act) which owns, controls or holds with power to vote 10% or more of the outstanding voting securities of HEI may be a public utility holding company, subject to regulation under the 1935 Act, unless an exemption is available under the 1935 Act or the Securities and Exchange Commission (the "SEC"), upon application, declares such a company not to be a holding company. In addition, under the 1935 Act, no person or company may, without prior approval of the SEC, acquire 5% or more of the outstanding Common Stock or other voting securities of HEI as long as HECO remains an HEI public utility subsidiary and a public utility holding company. The Savings and Loan Holding Company Act, the Change in Bank Control Act and the Office of Thrift Supervision ("OTS") regulations place restrictions on certain types of acquisitions of control of a savings bank and its holding company. Generally, no company, or any director or officer of a savings and loan holding company, or person who owns, or controls or holds with power to vote more than 25% of the voting stock of such holding company, may acquire control of a savings bank insured by the Federal Deposit Insurance Corporation or its holding company, without the prior written approval of the OTS. In addition, no person (other than certain persons affiliated with a savings and loan holding company) may acquire control of a savings bank or savings and loan holding company, unless the OTS has been given 60 days' prior written notice of the acquisition and has not objected to it. As a result of HEI's indirect ownership of American Savings Bank, F.S.B. ("ASB"), the acquisition of control of HEI, HEI Diversified, Inc. ("HEIDI") or ASB may be subject to the requirement of prior written OTS approval or 60 days' prior written notice to the OTS, unless such transaction would be exempt from such requirements under federal law or regulation. "Control" in this context means the acquisition of, control of, or holding proxies representing, more than 25% of the voting shares of HEI, HEIDI or ASB, or the power to control in any manner the election of a majority of the directors thereof. Moreover, under OTS regulations, one would be determined, subject to rebuttal, to have acquired control if one acquires more than 10% of the voting shares of HEI, HEIDI or ASB and is subject to one of certain specified "control factors." Anyone acquiring more than 10%, or additional stock above 10%, of any class of shares of HEI, HEIDI or ASB is required to file a certification with the OTS. 40 Under the Jones Act, it is unlawful to transport merchandise between points in the U.S. except in vessels owned by U.S. citizens. For a corporation to demonstrate U.S. citizenship, it must be incorporated under the laws of the United States or a state thereof, its chief executive officer and board chairman must be U.S. citizens, a majority of its directors must be U.S. citizens and at least 75% of its voting stock must be owned by U.S. citizens. If less than 75% of the Common Stock of HEI (which is the only class of voting stock presently outstanding) is owned by U.S. citizens, the vessels of HTB and YB would not be permitted to engage in transport between points in Hawaii. Dividend Reinvestment and Stock Purchase Plan. Any individual of legal age or entity is eligible to participate in the HEI Dividend Reinvestment and Stock Purchase Plan (the "Plan") by making an initial cash investment in Common Stock, subject to applicable laws and regulations and the requirements of the Plan. Holders of Common Stock, and preferred stock of HEI's electric utility subsidiaries (HECO, MECO and HELCO), may automatically reinvest some or all of their dividends to purchase additional shares of Common Stock at market prices (as defined in the Plan). Participants in the Plan may also purchase additional shares of Common Stock at market prices (as defined in the Plan) by making cash contributions to the Plan. HEI reserves the right to suspend, modify or terminate the Plan at any time. Shares of Common Stock issued under the Plan may either be newly issued shares or shares purchased by the Plan on the open market. Participants do not pay brokerage commissions or service charges in connection with purchases of newly issued shares, but do pay their pro rata share of brokerage commissions if the shares are purchased by the Plan for participants on the open market. PREFERRED STOCK Authorized Preferred Stock. Preferred Stock may be issued by the Board of Directors in one or more series, without action by stockholders and with such preferences, voting powers, restrictions and qualifications as may be fixed by resolution of the Board of Directors authorizing the issuance of such shares. Under current Hawaii law, the terms and provisions of all shares of Preferred Stock must be identical except with respect to dividend rates, redemption and redemption prices, amounts payable in liquidation, sinking fund provisions, conversion privileges, if any, and voting rights, if any. If and when authorized by the Board of Directors, any such Preferred Stock may be preferred as to dividends or in liquidation, or both, over the Common Stock. For example, the terms of the Preferred Stock, if and when authorized, could prohibit dividends on shares of Common Stock until all dividends and any mandatory redemptions have been paid with respect to shares of Preferred Stock. In addition, the Board of Directors may, without stockholder approval, issue Preferred Stock with voting and conversion rights which could adversely affect the voting power or economic rights of the holders of Common Stock. Issuance of Preferred Stock by HEI could thus have the effect of delaying, deferring or preventing a change of control of HEI. The first and only series of Preferred Stock that has been authorized by the Board of Directors as of the date hereof is the Series A Junior Participating Preferred Stock. Series A Junior Participating Preferred Stock. On October 28, 1997, the Board of Directors of HEI authorized a series of 500,000 shares of Preferred Stock, designated the Series A Junior Participating Preferred Stock. The Series A Junior Participating Preferred Stock is without par value, and was created in conjunction with the Board's adoption of the Rights Agreement between HEI and Continental Stock Transfer & Trust Company, as Rights Agent. No shares of Series A Junior Participating Preferred Stock have been issued. The Series A Junior Participating Preferred Stock may be purchased under certain circumstances, as set forth in the Rights Agreement. The exercise price for one one-hundredth of a share of Series A Junior Participating Preferred Stock is $112, subject to adjustment. The Series A Junior Participating Preferred Stock ranks junior to all other series of Preferred Stock as to the payment of dividends and distribution of assets, unless the terms of any such series provide otherwise. If declared by the Board of Directors out of funds legally available therefor, the dividend rate for the Series A Junior Participating Preferred Stock is the greater of $61.00 per quarter, or 100 times the then current quarterly dividend per common share (as adjusted from time to time to reflect stock dividends, subdivisions or combinations). Whenever quarterly dividends on the Series A Junior Participating Preferred Stock are in arrears, dividends or other distributions may not be made on the Common Stock or on any series of Preferred Stock ranking junior to the Series A Junior Participating Preferred Stock. Upon liquidation, no holders of shares ranking junior to the Series A Junior Participating Preferred Stock shall receive any distribution until all holders of the Series A Junior Participating Preferred Stock shall have received $100 per share, plus any unpaid dividends (the "Series A Liquida- 41 tion Preference"). Following payment of the Series A Liquidation Preference, no additional distributions shall be made to the holders of Series A Junior Participating Preferred Stock unless holders of Common Stock receive an amount equal to the Series A Liquidation Preference divided by 100, as adjusted, and thereafter (and after taking into account any amounts that may then be due to holders of any other series of Preferred Stock) the holders of the Series A Junior Participating Preferred Stock shall be entitled to share in the remaining assets of HEI with the holders of the Common Stock, ratably on a per share basis. In the event that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. Each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 100 votes, as may be adjusted from time to time, on all matters submitted to a vote of the stockholders of HEI, voting together with the Common Stock. If dividends on any Series A Junior Participating Preferred Stock are in arrears in an amount equal to six quarterly dividends, then until dividends for all previous quarters and for the current quarter have been declared and paid or set aside for payment, the holders of Series A Junior Participating Preferred Stock, voting as a class with holders of other series of Preferred Stock who are then entitled to vote thereon, shall also have the right to elect two directors to HEI's Board of Directors. The shares of Series A Junior Participating Preferred Stock are not redeemable. ITEM 2. PROPERTIES HEI leases office space from a nonaffiliated lessor in downtown Honolulu and - --- this lease expires on March 31, 2001. HEI also leases office space from HECO in downtown Honolulu. The properties of HEIOs subsidiaries are as follows: ELECTRIC UTILITY - ---------------- See page 5 for the "Generation statistics" of HECO and its subsidiaries, including generating and firm purchased capability, reserve margin and annual load factor. HECO owns and operates three generating plants on the island of Oahu at - ---- Honolulu, Waiau and Kahe, with an aggregate generating capability of 1,263 MW at December 31, 1997. The three plants are situated on HECO-owned land having a combined area of 535 acres. In addition, HECO owns a total of 127 acres of land on which are located substations, transformer vaults, distribution baseyards and the Kalaeloa cogeneration facility. Electric lines are located over or under public and nonpublic properties. Most of HECO's leases, easements and licenses have been recorded. HECO owns overhead transmission lines, overhead distribution lines, underground cables, fully owned or jointly owned poles and steel or aluminum high voltage transmission towers. The transmission system operates at 46,000 and 138,000 volts. The total capacity of HECO's transmission and distribution substations was 6,411,000 kilovoltamperes at December 31, 1997. HECO owns a building and approximately 11.5 acres of land located in Honolulu which houses its operating, engineering and information services departments and a warehousing center. It also leases an office building and certain office spaces in Honolulu. The lease for the office building expires in November 2004, with an option to further extend the lease to November 2012. The leases for certain office spaces expire on various dates through November 30, 2004 with options to extend to various dates through November 30, 2014. HECO owns 19.2 acres of land at Barbers Point used to situate fuel oil storage facilities with a combined capacity of 970,700 barrels. HECO also owns fuel oil tanks at each plant site with a total maximum usable capacity of 844,600 barrels. MECO owns and operates two generating plants on the island of Maui, at Kahului - ---- and Maalaea, with an aggregate capability of 191.5 MW as of December 31, 1997. The plants are situated on MECO-owned land having a combined area of 28.6 acres. MECO also owns fuel oil storage facilities at these sites with a total maximum usable capacity of 172,000 barrels. MECO's administrative offices and engineering and distribution departments are located on 9.1 acres of MECO-owned land in Kahului. 42 MECO also owns and operates smaller distribution and generation systems on the islands of Lanai and Molokai. HELCO owns and operates five generating plants on the island of Hawaii. These - ----- plants at Hilo (2), Waimea, Kona and Puna have an aggregate generating capability of 157.4 MW as of December 31, 1997 (excluding two small run-of-river hydro units and one small windfarm). The plants are situated on HELCO-owned land having a combined area of approximately 43 acres. HELCO also owns 6.0 acres of land in Kona, which is used for a baseyard, and it leases 4.0 acres of land for its baseyard in Hilo. The lease expires in 2030. The deeds to the sites located in Hilo contain certain restrictions which do not materially interfere with the use of the sites for public utility purposes. HELCO leases 78 acres of land for the windfarm. The properties of HELCO are subject to a first mortgage securing HELCO's outstanding first mortgage bonds, which amounted to $5 million as of December 31, 1997. SAVINGS BANK - ------------ ASB owns its executive office building located in downtown Honolulu and land and - --- an office building in the Mililani Technology Park on Oahu. The following table sets forth certain information with respect to branches owned and leased by ASB and its subsidiaries at December 31, 1997.
Number of branches --------------------------------------------------- Owned Leased Total - --------------------------------------------------------------------------------------------------------- Oahu.................................................. 11 37 48 Maui.................................................. 3 4 7 Kauai................................................. 3 3 6 Hawaii................................................ 2 5 7 Molokai............................................... -- 1 1 --------------------------------------------------- 19 50 69 ===================================================
The net book value of branches and office facilities is approximately $49 million. Of this amount, $39 million represents the net book value of the land and improvements for the branches and office facilities owned by ASB and $10 million represents the net book value of ASB's leasehold improvements. OTHER - ----- FREIGHT TRANSPORTATION - ---------------------- HTB owned seven tugboats ranging from 1,430 to 3,400 HP, two tenders (auxiliary boats) of 500 HP and two flatdecked barges as of December 31, 1997. HTB owns no real property, but rents on a month-to-month basis its pier property used in its operations from the State of Hawaii under a revocable permit. YB, HTB's subsidiary, owned five tugboats, two doubledecked and seven flatdecked barges and most of its shoreside equipment, including 20-foot containers, chassis, 20-foot and 40-foot refrigerated containers, container vans, hi-lifts, flatracks, automobile racks and other related equipment as of December 31, 1997. YB owns no real property, but rents on a month-to-month basis or leases various pier properties and warehouse facilities from the State of Hawaii under revocable permits or five-year leases. It is expected that leases will be renegotiated as necessary. REAL ESTATE DEVELOPMENT - ----------------------- MPC. See Item 1, "Business--Other--Real estate--Malama Pacific Corp." MDC, MPC's subsidiary, owns land adjacent to HECO's Ward Avenue facility on Oahu. In 1996, the sale of 0.23 acres of the property was completed. The remaining 1.04 acres is leased to HECO and other commercial tenants. OTHER - ----- HEIIC. See Item 1, "Business--Other--HEI Investment Corp." 43 As of March 17, 1998, HEIPC leases office space in downtown Honolulu. HEIPC also operates generating units at a facility in Tanguisson, Guam. See Item 1, "Business--Other--HEI Power Corp." ITEM 3. LEGAL PROCEEDINGS Except as provided for below and in "Item 1. Business," there are no known material pending legal proceedings, other than ordinary routine litigation incidental to their respective businesses, to which HEI or any of its subsidiaries is a party or of which any of their property is the subject. DISCONTINUED OPERATIONS - ----------------------- See Note 20 to HEI's Consolidated Financial Statements, incorporated herein by reference to page 63 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. In December 1994, five insurance agencies, which had served as insurance agents for the HIG Group, filed a complaint against HEI, HEIDI and others. The complaint set forth several causes of action, including breach of contract and piercing the corporate veil. The plaintiffs asked for relief from the defendants, including compensatory damages for lost commissions, business and profits, and punitive damages. In 1995, the court granted defendants' motion for summary judgment dismissing all claims. Judgment has been entered, plaintiffs have appealed and all appellate briefs have been filed. In the opinion of management, losses, if any, resulting from the ultimate outcome of the lawsuit will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS HEI and HECO: During the fourth quarter of 1997, no matters were submitted to a vote of security holders of the Registrants. EXECUTIVE OFFICERS OF HEI The following persons are, or may be deemed, executive officers of HEI. Their ages are given as of February 18, 1998 and their years of company service are given as of December 31, 1997. Officers are appointed to serve until the meeting of the HEI Board of Directors after the next Annual Meeting of Stockholders (which will occur on April 28, 1998) and/or until their successors have been appointed and qualified (or until their earlier resignation or removal). Company service includes service with an HEI subsidiary.
Business experience HEI Executive Officers for past five years - ------------------------------------------------------------------------------------------------------ Robert F. Clarke, age 55 President and Chief Executive Officer............................................ 1/91 to date Director......................................................................... 4/89 to date (Company service: 10 years) T. Michael May, age 51 Senior Vice President and Director............................................... 9/95 to date (Company service: 5 years) Mr. May is also President and Chief Executive Officer of HECO and served as HECO Senior Vice President from 2/92 to 8/95. Robert F. Mougeot, age 55 Financial Vice President and Chief Financial Officer............................. 4/89 to date (Company service: 9 years) Peter C. Lewis, age 63 Vice President - Administration.................................................. 10/89 to date (Company service: 29 years) Charles F. Wall, age 58 Vice President and Corporate Information Officer................................. 7/90 to date (Company service: 7 years)
44
Business experience HEI Executive Officers for past five years - ------------------------------------------------------------------------------------------------------ (continued) Andrew I. T. Chang, age 58 Vice President - Government Relations....................................... 4/91 to date (Company service: 13 years) Constance H. Lau, age 45 Treasurer................................................................... 4/89 to date (Company service: 13 years) Curtis Y. Harada, age 42 Controller.................................................................. 1/91 to date (Company service: 8 years) Betty Ann M. Splinter, age 52 Secretary................................................................... 10/89 to date (Company service: 23 years) Wayne K. Minami, age 55 President and Chief Executive Officer, American Savings Bank, F.S.B......... 1/87 to date (Company service: 11 years)
HEI's executive officers, with the exception of Charles F. Wall and Andrew I. T. Chang, are officers and/or directors of one or more of HEI's subsidiaries. Mr. Minami is deemed an executive officer of HEI for purposes of this Item under the definition of Rule 3b-7 of the SEC's General Rules and Regulations under the Securities Exchange Act of 1934. There are no family relationships between any executive officer of HEI and any other executive officer or director of HEI, or any arrangement or understanding between any executive officer and any person pursuant to which the officer was selected. PART II ------- ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS HEI: The information required by this item is incorporated herein by reference to pages 62 and 65 (Note 18, "Regulatory restrictions on net assets" and Note 23, "Quarterly information (unaudited)" to HEI's Consolidated Financial Statements) and page 25 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. Certain restrictions on dividends and other distributions of HEI are described in this report under "Item 1. Business-- Regulation and other matters--Restrictions on dividends and other distributions." The total number of holders of record of HEI common stock as of March 13, 1998, was 20,146. HECO: The information required with respect to "Market information" and "holders" is not applicable. Since the corporate restructuring on July 1, 1983, all the common stock of HECO has been held solely by its parent, HEI, and is not publicly traded. 45 The dividends declared and paid on HECO's common stock for the four quarters of 1997 and 1996 were as follows:
Quarters ended 1997 1996 - -------------------------------------------------------------------------------------------- March 31................................................ $15,062,000 $11,054,000 June 30................................................. 12,873,000 13,154,000 September 30............................................ 13,586,000 14,916,000 December 31............................................. 16,856,000 17,879,000
The discussion of regulatory restrictions on net assets is incorporated herein by reference to page 29 (Note 13 to HECO's Consolidated Financial Statements, "Regulatory restrictions on distributions to parent") of HECO's 1997 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA HEI: The information required by this item is incorporated herein by reference to page 25 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. HECO: The information required by this item is incorporated herein by reference to page 2 of HECO's 1997 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL and ITEM 7A. CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS HEI: The information required by this item is set forth in HEI's MD&A, incorporated herein by reference to pages 27 to 39 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. HECO: The information required by this item is set forth in HECO's MD&A, incorporated herein by reference to pages 3 to 11 of HECO's 1997 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. HECO is not required to provide "Quantitative and Qualitative Disclosures About Market Risks" in this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HEI: The information required by this item is incorporated herein by reference to the section entitled "Segment financial information" on page 26 and to pages 40 to 65 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. HECO: The information required by this item is incorporated herein by reference to pages 12 to 34 of HECO's 1997 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE HEI and HECO: None 46 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS HEI: Information for this item concerning the executive officers of HEI is set forth on pages 44 and 45 of this report. The list of current directors of HEI is incorporated herein by reference to page 66 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. Information on the current directors' business experience and directorships is incorporated herein by reference to pages 4 to 6 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. There are no family relationships between any director of HEI and any other executive officer or director of HEI, or any arrangement or understanding between any director and any person pursuant to which the director was selected. The information required under this item by Item 405 of Regulation S-K is incorporated by reference to page 11 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. HECO: The following persons are, or may be deemed, executive officers of HECO. Their ages are given as of February 18, 1998 and their years of company service are given as of December 31, 1997. Officers are appointed to serve until the meeting of the HECO Board of Directors after the next HECO Annual Meeting (which will occur on April 28, 1998) and/or until their respective successors have been appointed and qualified (or until their earlier resignation or removal). Company service includes service with HECO affiliates.
Business experience HECO Executive Officers for past five years - -------------------------------------------------------------------------------------------------------- Robert F. Clarke, age 55 Chairman of the Board........................................................ 1/91 to date (Company service: 10 years) T. Michael May, age 51 President, Chief Executive Officer and Director.............................. 9/95 to date Senior Vice President........................................................ 2/92 to 8/95 Chairman of the Board, MECO and HELCO........................................ 9/95 to date (Company service: 5 years) Jackie Mahi Erickson, age 57 Vice President - General Counsel & Government Relations...................... 9/95 to date Vice President - Corporate Counsel........................................... 2/91 to 8/95 (Company service: 17 years) Charles M. Freedman, age 51 Vice President - Corporate Relations......................................... 3/98 to date Vice President - Corporate Excellence........................................ 7/95 to 2/98 Vice President - Corporate Relations......................................... 5/92 to 6/95 (Company service: 7 years) Edward Y. Hirata, age 64 Vice President - Regulatory Affairs.......................................... 7/95 to date Vice President - Planning.................................................... 12/91 to 6/95 Vice President, MECO and HELCO............................................... 12/91 to date (Company service: 11 years)
47
Business experience HECO Executive Officers for past five years - -------------------------------------------------------------------------------------------------------- (continued) Thomas J. Jezierny, age 53 Vice President - Energy Delivery............................................. 9/96 to date President, MECO.............................................................. 4/90 to 8/96 (Company service: 27 years) Thomas L. Joaquin, age 54 Vice President - Power Supply................................................ 7/95 to date Vice President - Operations.................................................. 5/94 to 6/95 General Manager, Production.................................................. 11/93 to 4/94 Manager, Production.......................................................... 10/92 to 10/93 (Company service: 24 years) Richard L. O'Connell, age 68 Vice President - Customer Operations......................................... 7/95 to date Vice President - Customer Relations.......................................... 2/91 to 6/95 (Company service: 17 years) Paul A. Oyer, age 57 Financial Vice President and Treasurer....................................... 4/89 to date Director..................................................................... 4/85 to date Financial Vice President and Treasurer, MECO and HELCO....................... 3/85 to date (Company service: 31 years) Patricia U. Wong, age 41 Vice President - Corporate Excellence........................................ 3/98 to date Manager, Environmental Department............................................ 9/96 to 2/98 Associate General Counsel, Legal Department.................................. 5/90 to 9/96 (Company service: 7 years) Ernest T. Shiraki, age 50 Controller................................................................... 5/89 to date (Company service: 28 years) Molly M. Egged, age 47 Secretary.................................................................... 10/89 to date Secretary, MECO and HELCO.................................................... 10/89 to date (Company service: 17 years)
HECO's executive officers Robert F. Clarke, T. Michael May and Molly M. Egged are also officers of one or more of the affiliated nonutility HEI companies. There are no family relationships between any executive officer or director of HECO and any other executive officer or director of HECO, or any arrangement or understanding between any director and any person pursuant to which the director was selected. The list of current directors of HECO is incorporated herein by reference to page 36 of HECO's 1997 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. Information on the business experience and directorships of directors of HECO who are also directors of HEI is incorporated herein by reference to pages 4 through 6 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. Paul C. Yuen, age 69, and Anne M. Takabuki, age 41, as of February 18, 1998 are the only outside directors of HECO who are not directors of HEI. Dr. Yuen, who was elected a director of HECO in April 1993, is Dean of the College of Engineering at the University of Hawaii-Manoa. In the past five years, he has held various administrative positions at the University of Hawaii-Manoa. He also serves on 48 the board of Cyanotech Corporation. Miss Takabuki was elected a director of HECO in April 1997 and is Vice President/General Counsel of Wailea Golf Resort, Inc. She also serves on the boards of MECO, Wailea Golf Resort, Inc. and its affiliated companies and MAGBA, Inc. Information on Mr. Oyer's business experience and directorship is indicated above. ITEM 11. EXECUTIVE COMPENSATION HEI: The information required under this item for HEI is incorporated by reference to pages 9 to 10, 13 to 19, and 24 to 25 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. HECO: The following tables set forth the information required for the chief executive officer of HECO and the four other most highly compensated HECO executive officers serving at the end of 1997. All compensation amounts presented for T. Michael May are the same amounts presented in HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. SUMMARY COMPENSATION TABLE - -------------------------- The following summary compensation table shows the annual and long-term compensation of the chief executive officer of HECO and the four other most highly compensated executive officers of HECO who served at the end of 1997. SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation ----------------------------------- ---------------------------- Awards Payouts Other ------------- ------------ All Annual Securities Other Compen- Underlying LTIP Compen- Name and Principal Salary Bonus(1) sation(2) Options(3) Payouts(4) sation(5) Position Year ($) ($) ($) (#) ($) ($) - ------------------------------------------------------------------------------------------------------------------------- T. Michael May............. 1997 $313,000 $ 0 $ 0 12,000 -- $16,423 President and Chief 1996 282,000 98,747 107,412 12,000 52,175 13,945 Executive Officer 1995 226,000 41,987 0 4,000 na 8,177 Paul A. Oyer............... 1997 202,000 0 16,042 3,000 na 9,291 Financial Vice President 1996 196,000 19,706 14,533 0 na 8,748 and Treasurer 1995 188,000 17,959 13,167 3,000 na 7,907 Thomas J. Jezierny......... 1997 172,000 0 0 3,000 -- 5,760 Vice President- 1996 151,000 21,524 0 3,000 19,526 4,785 Energy Delivery 1995 135,000 14,642 0 3,000 29,204 4,320 Thomas L. Joaquin.......... 1997 168,000 0 0 3,000 na 6,232 Vice President- 1996 154,000 19,706 0 0 na 5,546 Power Supply 1995 137,000 17,959 0 3,000 na 4,404 Edward Y. Hirata........... 1997 149,000 0 0 3,000 na 11,084 Vice President- 1996 144,000 18,054 135 0 na 10,381 Regulatory Affairs 1995 140,000 16,519 270 3,000 na 10,002 na Not applicable.
49 (1) The named executive officers are eligible for an incentive award under the Company's annual Executive Incentive Compensation Plan (EICP). EICP bonus payouts are reflected as compensation for the year earned. (2) Covers perquisites of $107,412 for Mr. May for 1996 which he recognized as imputed income under the Internal Revenue Code, including $95,691 under the category club membership (representing once in a lifetime reimbursement of initiation fees of $50,000 grossed up for taxes, plus reimbursement of monthly dues not grossed up for taxes). Amounts for Mr. Oyer and Mr. Hirata represent above-market earnings on deferred annual payouts. (3) Except for Mr. May's, Mr. Oyer's, Mr. Joaquin's and Mr. Hirata's options granted in 1995, options granted include dividend equivalents. (4) Long-Term Incentive Plan (LTIP) payouts are determined in the second quarter of each year for the three-year cycle ending on December 31 of the previous calendar year. If there is a payout, the amount is reflected as LTIP compensation in the table for the previous year for Mr. May and Mr. Jezierny. In April 1996, an LTIP payout was made for the 1993-1995 performance cycle and is reflected as LTIP compensation in the table for 1995. In May 1997, an LTIP payout was made for the 1994-1996 performance cycle and is reflected as LTIP compensation in the table for 1996. The determination of whether there will be a payout under the 1995-1997 LTIP will not be made until the second quarter of this year. (5) Represents amounts accrued by the Company for certain death benefits provided to the named executive officers. Additional information is incorporated by reference to "Other Compensation Plans" on page 22 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. OPTION GRANTS IN LAST FISCAL YEAR - --------------------------------- The following table presents information on the nonqualified stock options which were granted in 1997 to the executives named in the HECO Summary Compensation Table. The practice of granting stock options, which may include dividend equivalent shares, has been followed each year since 1987.
OPTION GRANTS IN LAST FISCAL YEAR Number of Percent of Securities Total Options Underlying Granted to Exercise Grant Date Options Employees in Price Expiration Present Granted (1)(#) Fiscal Year ($/share) Date Value (2)($) - ------------------------------------------------------------------------------------------------------------------------------ T. Michael May........... 12,000 8% $34.61 April 14, 2007 $107,520 Paul A. Oyer............. 3,000 2 34.61 April 14, 2007 26,880 Thomas J. Jezierny....... 3,000 2 34.61 April 14, 2007 26,880 Thomas L. Joaquin........ 3,000 2 34.61 April 14, 2007 26,880 Edward Y. Hirata......... 3,000 2 34.61 April 14, 2007 26,880
(1) For the 24,000 option shares granted with an exercise price of $34.61 per share, additional dividend equivalent shares are granted at no additional cost throughout the four-year vesting period (vesting in equal installments) which begins on the date of grant. Dividend equivalents are computed, as of each dividend record date, both with respect to the number of shares under the option and with respect to the number of dividend equivalent shares previously credited to the participant and not issued during the period prior to the dividend record date. Accelerated vesting is provided in the event a change in control occurs. No stock appreciation rights have been granted under the Company's current benefit plans. (2) Based on a Binomial Option Pricing Model, which is a variation of the Black-Scholes Option Pricing Model. For the stock options granted on April 14, 1997, with a 10-year option period, an exercise price of $34.61, and with additional dividend equivalent shares granted for the first four years of the option, the Binomial Value adjusted for forfeiture risk is $8.96 per share. The following assumptions were used in the model: Stock Price: $34.61; Exercise Price: $34.61; Term: 10 years; Volatility: 0.098; Interest Rate: 7.05%; and Dividend Yield: 6.81%. The following were 50 the valuation results: Binomial Option Value: $2.92; Dividend Credit Value: $6.04; and Total Value $8.96. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES - ------------------------------------------------------------- The following table shows the stock options, including dividend equivalents, exercised by the named executive officers in 1997. Also shown is the number of unexercised options and the value of unexercised in the money options, including dividend equivalents, at the end of 1997. Under the Stock Option and Incentive Plan, dividend equivalents have been granted to all named executive officers as part of the 1997 stock option grant, to Mr. May as part of the 1996 stock option grant, to Mr. Oyer as part of the 1988 stock option grant and to Mr. Jezierny as part of the stock option grant for the 1990 through 1996 grants. Dividend equivalents permit a participant who exercises a stock option to obtain at no additional cost, in addition to the option shares, the amount of dividends declared on the number of shares of common stock with respect to which the option is exercised during the period between the grant and the exercise of the option. Dividend equivalents are computed, as of each dividend record date throughout the four-year vesting period (vesting in equal installments), which begins on the date of grant, both with respect to the number of shares underlying the option and with respect to the number of dividend equivalent shares previously credited to the executive officer and not issued during the period prior to the dividend record date. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Value of Number of Unexercised In Unexercised the Money Options Options (Including (Including Dividend Dividend Value Equivalents) at Equivalents)at Shares Dividend Realized On Fiscal Year-End Fiscal Year-End (1) Acquired Equivalents Value Dividend -------------------- --------------------- On Exercise Acquired On Realized On Equivalents Exercisable/ Exercisable/ (#) Exercise (#) Options ($) ($) Unexercisable (#) Unexercisable ($) - -------------------------------------------------------------------------------------------------------------------------------- T. Michael May...... -- -- $ -- $ -- 9,379 / 24,767 $ 57,137 / 208,901 Paul A. Oyer........ 700 205 2,909 7,591 9,181 / 4,657 70,321 / 37,280 Thomas J. Jezierny.. -- -- -- -- 20,469 / 8,461 274,776 / 87,150 Thomas L. Joaquin... -- -- -- -- 1,500 / 4,657 12,068 / 37,280 Edward Y. Hirata.... -- -- -- -- 4,500 / 4,657 19,883 / 37,280
(1) All options were in the money (where the option price is less than the closing price on December 31, 1997). Value based on closing price of $40.875 per share on the New York Stock Exchange on December 31, 1997. LONG-TERM INCENTIVE PLAN AWARDS TABLE - ------------------------------------- A Long-Term Incentive Plan award made to Mr. May in 1997 was the only such award made to the named executive officers in the HECO Summary Compensation Table. Additional information required under this item is incorporated by reference to page 16 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. PENSION PLAN - ------------ The Retirement Plan for Employees of Hawaiian Electric Industries, Inc. and Participating Subsidiaries (the Retirement Plan) provides a monthly retirement pension for life. Additional information required under this item is incorporated by reference to "Pension Plans" on pages 17 and 18 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. As of December 31, 1997, the named executive officers in the HECO Summary Compensation Table had the following number of years of credited service under the Retirement Plan: Mr. May, 5 years; Mr. Oyer, 31 years: Mr. Jezierny, 27 years; Mr. Joaquin, 24 years; and Mr. Hirata, 11 years. 51 CHANGE-IN-CONTROL AGREEMENTS - ---------------------------- Mr. May is the only named executive officer in the HECO Summary Compensation Table with whom HEI has a currently applicable Change-in-Control Agreement. Additional information required under this item is incorporated by reference to "Change-in-Control Agreements" on pages 18 and 19 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. EXECUTIVE MANAGEMENT COMPENSATION - --------------------------------- Decisions on executive compensation for the named HECO executive officers are made by the HEI Compensation Committee which is composed of six independent nonemployee directors. All decisions by the Committee concerning HECO officers are reviewed and approved by the full HEI Board of Directors as well as the HECO Board of Directors. HECO BOARD OF DIRECTORS - ----------------------- Committees of the HECO Board - ---------------------------- During 1997, the Board of Directors of HECO had only one standing committee, the Audit Committee, which was comprised of three nonemployee directors: Edwin L. Carter, Chairman, Diane J. Plotts and Paul C. Yuen. The Audit Committee holds such meetings as it deems advisable to review the financial operations of HECO. In 1997, the Audit Committee held five meetings to review with management, the internal auditor and HECO's independent auditors the activities of the internal auditor, the results of the annual audit by the independent auditors and the financial statements which are included in HECO's 1997 Annual Report to Stockholder. Remuneration of HECO Directors and attendance at meetings - --------------------------------------------------------- In 1997, Paul C. Yuen and Anne M. Takabuki were the only nonemployee directors of HECO who were not also directors of HEI. They were each paid a retainer of $20,000, 60% of which was distributed in the common stock of HEI pursuant to the HEI Nonemployee Director Stock Plan and 40% of which was distributed in cash. The number of shares of stock distributed was based on a share price of $33.3125, which is equal to the average high and low sales prices of HEI common stock on April 25, 1997, with a cash payment made in lieu of any fractional share. The nonemployee directors of HECO who were also nonemployee directors of HEI did not receive a separate retainer from HECO. In addition, a fee of $700 was paid in cash to each nonemployee director (including nonemployee directors of HECO who are also nonemployee directors of HEI) for each Board and Committee meeting attended by the director. The Chairman of the HECO Audit Committee was paid an additional $100 for each Committee meeting attended. Employee members of the Board of Directors are not compensated for attendance at any meeting of the Board or Committees of the Board. In 1997, there were five regular bi-monthly meetings, two joint meetings and one special meeting of the HECO Board of Directors. All incumbent directors attended at least 75% of the combined total number of meetings of the Board and Committees on which they served. At the meeting of the HEI Board of Directors on December 17, 1996, the HEI Board voted to terminate the Nonemployee Director Retirement Plan referenced on page 9 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998, and pay the present value of the accrued retirement benefits to directors age 55 and under or with 5 years of service or less (Dr. Yuen) as of April 22, 1997, on the basis of 60% HEI Common Stock and 40% cash. A discount rate of 6.5% was used in the calculation of the present value and it was assumed that the current nonemployee director's accrued benefits would commence at the mandatory retirement age of 72. The total present value of Dr. Yuen's accrued benefits was $33,415, of which the cash portion was paid on January 30, 1997, and the stock portion was invested in Dr. Yuen's HEI Dividend Reinvestment and Stock Purchase Plan account on February 28, 1997. 52 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT HEI: The information required under this item is incorporated by reference to pages 11 and 12 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. HECO: HEI owns all of the common stock of HECO, which is HECO's only class of voting securities. HECO has also issued and has outstanding various series of preferred stock, the holders of which, upon certain defaults in dividend payments, have the right to elect a majority of the directors of HECO. The following table shows the shares of HEI common stock beneficially owned by each HECO director (other than those who are also directors of HEI), named HECO executive officers as listed in the Summary Compensation Table on pages 42 and 43 and by HECO directors and officers as a group, as of February 18, 1998, based on information furnished by the respective individuals.
Amount of Common Stock and Nature of Name of Individual or Group Beneficial Ownership - ---------------------------------------------------------------------------------------------------- Total ---------- Directors - --------- Paul A. Oyer* 1,203 (a) 9,051 (d) 10,254 ------------------- Anne M. Takabuki 419 (a) 419 ------------------- Paul C. Yuen 1,012 (a) 1,069 (b) 2,081 ------------------- Other named executive officers - ------------------------------ Thomas J. Jezierny 3,473 (a) 24,109 (d) 27,582 ------------------- Thomas L. Joaquin 3,460 (a) 26 (b) 23 (c) 3,051 (d) 6,560 ------------------- Edward Y. Hirata 5,118 (a) 6,051 (d) 11,169 ------------------- All directors and executive officers 40,471 (a) as a group (18 persons) 13,548 (b) 517 (c) 196,524 (d) 251,060** -------------------
* Also a named executive officer listed in the Summary Compensation Table on pages 49 and 43. ** HECO directors Carter, Clarke, Henderson, May and Plotts, who also serve on the HEI Board of Directors, are not shown separately, but are included in the total amount. The information required as to these directors is incorporated by reference to page 11 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. Messrs. Clarke and May are also named executive officers listed in the Summary Compensation Table incorporated by reference to pages 13 and 14 of the above-referenced Definitive Proxy 53 Statement of HEI. The number of shares of common stock beneficially owned by any HECO director or by all HECO directors and officers as a group does not exceed 1% of the outstanding common stock of HEI. (a) Sole voting and investment power. (b) Shared voting and investment power (shares registered in name of respective individual and spouse). (c) Shares owned by spouse, children or other relatives sharing the home of the director or an officer in the group and in which personal interest of the director or officer is disclaimed. (d) Stock options, including accompanying dividend equivalents shares, exercisable within 60 days after February 18, 1998, under the 1987 Stock Option and Incentive Plan, as amended in 1992 and 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS HEI: The information required under this item is incorporated by reference to pages 24 to 25 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. HECO: The information required under this item is incorporated by reference to pages 24 to 25 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS The following financial statements contained in HEI's 1997 Annual Report to Stockholders and HECO's 1997 Annual Report to Stockholder, portions of which are filed by HEI as Exhibit 13 and, portions of which are filed by HECO as Exhibit 13, respectively, are incorporated by reference in Part II, Item 8, of this Form 10-K:
1997 Annual Report to Stockholder(s) (Page/s) --------------------------------- HEI HECO ------------------------------------------------------------------------------------------------------ Independent Auditors' Report...................................... 40 34 Consolidated Statements of Income, Years ended December 31, 1997, 1996 and 1995................................................... 41 12 Consolidated Statements of Retained Earnings, Years ended December 31, 1997, 1996 and 1995................................ 41 12 Consolidated Balance Sheets, December 31, 1997 and 1996........... 42 13 Consolidated Statements of Capitalization, December 31, 1997 and 1996...................................... na 14-15 Consolidated Statements of Cash Flows, Years ended December 31, 1997, 1996 and 1995............................................. 43 16 Notes to Consolidated Financial Statements........................ 26, 44-65 17-33
54 (A)(2) FINANCIAL STATEMENT SCHEDULES The following financial statement schedules for HEI and HECO are included in this Report on the pages indicated below:
Page/s in Form 10-K --------------------------------- HEI HECO -------------------------------------------------------------------------------------------------------- Independent Auditors' Report 56 57 Schedule II Condensed Financial Information of Registrant, Hawaiian Electric Industries, Inc. (Parent Company) as of December 31, 1997 and 1996 and Years ended December 31, 1997, 1996 and 1995....... 58-60 na Schedule V Valuation and Qualifying Accounts, Years ended December 31, 1997, 1996 and 1995................... 61 61
Certain Schedules, other than those listed, are omitted because they are not required, or are not applicable, or the required information is shown in the consolidated financial statements or notes included in HEI's 1997 Annual Report to Stockholders and HECO's 1997 Annual Report to Stockholder, which financial statements are incorporated herein by reference. (A)(3) EXHIBITS Exhibits for HEI and HECO and their subsidiaries are listed in the "Index to Exhibits" found on pages 62 through 70 of this Form 10-K. The exhibits listed for HEI and HECO are listed in the index under the headings "HEI" and "HECO," respectively, except that the exhibits listed under "HECO" are also considered exhibits for HEI. (B) REPORTS ON FORM 8-K HEI AND HECO: During the fourth quarter of 1997, HEI and HECO filed a Form 8-K, dated October 16, 1997, under Item 5, which included HEI's October 16, 1997 news release reporting third quarter 1997 earnings. During the fourth quarter of 1997, HEI filed a Form 8-K, dated December 6, 1997, under Items 2 and 7, which included the purchase and assumption agreement with BoA. On January 30, 1998, HEI filed a Form 8-K/A, dated December 6, 1997, under Item 7, which included financial statements and pro forma financial information relating to ASB's acquisition of most of the Hawaii operations of BoA. On March 2, 1998, HEI and HECO filed a Form 8-K, dated February 27, 1998, under Item 7, which included portions of HEI's 1997 Annual Report to Stockholders and HECO's 1997 Annual Report to Stockholder. On March 11, 1998, HEI and HECO filed a Form 8-K, dated March 2, 1998, under Item 5, which updated the following: "PUC show cause order for HECO," "HELCO power situation," "Property damage reserve" and "Competition." 55 [KPMG Peat Marwick letterhead] Independent Auditors' Report ---------------------------- The Board of Directors and Stockholders Hawaiian Electric Industries, Inc.: Under date of January 19, 1998, we reported on the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, retained earnings and cash flows for each of the years in the three-year period ended December 31, 1997, as contained in the 1997 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1997. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii January 19, 1998 56 [KPMG Peat Marwick letterhead] Independent Auditors' Report ---------------------------- The Board of Directors and Stockholder Hawaiian Electric Company, Inc.: Under date of January 19, 1998, we reported on the consolidated balance sheets and consolidated statements of capitalization of Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric Industries, Inc.) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, retained earnings and cash flows for each of the years in the three-year period ended December 31, 1997, as contained in the 1997 annual report to stockholder. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1997. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in the accompanying index. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii January 19, 1998 57 Hawaiian Electric Industries, Inc. SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS
December 31, ----------------------------------- (in thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------- ASSETS Cash and equivalents................................................ $ 416 $ 1,161 Advances to and notes receivable from subsidiaries.................. 25,459 40,455 Accounts receivable................................................. 1,315 2,135 Other investments................................................... 810 810 Property, plant and equipment, net.................................. 3,288 3,177 Other assets........................................................ 4,182 2,933 Investment in wholly owned subsidiaries, at equity.................. 1,245,415 1,021,115 ----------------------------------- $1,280,885 $1,071,786 =================================== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable.................................................... $ 3,555 $ 7,231 Notes payable to subsidiaries....................................... 3,181 -- Commercial paper.................................................... 189,482 87,600 Long-term debt...................................................... 160,000 191,500 Loan from HEI Preferred Funding, LP (8.36% due in 2017)............. 103,000 -- Deferred income taxes............................................... 1,374 3,055 Unamortized tax credits............................................. 117 30 Other............................................................... 5,495 9,518 ----------------------------------- 466,204 298,934 ----------------------------------- Stockholders' equity Common stock........................................................ 654,819 622,945 Retained earnings................................................... 159,862 149,907 ----------------------------------- 814,681 772,852 ----------------------------------- $1,280,885 $1,071,786 =================================== Note to Balance Sheets - ---------------------- Long-term debt consisted of the following: Promissory notes, 6.3% - 7.1%, due in various years through 2012.... $ 96,000 $ 127,000 Promissory notes, 8.2% - 8.7%, due in various years through 2011.... 29,000 29,500 Promissory note, variable rate (6.325% at December 31, 1997) due 1999............................................................... 35,000 35,000 ----------------------------------- $ 160,000 $ 191,500 ===================================
As of December 31, 1997, HEI guaranteed its subsidiary and affiliate nonintercompany debt of $7 million. The aggregate payments of principal required on long-term debt and a loan from HEI Preferred Funding, LP subsequent to December 31, 1997 are $1 million in 1998, $41 million in 1999, $11 million in 2000, $23 million in 2001 and $5 million in 2002. 58 Hawaiian Electric Industries, Inc. SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME
Years ended December 31, ---------------------------------------------------- (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- REVENUES............................................ $ 2,468 $ 2,731 $ 2,923 Equity in income of subsidiaries.................... 99,093 93,488 89,198 ---------------------------------------------------- 101,561 96,219 92,121 ---------------------------------------------------- EXPENSES: Operating, administrative and general............... 7,661 8,639 7,543 Depreciation and amortization of property, plant and equipment.............................. 864 651 491 Taxes, other than income taxes...................... 300 325 282 ---------------------------------------------------- 8,825 9,615 8,316 ---------------------------------------------------- 92,736 86,604 83,805 Interest expense.................................... 22,822 18,103 17,922 ---------------------------------------------------- INCOME BEFORE INCOME TAX BENEFIT.................... 69,914 68,501 65,883 Income tax benefit.................................. 16,528 10,157 11,610 ---------------------------------------------------- NET INCOME.......................................... $ 86,442 $78,658 $77,493 ====================================================
59 Hawaiian Electric Industries, Inc. SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, ----------------------------------------------- (in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.......................................................... $ 86,442 $ 78,658 $ 77,493 Adjustments to reconcile net income to net cash provided by operating activities Equity in income of subsidiaries.................................. (99,093) (93,488) (89,198) Dividends/distributions received from subsidiaries................ 72,762 67,972 51,435 Depreciation and amortization of property, plant and equipment.... 864 651 491 Other amortization................................................ 183 288 239 Deferred income taxes and tax credits, net........................ (3,433) (9) (1,236) Changes in assets and liabilities Decrease in accounts receivable................................ 820 269 161 Increase (decrease) in accounts payable........................ (3,676) 79 (2,094) Changes in other assets and liabilities........................ (3,615) 711 1,880 ----------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES........................... 51,254 55,131 39,171 ----------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net decrease (increase) in advances to and notes receivable from subsidiaries....................................................... 14,996 121 (12,880) Capital expenditures................................................ (975) (1,401) (488) Additional investments in subsidiaries.............................. (203,703) (28,100) (39,610) ----------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES............................... (189,682) (29,380) (52,978) ----------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in notes payable to subsidiaries with original maturities of three months or less........................ 3,181 -- (2,293) Net increase in commercial paper.................................... 101,882 42,207 32,643 Proceeds from issuance of long-term debt............................ 19,000 10,000 30,000 Repayment of long-term debt......................................... (50,500) (42,000) (16,000) Loan from HEI Preferred Funding, LP................................. 103,000 -- -- Net proceeds from issuance of common stock.......................... 22,919 19,818 19,322 Common stock dividends.............................................. (61,799) (55,288) (49,415) ----------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................. 137,683 (25,263) 14,257 ----------------------------------------------- Net increase (decrease) in cash and equivalents..................... (745) 488 450 Cash and equivalents, beginning of year............................. 1,161 673 223 ----------------------------------------------- CASH AND EQUIVALENTS, END OF YEAR................................... $ 416 $ 1,161 $ 673 ===============================================
Supplemental disclosures of noncash activities: In 1997, 1996 and 1995, $1.0 million, $1.1 million and $1.3 million, respectively, of HEI advances to HEIDI were converted to equity in a noncash transaction. Common stock dividends reinvested by stockholders in HEI common stock in noncash transactions amounted to $15 million in 1997, $18 million in 1996 and $20 million in 1995. 60 Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc. SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------------------------------------------------------- Col. A Col. B Col. C Col. D Col. E - --------------------------------------------------------------------------------------------------------------------------------- (in thousands) Additions -------------------------------- Balance at beginning Charged to Balance at of costs and Charged to end of Description period expenses other accounts Deductions period - --------------------------------------------------------------------------------------------------------------------------------- 1997 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries................. $ 1,167 $ 2,850 $ 1,256 $ 3,988 $ 1,285 Other companies................... 1,433 653 -- 83 2,003 ------------- -------------- -------------- ------------- -------------- $ 2,600 $ 3,503 $ 1,256(a) $ 4,071(b) $ 3,288 ============= ============== ============== ============= ============== Allowance for uncollectible interest (ASB).................... $ 2,272 $ 2,166 $ -- $ -- $ 4,438 ============= ============== ============== ============= ============== Allowance for losses for loans receivable (ASB).................. $ 19,205 $ 6,934 $ 6,656(c) $ 2,845(b) $ 29,950 ============= ============== ============== ============= ============== 1996 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries................. $ 1,101 $ 2,591 $ 1,310 $ 3,835 $ 1,167 Other companies................... 642 846 7 62 1,433 ------------- -------------- -------------- ------------- -------------- $ 1,743 $ 3,437 $ 1,317(a) $ 3,897(b) $ 2,600 ============= ============== ============== ============= ============== Allowance for uncollectible interest (ASB).................... $ 1,273 $ 999 $ -- $ -- $ 2,272 ============= ============== ============== ============= ============== Allowance for losses for loans receivable (ASB).................. $ 12,916 $ 7,631 $ 106(a) $ 1,448(b) $ 19,205 ============= ============== ============== ============= ============== 1995 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries................. $ 1,136 $ 2,492 $ 1,266 $ 3,793 $ 1,101 Other companies................... 280 400 -- 38 642 ------------- -------------- -------------- ------------- -------------- $ 1,416 $ 2,892 $ 1,266(a) $ 3,831(b) $ 1,743 ============= ============== ============== ============= ============== Allowance for uncollectible interest (ASB).................... $ 1,101 $ 172 $ -- $ -- $ 1,273 ============= ============== ============== ============= ============== Allowance for losses for loans receivable (ASB).................. $ 8,793 $ 4,887 $ 392(a) $ 1,156(b) $ 12,916 ============= ============== ============== ============= ==============
(a) Primarily bad debts recovered. (b) Bad debts charged off. (c) Primarily related to loans receivable acquired from BoA. 61 INDEX TO EXHIBITS The exhibits designated by an asterisk (*) are filed herein. The exhibits not so designated are incorporated by reference to the indicated filing. A copy of any exhibit may be obtained upon written request for a $0.20 per page charge from the HEI Shareholder Services Division, P.O. Box 730, Honolulu, Hawaii 96808- 0730.
EXHIBIT NO. DESCRIPTION - ----------- ----------- HEI: - ---------------- 3(i).1 HEI's Restated Articles of Incorporation (Exhibit 4(b) to Registration No. 33-7895). 3(i).2 Articles of Amendment of HEI filed June 30, 1990 (Exhibit 4(b) to Registration No. 33-40813). *3(i).3 Statement of Issuance of Shares of Preferred or Special Classes in Series for HEI Series A Junior Participating Preferred Stock filed October 28, 1997. 3(ii) HEI's Restated By-Laws (Exhibit 3(ii) to Form 10-Q for the quarter ended September 30, 1997). 4.1 Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HEI and its subsidiaries (Exhibit 4.1 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8503). 4.2 Rights Agreement, dated as of October 28, 1997, between HEI and Continental Stock Transfer & Trust Company, as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificates (Exhibit 1 to HEI's Form 8-A, dated October 28, 1997, File No. 1-8503). 4.3 Indenture, dated as of October 15, 1988, between HEI and Citibank, N.A., as Trustee (Exhibit 4 to Registration No. 33-25216). 4.4 First Supplemental Indenture dated as of June 1, 1993 between HEI and Citibank, N.A., as Trustee, to Indenture dated as of October 15, 1988 between HEI and Citibank, N.A., as Trustee (Exhibit 4(a) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-8503). 4.5 Pricing Supplements Nos. 1 through 9 to the Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed in connection with the sale of Medium-Term Notes, Series B (Exhibit 4(b) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-8503). 4.5(a) Pricing Supplement No. 10 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed in connection with the sale of Medium-Term Notes, Series B (Exhibit 4.7 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-8503). 4.5(b) Pricing Supplement No. 11 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on December 1, 1995 in connection with the sale of Medium-Term Notes, Series B (Exhibit 4.8 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-8503). 4.5(c) Pricing Supplement No. 12 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 12, 1996 in connection with the sale of Medium-Term Notes, Series B (Exhibit 4.9 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-8503).
62
EXHIBIT NO. DESCRIPTION - ----------- ----------- 4.5(d) Pricing Supplements Nos. 13 through 14 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on September 26, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(e) Pricing Supplement No. 15 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on September 29, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(f) Pricing Supplement No. 16 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on September 30, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(g) Pricing Supplement No. 17 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on October 2, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(h) Pricing Supplement No. 18 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 5, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(i) Pricing Supplement No. 19 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 6, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(j) Pricing Supplement No. 20 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 6, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(k) Pricing Supplement No. 21 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 12, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.6 Purchase Agreement dated March 7, 1991 among HEI and the Purchasers named therein, together with the Notes issued to such Purchasers, each dated March 7, 1991, pursuant to the Purchase Agreement (Exhibit 4.5 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 4.7 Composite conformed copy of the Note Purchase Agreement dated as of December 16, 1991 among HEI and the Purchasers named therein (Exhibit 4.6 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8503). 4.8 Amended and Restated Agreement of Limited Partnership of the Partnership dated as of February 1, 1997 (Exhibit 4(e) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.9 Amended and Restated Trust Agreement of Hawaiian Electric Industries Capital Trust I (HEI Trust I) dated as of February 1, 1997 (Exhibit 4(f) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.10 Junior Indenture between HEI and The Bank of New York, as Trustee, dated as of February 1, 1997 (Exhibit 4(i) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503).
63
EXHIBIT NO. DESCRIPTION - ----------- ----------- 4.11 Officers' Certificate in connection with issuance of 8.36% Junior Subordinated Debenture, Series A, Due 2017 under Junior Indenture of HEI (Exhibit 4(l) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.12 8.36% Trust Originated Preferred Security (Liquidation Amount $25 Per Trust Preferred Security) of HEI Trust I (Exhibit 4(m) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.13 8.36% Junior Subordinated Debenture Series A, Due 2017, of HEI (Exhibit 4(n) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.14 Trust Preferred Securities Guarantee Agreement with respect to HEI Trust I dated as of February 1, 1997 (Exhibit 4(o) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.15 Partnership Guarantee Agreement with respect to the Partnership dated as of February 1, 1997 (Exhibit 4(p) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.16 Affiliate Investment Instruments Guarantee Agreement with respect to 8.36% Junior Subordinated Debenture of HEIDI dated as of February 1, 1997 (Exhibit 4(q) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.17 Certificate Evidencing Trust Common Securities of HEI Trust I dated February 4, 1997 (Exhibit 4.12 to the Quarterly Report on Form 10-Q of HEI Trust I and the Partnership, File No. 1-8503-02, for the quarter ended March 31, 1997). 4.18 Certificate Evidencing Partnership Preferred Securities of the Partnership dated February 4, 1997 (Exhibit 4.13 to the Quarterly Report on Form 10-Q of HEI Trust I and the Partnership, File No. 1-8503-02, for the quarter ended March 31, 1997). 10.1 PUC Order Nos. 7070, 7153, 7203 and 7256 in Docket No. 4337, including copy of "Conditions for the Merger and Corporate Restructuring of Hawaiian Electric Company, Inc." dated September 23, 1982 (Exhibit 10 to Amendment No. 1 to Form U-1). 10.2 Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988, between HEI, HEIDI and the Federal Savings and Loan Insurance Corporation (by the Federal Home Loan Bank of Seattle) (Exhibit (28)-2 to HEI's Current Report on Form 8-K dated May 26, 1988, File No. 1-8503). 10.2(a) OTS letter regarding release from Part II.B. of the Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988 (Exhibit 10.3(a) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8503). 10.3 Executive Incentive Compensation Plan (Exhibit 10(a) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, File No. 1-8503). 10.4 HEI Executives' Deferred Compensation Plan (Exhibit 10.5 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 10.5 1987 Stock Option and Incentive Plan of HEI as amended and restated effective February 20, 1996 (Exhibit A to Proxy Statement of HEI, dated March 8, 1996, for the Annual Meeting of Stockholders, File No. 1-8503).
64
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.6 HEI Long-Term Incentive Plan (Exhibit 10.11 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-8503). 10.7 HEI Supplemental Executive Retirement Plan effective January 1, 1990 (Exhibit 10.9 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 10.8 HEI Excess Benefit Plan (Exhibit 10.13 (Exhibit A) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.9 Change-in-Control Agreement (Exhibit 10.14 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.10 Nonemployee Director Retirement Plan, effective as of October 1, 1989 (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.11 HEI 1990 Nonemployee Director Stock Plan (Exhibit 10(a) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-8503). 10.12 HEI Nonemployee Directors' Deferred Compensation Plan (Exhibit 10.14 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 10.13 HEI and HECO Executives' Deferred Compensation Agreement. The agreement pertains to and is substantially identical for all the HEI and HECO executive officers (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8503). 10.14 Settlement Agreement and General Release made and entered into on February 10, 1994, by and between the Insurance Commissioner as Rehabilitator/Liquidator, HIG and its subsidiaries, the Hawaii Insurance Guaranty Association, HEI, HEIDI and others. (Exhibit 10.20 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-8503). *11 Computation of Earnings per Share of Common Stock. Filed herein as page 71. *12.1 Computation of Ratio of Earnings to Fixed Charges. Filed herein as pages 72 and 73. 13 Pages 25 to 66 of HEI's 1997 Annual Report to Stockholders (with the exception of the data incorporated by reference in Part I, Part II, Part III and Part IV, no other data appearing in the 1997 Annual Report to Stockholders is to be deemed filed as part of this Form 10-K Annual Report) (HEI Exhibit 13.1 to HEI's Current Report on Form 8-K dated February 27, 1998, File No. 1-8503). *21.1 Subsidiaries of HEI. Filed herein as page 75. *23 Accountants' Consent. Filed herein as page 77. *27.1 HEI and subsidiaries financial data schedule, December 31, 1997 and year ended December 31, 1997. *27.1(a) HEI and subsidiaries restated financial data schedule, December 31, 1996 and year ended December 31, 1996. *27.1(b) HEI and subsidiaries restated financial data schedule, December 31, 1995 and year ended December 31, 1995.
65
EXHIBIT NO. DESCRIPTION - ----------- ----------- *99.1 HEI Dividend Reinvestment and Stock Purchase Plan (as amended through February 2, 1998). *99.2 Eighth Amendment to Trust Agreement, made and entered into on February 27, 1998, Between Fidelity Management Trust Company and HEI for the Hawaiian Electric Industries Retirement Savings Plan for incorporation by reference in the Registration Statement on Form S-8 (Regis. No. 333-02103). HECO: - ---------------- 3(i).1 HECO's Certificate of Amendment of Articles of Incorporation (filed June 30, 1987) (Exhibit 3.1 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 3(i).2 Statement of Issuance of Shares of Preferred or Special Classes in Series for HECO Series R Preferred Stock filed December 15, 1989 (Exhibit 3.1(a) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 3(i).3 Articles of Amendment to HECO's Amended Articles of Incorporation filed December 21, 1989 (Exhibit 3.1(b) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No 1-4955). 3(ii) HECO's By-Laws (Exhibit 3.2 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 4.1 Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HECO, HELCO and MECO (Exhibit 4 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 4.2 Indenture dated as of December 1, 1993 between HECO and The Bank of New York, as Trustee (Exhibit 4(a) to Registration No. 33-51025). 4.3 Indenture dated as of December 1, 1993 among MECO, HECO, as guarantor, and The Bank of New York, as Trustee (Exhibit 4(b) to Registration No. 33-51025). 4.4 Indenture dated as of December 1, 1993 among HELCO, HECO, as guarantor, and The Bank of New York, as Trustee (Exhibit 4(c) to Registration No. 33-51025). 4.5 Officers' Certificate dated as of December 22, 1993, pursuant to Sections 102 and 301 of the Indenture dated as of December 1, 1993 between HECO and The Bank of New York, as Trustee, establishing the $30,000,000 Notes, 5.83% Series Due 1998 (Exhibit 4.6 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-4955). 4.6 Amended and Restated Trust Agreement of HECO Capital Trust I (HECO Trust I) dated as of March 1, 1997 (Exhibit 4(c) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.7 HECO Junior Indenture with The Bank of New York, as Trustee, dated as of March 1, 1997 (Exhibit 4(d) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.8 8.05% Cumulative Quarterly Income Preferred Security (liquidation preference $25 per preferred security) of HECO Trust I (Exhibit 4(e) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955).
66
EXHIBIT NO. DESCRIPTION - ----------- ----------- 4.9 8.05% Junior Subordinated Deferrable Interest Debenture, Series 1997 of HECO (Exhibit 4(f) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.10 Trust Guarantee Agreement with respect to HECO Trust I dated as of March 1, 1997 (Exhibit 4(g) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.11 MECO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of March 1, 1997 (with the form of MECO's 8.05% Junior Subordinated Deferrable Interest Debenture, Series 1997 included as Exhibit A) (Exhibit 4(h)-1 to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.12 HELCO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of March 1, 1997 (with the form of HELCO's 8.05% Junior Subordinated Deferrable Interest Debenture, Series 1997 included as Exhibit A) (Exhibit 4(h)-2 to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.13 Agreement as to Expenses and Liabilities among HECO Trust I, HECO, MECO and HELCO (Exhibit 4(i) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 10.1 Power Purchase Agreement between Kalaeloa Partners, L.P., and HECO dated October 14, 1988 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, File No. 1-4955). 10.1(a) Amendment No. 1 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated June 15, 1989 (Exhibit 10(c) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.1(b) Lease Agreement between Kalaeloa Partners, L.P., as Lessor, and HECO, as Lessee, dated February 27, 1989 (Exhibit 10(d) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.1(c) Restated and Amended Amendment No. 2 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated February 9, 1990 (Exhibit 10.2(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 10.1(d) Amendment No. 3 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated December 10, 1991 (Exhibit 10.2(e) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-4955). 10.2 Power Purchase Agreement between AES Barbers Point, Inc. and HECO, entered into on March 25, 1988 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1988, File No. 1-4955). 10.2(a) Agreement between HECO and AES Barbers Point, Inc., pursuant to letters dated May 10, 1988 and April 20, 1988 (Exhibit 10.4 to HECO's Annual Report on Form 10-K for fiscal year ended December 31, 1988, File No. 1-4955). 10.2(b) Amendment No. 1, entered into as of August 28, 1988, to Power Purchase Agreement between AES Barbers Point, Inc. and HECO (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, File No. 1-4955).
67
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.2(c) HECO's Conditional Notice of Acceptance to AES Barbers Point, Inc. dated January 15, 1990 (Exhibit 10.3(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 10.3 Amended and Restated Power Purchase Agreement between Hilo Coast Processing Company and HELCO dated March 24, 1995 (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, File No. 1-4955). 10.4 Agreement between MECO and Hawaiian Commercial & Sugar Company pursuant to letters dated November 29, 1988 and November 1, 1988 (Exhibit 10.8 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 10.4(a) Amended and Restated Power Purchase Agreement by and between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 30, 1989 (Exhibit 10(e) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-4955). 10.4(b) First Amendment to Amended and Restated Power Purchase Agreement by and between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 1, 1990, amending the Amended and Restated Power Purchase Agreement dated November 30, 1989 (Exhibit 10(f) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-4955). *10.4(c) Letter agreement dated December 11, 1997 to Extend Term of Amended and Restated Power Purchase Agreement Between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO dated November 30, 1989, as Amended on November 1, 1990. 10.5 Purchase Power Contract between HELCO and Thermal Power Company dated March 24, 1986 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.5(a) Firm Capacity Amendment between HELCO and Puna Geothermal Venture (assignee of AMOR VIII, who is the assignee of Thermal Power Company) dated July 28, 1989 to Purchase Power Contract between HELCO and Thermal Power Company dated March 24, 1986 (Exhibit 10(b) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). *10.5(b) Amendment made in October 1993 to Purchase Power Contract between HELCO and Puna Geothermal Venture dated March 24, 1986, as amended. *10.5(c) Third Amendment dated March 7, 1995 to the Purchase Power Contract between HELCO and Puna Geothermal Venture dated March 24, 1986, as amended. 10.5(d) Performance Agreement and Fourth Amendment dated February 12, 1996 to the Purchase Power Contract between HELCO and Puna Geothermal Venture dated March 24, 1986, as amended (Exhibit 10.5(b) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4955). 10.6 Purchase Power Contract between HECO and the City and County of Honolulu dated March 10, 1986 (Exhibit 10.9 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955).
68
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.6(a) Firm Capacity Amendment, dated April 8, 1991, to Purchase Power Contract, dated March 10, 1986, by and between HECO and the City & County of Honolulu (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991, File No. 1-4955). *10.6(b) Amendment No. 2 to Purchase Power Contract Between HECO and City and County of Honolulu dated March 10, 1986. *10.7 Power Purchase Agreement between Encogen Hawaii, L.P. and HELCO dated October 22, 1997. The following attachments were omitted from Exhibit no. 10.7: Attachment C, "Selected portions of the North American Electric Reliability Council Generating Availability Data System Data Reporting Instructions dated October 1996" and Attachment E, "Form of the Interconnection Agreement between Encogen Hawaii, L.P. and HELCO" - provided in final form as Exhibit 10.7(a). *10.7(a) Interconnection Agreement between Encogen Hawaii, L.P. and HELCO dated October 22, 1997. *10.8 Low Sulfur Fuel Oil Supply Contract by and between Chevron and HECO dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit). *10.9 Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between Chevron and HECO, MECO, HELCO, HTB and YB dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit). *10.10 Facilities and Operating Contract by and between Chevron and HECO dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit). *10.11 Low Sulfur Fuel Oil Supply Contract by and between BHP and HECO dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit). *10.12 Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between BHP and HECO, MECO and HELCO dated November 14, 1997 (confidential treatment has been requested for portions of this exhibit). 10.13 Contract of private carriage by and between HITI and HELCO dated November 10, 1993 (Exhibit 10.13 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-4955). *10.13(a) Extension, dated December 1, 1997, of the contract of private carriage by and between HITI and HELCO dated November 10, 1993. 10.14 Contract of private carriage by and between HITI and MECO dated November 12, 1993 (Exhibit 10.14 to HECO's Annual Report on Form 10-K for the fiscal year ended December 1, 1993, File No. 1-4955). *10.14(a) Extension, dated December 1, 1997, of the contract of private carriage by and between HITI and MECO dated November 12, 1993. 10.15 HECO Nonemployee Directors' Deferred Compensation Plan (Exhibit 10.16 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4955).
69
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.16 HEI and HECO Executives' Deferred Compensation Agreement. The agreement pertains to and is substantially identical for all the HEI and HECO executive officers (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8503). 11 Computation of Earnings Per Share of Common Stock. See note on page 2 of HECO's 1997 Annual Report to Stockholder attached as HECO Exhibit 13 hereto. *12.2 Computation of Ratio of Earnings to Fixed Charges. Filed herein as page 74. 13 Pages 2 to 34 and 36 of HECO's 1997 Annual Report to Stockholder (with the exception of the data incorporated by reference in Part I, Part II, Part III and Part IV, no other data appearing in the 1997 Annual Report to Stockholder is to be deemed filed as part of this Form 10-K Annual Report) (HECO Exhibit 13.2 to HECO's Current Report on Form 8-K dated February 27, 1998, File No. 1-4955). *21.2 Subsidiaries of HECO. Filed herein as page 76. *27.2 HECO and subsidiaries financial data schedule, December 31, 1997 and year ended December 31, 1997. *99.2 Reconciliation of electric utility operating income per HEI and HECO Consolidated Statements of Income. Filed herein as page 78.
70 HEI Exhibit 11 Hawaiian Electric Industries, Inc. COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK Years ended December 31, 1997, 1996, 1995, 1994 and 1993
(in thousands, except per share amounts) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) Continuing operations....... $86,442 $78,658 $77,493 $73,030 $ 61,684 Discontinued operations..... -- -- -- -- (13,025) --------------- --------------- --------------- --------------- ---------------- $86,442 $78,658 $77,493 $73,030 $ 48,659 =============== =============== =============== =============== ================ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.. 31,375 30,310 29,187 28,137 25,938 =============== =============== =============== =============== ================ ADJUSTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................ 31,470 30,388 29,248 28,193 25,989 =============== =============== =============== =============== ================ BASIC EARNINGS (LOSS) PER COMMON SHARE Continuing operations....... $ 2.76 $ 2.60 $ 2.66 $ 2.60 $ 2.38 Discontinued operations..... -- -- -- -- (0.50) --------------- --------------- --------------- --------------- ---------------- $ 2.76 $ 2.60 $ 2.66 $ 2.60 $ 1.88 =============== =============== =============== =============== ================ DILUTED EARNINGS (LOSS) PER COMMON SHARE Continuing operations....... $ 2.75 $ 2.59 $ 2.65 $ 2.59 $ 2.37 Discontinued operations..... -- -- -- -- (0.50) --------------- --------------- --------------- --------------- ---------------- $ 2.75 $ 2.59 $ 2.65 $ 2.59 $ 1.87 =============== =============== =============== =============== ================
71 HEI Exhibit 12.1 (page 1 of 2) Hawaiian Electric Industries, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1997, 1996, 1995, 1994 and 1993
1997 1996 1995 ------------------------ ------------------------- ------------------------ (dollars in thousands) (1) (2) (1) (2) (1) (2) - ------------------------------------------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges The Company (3)................. $140,422 $229,521 $129,647 $220,811 $117,494 $206,790 Proportionate share of fifty-percent-owned persons.... 569 569 751 751 867 867 Interest component of rentals.... 2,973 2,973 3,583 3,583 3,857 3,857 Pretax preferred stock dividend requirements of subsidiaries.... 9,986 9,986 10,731 10,731 11,433 11,433 Preferred securities distributions of trust subsidiaries.................... 10,600 10,600 -- -- -- -- -------- -------- -------- -------- -------- -------- TOTAL FIXED CHARGES.............. $164,550 $253,649 $144,712 $235,876 $133,651 $222,947 ======== ======== ======== ======== ======== ======== EARNINGS Pretax income from continuing operations...................... $141,783 $141,783 $133,488 $133,488 $133,233 $133,233 Fixed charges, as shown.......... 164,550 253,649 144,712 235,876 133,651 222,947 Interest capitalized The Company..................... (6,442) (6,442) (7,177) (7,177) (6,337) (6,337) Proportionate share of fifty-percent-owned persons.... (128) (128) (746) (746) (867) (867) -------- -------- -------- -------- -------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES......................... $299,763 $388,862 $270,277 $361,441 $259,680 $348,976 ======== ======== ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES......................... 1.82 1.53 1.87 1.53 1.94 1.57 ======== ======== ======== ======== ======== ========
(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. 72 HEI Exhibit 12.1 (page 2 of 2) Hawaiian Electric Industries, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1997, 1996, 1995, 1994 and 1993--Continued
1994 1993 -------------------------- -------------------------- (dollars in thousands) (1) (2) (1) (2) - -------------------------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges The Company (3)...................... $ 82,306 $158,815 $ 68,254 $145,905 Proportionate share of fifty-percent-owned persons......... 539 539 564 564 Interest component of rentals......... 3,819 3,819 3,944 3,944 Pretax preferred stock dividend requirements of subsidiaries......... 11,899 11,899 11,018 11,018 ------------ ------------- ------------- ------------- TOTAL FIXED CHARGES................... $ 98,563 $175,072 $ 83,780 $161,431 ============ ============= ============= ============= EARNINGS Pretax income from continuing operations........................... $126,049 $126,049 $108,770 $108,770 Fixed charges, as shown............... 98,563 175,072 83,780 161,431 Interest capitalized The Company.......................... (4,924) (4,924) (3,881) (3,881) Proportionate share of fifty-percent-owned persons......... (539) (539) (408) (408) ------------ ------------- ------------- ------------- EARNINGS AVAILABLE FOR FIXED CHARGES.. $219,149 $295,658 $188,261 $265,912 ============ ============= ============= ============= RATIO OF EARNINGS TO FIXED CHARGES.... 2.22 1.69 2.25 1.65 ============ ============= ============= =============
(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. 73 HECO Exhibit 12.2 Hawaiian Electric Company, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1997, 1996, 1995, 1994 and 1993
(dollars in thousands) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges................ $ 48,778 $ 47,451 $ 44,377 $ 37,340 $ 35,287 Interest component of rentals......... 757 690 672 808 970 Pretax preferred stock dividend requirements of subsidiaries......... 4,150 4,358 4,494 4,651 3,425 Preferred securities distributions of trust subsidiary..................... 3,052 -- -- -- -- ------------------------------------------------------------------------------- TOTAL FIXED CHARGES................... $ 56,737 $ 52,499 $ 49,543 $ 42,799 $ 39,682 =============================================================================== EARNINGS Income before preferred stock dividends of HECO.................... $ 81,849 $ 85,213 $ 77,023 $ 65,961 $ 56,126 Fixed charges, as shown............... 56,737 52,499 49,543 42,799 39,682 Income taxes (see note below)......... 52,535 55,888 50,198 43,588 36,897 Allowance for borrowed funds used during construction.................. (6,190) (5,862) (5,112) (4,043) (3,869) ------------------------------------------------------------------------------- EARNINGS AVAILABLE FOR FIXED CHARGES.. $184,931 $187,738 $171,652 $148,305 $128,836 =============================================================================== RATIO OF EARNINGS TO FIXED CHARGES.... 3.26 3.58 3.46 3.47 3.25 =============================================================================== Note: Income taxes is comprised of the following: Income tax expense relating to operating income for regulatory purposes............................ $ 52,795 $ 56,170 $ 50,719 $ 43,820 $ 37,007 Income tax benefit relating to nonoperating loss................... (260) (282) (521) (232) (110) ------------------------------------------------------------------------------- $ 52,535 $ 55,888 $ 50,198 $ 43,588 $ 36,897 ===============================================================================
74 HEI Exhibit 21.1 Hawaiian Electric Industries, Inc. SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiaries of the registrant as of March 17, 1998:
State of incorporation or Name organization - ------------------------------------------------------------------------------------------------------ Hawaiian Electric Company, Inc., including subsidiaries Maui Electric Company, Limited, Hawaii Electric Light Company, Inc. and HECO Hawaii Capital Trust I....................................................... HEI Investment Corp.................................................... Hawaii Malama Pacific Corp., including subsidiaries Malama Waterfront Corp., Malama Property Investment Corp., Malama Development Corp., Malama Realty Corp., Malama Elua Corp., TMG Service Corp., Malama Hoaloha Corp., Malama Mohala Corp. and Baldwin*Malama (a limited partnership in which Malama Development Corp. is the sole general partner)............................................................ Hawaii Hawaiian Tug & Barge Corp., including subsidiary Young Brothers, Limited............................................................... Hawaii HEI Diversified, Inc., including subsidiary HEIDI Real Estate Corp. Hawaii (except American and American Savings Bank, F.S.B. and its subsidiaries, American Savings Bank, F.S.B., which Savings Investment Services Corp., ASB Service Corporation, is federally chartered) AdCommunications, Inc. and American Savings Mortgage Co., Inc. Pacific Energy Conservation Services, Inc.............................. Hawaii HEI Power Corp., including subsidiary HEI Power Corp. Guam and Cayman Islands subsidiary, HEI Power Corp. International and its Cayman Islands subsidiaries, HEIPC Cambodia Ventures, HEIPC Phnom Penh Power (Limited), LLC, HEIPC Phnom Penh Power (General), LLC, HEIPC Philippine Ventures, HEIPC Philippine Development, LLC, HEIPC Lake Mainit Power, LLC, HEIPC Bulacan I and HEIPC Bulacan II and its Hawaii, unless otherwise Republic of Mauritius subsidiary, HEI Power Corp. China............... noted Hycap Management, Inc., including subsidiary HEI Preferred Funding, LP (a limited partnership in which Hycap Management, Inc. is the sole general partner)...................................................... Delaware Hawaiian Electric Industries Capital Trust I (a business trust)........ Delaware Hawaiian Electric Industries Capital Trust II (a business trust)....... Delaware Hawaiian Electric Industries Capital Trust III (a business trust)...... Delaware
75 HECO Exhibit 21.2 Hawaiian Electric Company, Inc. SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiaries of the registrant as of March 17, 1998:
Name State of incorporation - ------------------------------------------------------------------------------------------------------ Maui Electric Company, Limited......................................... Hawaii Hawaii Electric Light Company, Inc..................................... Hawaii HECO Capital Trust I (a business trust)................................ Delaware
76 [KPMG Peat Marwick letterhead] HEI Exhibit 23 Accountants' Consent -------------------- The Board of Directors Hawaiian Electric Industries, Inc.: We consent to incorporation by reference in Registration Statement Nos. 33- 56561, 33-58820 and 333-18809 on Form S-3 and in Registration Statement Nos. 33- 65234, 333-05667 and 333-02103 on Form S-8 of Hawaiian Electric Industries, Inc., and in Registration Statement Nos. 333-18809-01, 333-18809-02, 333-18809- 03 and 333-18809-04 on Form S-3 of Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III and HEI Preferred Funding, LP of our report dated January 19, 1998, relating to the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, retained earnings and cash flows for each of the years in the three-year period ended December 31, 1997, which report is incorporated by reference in the 1997 annual report on Form 10-K of Hawaiian Electric Industries, Inc. We also consent to incorporation by reference of our report dated January 19, 1998 relating to the financial statement schedules of Hawaiian Electric Industries, Inc. in the aforementioned 1997 annual report on Form 10-K, which report is included in said Form 10-K. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii March 17, 1998 77 HECO Exhibit 99.2 Hawaiian Electric Company, Inc. RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, ----------------------------------------------------- (in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- Operating income from regulated and nonregulated activities before income taxes (per HEI Consolidated Statements of Income).................................... $171,753 $173,613 $159,043 Deduct: Income taxes on regulated activities..................... (52,795) (56,170) (50,719) Revenues from nonregulated activities.................... (8,768) (9,442) (6,732) Add: Expenses from nonregulated activities.................... 850 790 1,130 ----------------------------------------------------- Operating income from regulated activities after income taxes (per HECO Consolidated Statements of Income)....... $111,040 $108,791 $102,722 =====================================================
78 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signatures of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof. HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC. (Registrant) (Registrant) By /s/ Robert F. Mougeot By /s/ Paul Oyer ------------------------------------- ----------------------------- Robert F. Mougeot Paul A. Oyer Financial Vice President and Financial Vice President and Chief Financial Officer of HEI Treasurer of HECO (Principal Financial Officer of HEI) (Principal Financial Officer of HECO) Date: March 26, 1998 Date: March 26, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities indicated on March 26, 1998. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named companies and any subsidiaries thereof.
SIGNATURE TITLE - ---------------------------------------- ------------------------------------------- /s/ Robert F. Clarke President and Director of HEI - ---------------------------------------- Chairman of the Board of Directors of HECO Robert F. Clarke (Chief Executive Officer of HEI) /s/ T. Michael May Senior Vice President and Director of HEI - ---------------------------------------- President and Director of HECO T. Michael May (Chief Executive Officer of HECO) /s/ Robert F. Mougeot Financial Vice President and - ---------------------------------------- Chief Financial Officer of HEI Robert F. Mougeot (Principal Financial Officer of HEI) /s/ Curtis Y. Harada Controller of HEI - ---------------------------------------- (Principal Accounting Officer of HEI) Curtis Y. Harada /s/ Paul Oyer Financial Vice President, Treasurer and - ---------------------------------------- Director of HECO Paul A. Oyer (Principal Financial Officer of HECO)
79 SIGNATURES (CONTINUED)
SIGNATURE TITLE - ---------------------------------------- ------------------------------------------- /s/ Ernest T. Shiraki Controller of HECO - ---------------------------------------- (Principal Accounting Officer of HECO) Ernest T. Shiraki Director of HEI - ---------------------------------------- Don E. Carroll /s/ Edwin L. Carter Director of HEI and HECO - ---------------------------------------- Edwin L. Carter /s/ Richard Henderson Director of HEI and HECO - ---------------------------------------- Richard Henderson /s/ Victor Hao Li Director of HEI - ---------------------------------------- Victor Hao Li /s/ Bill D. Mills Director of HEI - ---------------------------------------- Bill D. Mills /s/ A. Maurice Myers Director of HEI - ---------------------------------------- A. Maurice Myers
80 SIGNATURES (CONTINUED)
SIGNATURE TITLE - ---------------------------------------- ------------------------------------------- /s/ Diane J. Plotts Director of HEI and HECO - ---------------------------------------- Diane J. Plotts /s/ James K. Scott Director of HEI - ---------------------------------------- James K. Scott /s/ Oswald K. Stender Director of HEI - ---------------------------------------- Oswald K. Stender /s/ Anne M. Takabuki Director of HECO - ---------------------------------------- Anne M. Takabuki /s/ Kelvin H. Taketa Director of HEI - ---------------------------------------- Kelvin H. Taketa /s/ Jeffrey N. Watanabe Director of HEI - ---------------------------------------- Jeffrey N. Watanabe /s/ Paul C. Yuen Director of HECO - ---------------------------------------- Paul C. Yuen
81 EX-3.(I)3 2 STATEMENT OF ISSUANCE OF SHARES HEI Exhibit 3(i).3 ------------------ Filing Fee - $50.00 DOMESTIC PROFIT Dishonored Check - $15.00 Fee Plus Interest Charges STATE OF HAWAII DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS BUSINESS REGISTRATION DIVISION 1010 Richards Street Mailing Address: P.O. Box 40, Honolulu, HI 96810 STATEMENT OF ISSUANCE OF SHARES OF PREFERRED OR SPECIAL CLASSES IN SERIES (SECTION 415-16, HAWAII REVISED STATUTES) The undersigned, duly authorized officers of the corporation submitting this Statement, certify as follows: 1. The name of the corporation is: HAWAIIAN ELECTRIC INDUSTRIES, INC. -------------------------------------------------------------------------- 2. A copy of the resolution establishing and designating the series, and fixing and determining the relative rights and preferences of the new shares is attached. 3. The resolution was adopted on: October 28, 1997 ------------------- (Month Day Year) 4. The resolution was adopted by the Board of Directors. We certify under the penalties of Section 415-136, Hawaii Revised Statutes, that we have read the above statements, and that the same are true and correct. Witness our hands this 28th day of October , 1997. -------- ----------- -- /s/ Robert F. Clarke /s/ Robert F. Mougeot --------------------- ---------------------- Robert F. Clarke Robert F. Mougeot President Financial Vice President RESOLUTION OF THE BOARD OF DIRECTORS OF HAWAIIAN ELECTRIC INDUSTRIES, INC. Authorizing an Issue of Series A Junior Participating Preferred Stock Adopted - October 28, 1997 ------- ---------------- WHEREAS, Hawaiian Electric Industries, Inc. (the "corporation") has an authorized capital stock of one hundred million (100,000,000) shares of Common Stock without par value and ten million (10,000,000) shares of Preferred Stock without par value, of which 31,693,971 shares of Common Stock were issued and outstanding as of September 30, 1997 and no shares of Preferred Stock were issued and outstanding as of the date hereof; and WHEREAS, the corporation acting through its Board of Directors has power under law and its Restated Articles of Incorporation, as amended, to issue its authorized Preferred Stock in one or more series having such terms, preferences, voting powers, restrictions and qualifications as shall be fixed in the resolutions authorizing each such series; and WHEREAS, it is deemed advisable that the corporation authorize a series of 500,000 shares of Preferred Stock, without par value, designated as the corporation's Series A Junior Participating Preferred Stock and having the preferences, voting powers, restrictions and qualifications thereof hereinafter set forth. NOW, THEREFORE, BE IT RESOLVED, that pursuant to the authority vested in the Board of Directors of this corporation in accordance with the provisions of its Restated Articles of Incorporation, as amended, and by law, a series of Preferred Stock of the corporation be and it hereby is created, and that the designation and 1 amount thereof and the terms, voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be ---------------------- designated as "Series A Junior Participating Preferred Stock" and the number of shares constituting such series shall be 500,000. Section 2. Dividends and Distributions. --------------------------- (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock hereafter created which ranks prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the tenth (10th) day of December, March, June and September in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $61.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all noncash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, of the corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the corporation shall at any time after October 28, 1997 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of 2 Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in Paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $61.00 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A 3 Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a sharebyshare basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Junior ------------- Participating Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the corporation. In the event the corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the corporation. (C) (i) If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends 4 thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Series A Junior Participating Preferred Stock with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class together with holders of Preferred Stock who, by the terms thereof, are then entitled to vote thereon, irrespective of series, shall have the right to elect two (2) directors, which directors shall be in addition to the number of directors otherwise then provided for. Such right to elect two directors is in addition to the voting rights afforded holders of Series A Junior Participating Preferred Stock set forth in Section 3(B) above. (ii) During any default period, such voting right of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of directors shall be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) directors or, if such right is exercised at an annual meeting, to elect two (2) directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of directors as shall 5 be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect directors in any default period and during the continuance of such period, the number of directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Junior ---- ----- Participating Preferred Stock. (iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a VicePresident or the Secretary of the corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this Paragraph (C)(iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this Paragraph (C)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders. (iv) In any default period, the holders of Common Stock, and other classes of stock of the corporation if applicable, shall continue to be entitled to elect the whole number of directors until the holders of Preferred Stock shall have exercised their right to elect two (2) directors voting as a class, after the exercise 6 of which right (x) the directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in Paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the remaining directors theretofore elected by the holders of the class of stock which elected the director whose office shall have become vacant. References in this Paragraph (C) to directors elected by the holders of a particular class of stock shall include directors elected by such directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect directors shall cease, (y) the term of any directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of directors shall be such number as may be provided for in the certificate of incorporation or bylaws irrespective of any increase made pursuant to the provisions of Paragraph (C)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or bylaws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining directors. (D) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. -------------------- (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not de- 7 clared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the 8 Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The corporation shall not permit any subsidiary of the corporation to purchase or otherwise acquire for consideration any shares of stock of the corporation unless the corporation could, under Paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Junior Participating ----------------- Preferred Stock purchased or otherwise acquired by the corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. -------------------------------------- (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received an amount equal to $100 per share of Series A Participating Preferred Stock, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of 9 shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively (together with payment of the full amounts due in respect of any series of Preferred Stock which ranks on a parity with the Series A Junior Participating Preferred Stock), and without limitation on the amounts due to any holders of any series of Preferred Stock which ranks on a parity with the Series A Junior Participating Preferred Stock, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or 10 (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the corporation shall enter -------------------------- into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Junior Participating ------------- Preferred Stock shall not be redeemable. Section 9. Ranking. The Series A Junior Participating Preferred Stock shall ------- rank junior to all other series of the corporation's Preferred Stock as to the 11 payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 10. Amendment. At any time when any shares of Series A Junior --------- Participating Preferred Stock are outstanding, neither the Restated Articles of Incorporation of the corporation nor the Statement of Issuance of Shares of Preferred or Special Classes in Series shall be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class. Section 11. Fractional Shares. Series A Junior Participating Preferred Stock ----------------- may be issued in fractions of a share which are integral multiples of one one- hundredth of a share of Preferred Stock, which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock. FURTHER RESOLVED, that any two officers of the corporation be, and they hereby are, authorized and directed to execute and file with the Department of Commerce and Consumer Affairs of the State of Hawaii a "Statement of Issuance of Shares of Preferred or Special Classes in Series," to which this resolution shall be annexed. 12 EX-10.4(C) 3 LETTER AGREEMENT DATED DECEMBER 11, 1997 HECO Exhibit 10.4(c) -------------------- [ Maui Electric Company, Ltd. letterhead ] December 11, 1997 Mr. Steve Holaday Hawaiian Commercial & Sugar Company P. O. Box 266 Puunene, HI 96784 Dear Mr. Holaday: Re: Agreement to Extend Term of Amended and Restated Power Purchase Agreement Between A&B Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and Maui Electric Company, Limited, dated November 30, 1989, as Amended on November 1, 1990 This will confirm and document the Agreement between A&B Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company ("HC&S") and Maui Electric Company, Limited ("MECO") to extend the term of the Amended and Restated Power Purchase Agreement Between HC&S and MECO (the "Power Purchase Agreement") as follows: 1. The Power Purchase Agreement shall remain in full force and effect through December 31, 2000, and from year to year thereafter; subject to termination on or after January 1, 2001, on not less than two (2) years' prior written notice by either party. 2. All other terms and conditions of the Power Purchase Agreement shall remain unmodified for the extended term set forth above. 3. To the extent that this Agreement to extend the Power Purchase Agreement requires the approval of the Public Utilities Commission ("PUC") of the State of Hawaii, it is expressly understood and agreed that the obligations of MECO and HC&S hereunder are contingent upon the continuing approval of the PUC. If the foregoing meets with your approval, please execute the below acknowledgment and return the original to me, retaining the duplicate original for your files. MECO values its long-standing relationship with HC&S, and thanks you for your willingness to work cooperatively to position both companies for the future. MAUI ELECTRIC COMPANY, LIMITED By /S/ T. Michael May --------------------- Its Board Chairman ---------------- Date: 12/11/97 ---------- By /S/ William A. Bonnet ------------------------ Its President ----------- Date: 12/11/97 ---------- Acknowledged and agreed: A&B-HAWAII, INC., by its division HAWAIIAN COMMERCIAL & SUGAR COMPANY By /S/ Steven Holaday -------------------- Its Gen. Mgr. ----------- Date: Dec., 12, 1997 ---------------- By /S/ Robert Kwok ----------------- Its Vice President, Production ---------------------------- Date: Dec., 12, 1997 ---------------- Page 2 EX-10.5(B) 4 AMENDMENT MADE IN OCTOBER 1993 HECO Exhibit 10.5(b) -------------------- AMENDMENT TO PURCHASE POWER CONTRACT, AS AMENDED ------------------------------------------------ THIS AMENDMENT, made this ______ day of October, 1993, by HAWAII ELECTRIC LIGHT COMPANY, INC., a Hawaii corporation ("Company"), and PUNA Geothermal VENTURE, a Hawaii general partnership ("Seller"); R E C I T A L S : - - - - - - - - A. The Company and Thermal Power Company, as seller therein, had previously entered into that certain Purchase Power Contract For Unscheduled Energy made Available From A Qualifying Facility, dated March 24, 1986 ("Purchase Power Contract"), which was subsequently approved by the Public Utilities Commission ("PUC") in its Decision and Order ("D & O") No. 8692, filed in PUC Docket No. 5525 on March 25, 1986. B. The Seller subsequently succeeded to the interest of Thermal Power Company under the Purchase Power Contract. C. The Company and the Seller entered into that certain Firm Capacity Amendment To Purchase Power Contract Dated March 24, 1986, dated July 28, 1989 ("Firm Capacity Amendment"), which was subsequently approved by the PUC in its D & O No. 10519, filed in PUC Docket No. 6498 on February 14, 1990. D. The Seller's geothermal power project located in Kapoho, Hawaii ("Facility") was from its inception a "qualifying facility" ("QF"), under Subchapter 2 of the "Standards for Small Power Production and Cogeneration," Hawaii Administrative Rules, Title 6, Chapter 74 ("PUC Standards"). E. As a result of a restructuring of the ownership of the Seller and the Facility in connection with financing for the Facility, the Facility may, following such restructuring, no longer qualify as a QF under the PUC Standards, but such restructuring will not otherwise affect or modify the Seller's capability of performing its obligations under the Purchase Power Contract, as amended, and/or the rights of the Company thereunder. F. The Company and the Seller firmly believe that the rates for purchase set forth in the Purchase Power Contract, as amended, are fully consistent with the provisions of H.R.S. (S)269-27.2 and continue to be in furtherance of the State's policy to encourage the development of the State's renewable alternate energy resources, including the geothermal resources. G. The company and the Seller further believe that it is in the best interests of the parties to amend the Purchase Power Contract, as amended, to (i) provide that the Facility shall be either (i) a QF or (ii) a producer of electricity generated from nonfossil fuel sources and thus falling within the meaning of Section 269-27.2, Hawaii Revised Statutes ("nonfossil fuel producer"), and to advise the PUC of such amendment. NOW, THEREFORE, in consideration of the premises, the parties hereby agree to amend the Purchase Power Contract and the Firm Capacity Amendment as follows: 1. Amendments to the Purchase Power Contract. ----------------------------------------- a. The second WHEREAS clause on page 1 of the Purchase Power Contract is amended by (i) deleting the following portion of that clause: "of a cogeneration facility or small power production facility which is a qualifying facility under Subchapter 2 of the PUC's Standards for Small Power Production and Cogeneration in the State of Hawaii, Chapter 74 of Title 6; and" and (ii) substituting in lieu thereof the following new portion: "of a cogeneration facility or small power production facility which is (i) a qualifying facility under Subchapter 2 of the PUC's Standards for Small Power Production and Cogeneration in the State of Hawaii, Chapter 74 of Title 6, or (ii) a producer of electricity generated from nonfossil fuel sources and thus falling within the meaning of Section 269-27.2, Hawaii Revised Statutes ("nonfossil fuel producer"); and" b. APPENDIX E on page 19 of the Purchase Power Contract is amended by deleting subparagraph 1.(a)(ii) in its entirety and substituting in lieu thereof the following new subparagraphs l.(a)(ii): "(ii) failure of the Seller's facility, upon its completion and operation, to be (i) a qualifying facility under Subchapter 2 of the PUC's Standards for Small Power 2 Production and Cogeneration in the State of Hawaii, Chapter 74 of Title 6 in effect as of the date of this Contract, or (ii) a nonfossil fuel producer falling within the meaning of Section 269-27.2, Hawaii Revised Statutes; or" c. All other references or requirements in the Purchase Power Contract to the Facility being a "QF" or "qualifying facility" are similarly amended by adding to each such reference or requirement the phrase "or nonfossil fuel producer falling within the meaning of Section 269-27.2, Hawaii Revised Statutes." 2. Amendments to the Firm Capacity Amendment. ----------------------------------------- a. The sixth (6th) WHEREAS clause on page 1 of the Firm Capacity Amendment is amended by deleting that WHEREAS cause in its entirety and substituting in lieu thereof the following new WHEREAS clause; "WHEREAS, the Seller's facility will be (i) a qualifying facility under Subchapter 2 of the PUC's Standards for Small Power Production and Cogeneration in the State of Hawaii, Chapter 74 of Title 6, or (ii) a facility which generates electricity from nonfossil fuel sources and thus falling within the meaning of Section 269-27.2, Hawaii Revised Statutes;" b. All other references or requirements in the Firm Capacity Amendment to the Facility being a "QF" or "qualifying facility" are similarly amended by adding to each such reference or requirement the phrase "or nonfossil fuel producer falling within the meaning of Section 269-27.2, Hawaii Revised Statutes". 3. Continuing Effect. Except as amended by this instrument, the ----------------- Power Purchase Contract, as amended by the Firm Capacity Amendment, remains in otherwise unmodified and in full force and effect. 4. Further Action. The Company and the Seller shall take such -------------- further action as may be necessary or desirable to implement the provisions, and advise the PUC, of this Amendment to Purchase Power Contract, as amended, as expeditiously as possible. 5. Counterparts. This instrument may be executed in any number of ------------ counterparts, each of which shall be deemed an 3 original, and all of which together shall constitute one and the same instrument. 6. Effective Date. This Amendment to Purchase Power Contract, as -------------- amended, shall become effective when signed by the Seller and the Company. IN WITNESS WHEREOF, the Company and the Seller have executed this Amendment to Purchase Power Contract, as amended, as of the day and year first above written. HAWAII ELECTRIC LIGHT COMPANY, INC By /s/ Warren H. W. Lee ------------------------ Warren H. W. Lee Its President Date: October 14, 1993 By /s/ Edward Y. Hirata ------------------------ Edward Y. Hirata Its Vice President Date: October 14, 1993 PUNA GEOTHERMAL VENTURE By CE PUNA LIMITED PARTNERSHIP, a Maryland Limited partnership By CE PUNA I, INC., a Maryland corporation Its General Partners By /s/ Bruce M. Ambler ------------------- Bruce M. Ambler Its President 4 STATE OF HAWAII ) ) SS. CITY AND COUNTY OF HONOLULU ) On this 14th day of October, 1993, before me personally appeared WARREN H. W. LEE and EDWARD Y. HIRATA, to me personally known, who, being by me duly sworn, did say that they are the President and Vice President, respectively, of HAWAII ELECTRIC LIGHT COMPANY, INC., a Hawaii corporation, and that the seal affixed to the foregoing instrument is the corporate seal of said corporation and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and the said officers acknowledged said instrument to be the free act and deed of said corporation. /s/ Wendy E. Oda Notary Public, State of Hawaii My Commission Expires: 8/25/95 STATE OF MARYLAND ) ) SS. COUNTY OF BALTIMORE ) On this 19th day of October, l993, before me appeared Bruce M. Ambler, to me personally known, who, being by me duly sworn, did say that he is the President of CE PUNA I, INC, a Maryland corporation; that said corporation is a general partner of CE Puna Limited Partnership, a Maryland limited partnership named in the foregoing instrument; that said instrument was executed by said corporation as the duly authorized general partner of and on behalf of CE Puna Limited Partnership, and acknowledged that the seal affixed to the foregoing instrument is the corporate seal of said corporation, and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors and in the name of and on behalf of said limited partnership, and said officer acknowledged said instrument to be the free act and deed of said corporation and as said general partner of said limited partnership. /s/ Melissa A. Hill Notary Public, State of Maryland My Commission Expires: September 24, 1996 EX-10.5(C) 5 THIRD AMENDMENT TO PURCHASE POWER CONTRACT HECO Exhibit 10.5(c) -------------------- THIRD AMENDMENT TO THE PURCHASE POWER CONTRACT DATED MARCH 24, 1986 AS AMENDED BY THE FIRM CAPACITY AMENDMENT DATED JULY 28, 1989 THIS THIRD AMENDMENT ("Third Amendment" or "Agreement") is made this 7th day of March 1995, by and between HAWAII ELECTRIC LIGHT COMPANY, INC. (the "Company" or "HELCO"), and PUNA GEOTHERMAL VENTURE (the "Seller" or "PGV"). WHEREAS, the Company has entered into a Purchase Power Contract for Unscheduled Energy Made Available From a Qualifying Facility (the "Unscheduled Energy Contract"), dated March 24, 1986, with Thermal Power Company ("Thermal Power"); WHEREAS, the Hawaii Public Utilities Commission (the "PUC" or "Commission") authorized the Company to include the purchased power costs of the Unscheduled Energy Contract in its fuel clause by its Decision and Order No. 8692 dated March 25, 1986, in Docket No. 5525; WHEREAS, Thermal Power assigned the Unscheduled Energy Contract to AMOR VIII with the Company's written consent on July 19, 1988; WHEREAS, AMOR VIII assigned the Unscheduled Energy Contract to Puna Geothermal Ventures with the Company's written consent; WHEREAS, HELCO and PGV have entered into that certain Firm Capacity Amendment to Purchase Power Contract, dated July 28, 1989 ("Firm Capacity Amendment"), which amended the Unscheduled Energy Contract; WHEREAS, by Amendment to Purchase Power Contract, As Amended ("Second Amendment") HELCO and PGV amended the Unscheduled Energy Contract and Firm Capacity Amendment (the Unscheduled Energy Contract as amended by the Firm Capacity Amendment and the Second Amendment, and as may be amended from time to time, is referred to as the "Amended PPC"). WHEREAS, a number of issues arose between the Company and Seller which they settled in a Settlement Agreement dated March 7, 1995 ("Settlement Agreement"); WHEREAS, as part of the Settlement Agreement, the Company and Seller agreed to amend the Amended PPC as reflected in the terms and conditions herein and in "APPENDIX D, POWER PURCHASES BY COMPANY (Interim Period)" for the period ---------- -------------------------- (the "Interim Period") starting with the Effective Date (as defined herein) until the satisfaction by PGV of all of PGV's obligations under the Settlement Agreement; WHEREAS, subsequent to the Interim Period, HELCO and PGV desire to revise the Amended PPC to reflect the parties' understanding of the Amended PPC prior to the Interim Period as reflected in the terms and conditions herein and in "APPENDIX D, POWER PURCHASES BY COMPANY (Subsequent to Interim Period)"; ---------- -------------------------- WHEREAS, the Seller's facility will continue to be throughout the term of this contract either (1) a qualifying, small power production facility under Subchapter 2 of the PUC's Standards for Small Power Production and Cogeneration in the State of Hawaii, Chapter 74 of Title 6 of the State's Administrative Rules, or (2) a "non-fossil fuel producer" within the meaning of Section 269- 27.2, Hawaii Revised Statutes; WHEREAS, the Seller is not, and will continue not to be throughout the term of the Amended PPC, as amended, an "Affiliated Interest" within the meaning of Section 269-19.5, Hawaii Revised Statutes; NOW, THEREFORE, in consideration of the premises and the respective promises herein, the Company and the Seller hereby agree to amend the Amended PPC as follows: 1. Interim Period Appendix D. Upon the Effective Date (as defined ------------------------- herein), "APPENDIX D, POWER PURCHASE BY COMPANY", of the Amended PPC is deleted ---------- ------------------------- in its entirety and replaced with "APPENDIX D, POWER PURCHASE BY COMPANY ---------- ------------------------- (Interim Period)", which is attached hereto as Attachment A and incorporated herein by reference. 2. Subsequent Period Appendix D. Upon the satisfaction by PGV of ---------------------------- all of PGV's monetary and energy obligations under the Settlement Agreement, "APPENDIX D, POWER PURCHASE BY COMPANY (Interim Period)", shall be deleted in - ----------- ------------------------- its entirety and replaced with "APPENDIX D, POWER PURCHASE BY COMPANY ---------- ------------------------- (Subsequent to Interim Period)", which is attached hereto as Attachment B and incorporated herein by reference. 3. Affiliated Interest. The Seller shall not sell or transfer more ------------------- than a 10% equity interest to any person or entity, or enter into any other transaction that would make the Seller an Affiliated Interest with the Company as defined by Section 269-19.5, Hawaii Revised Statutes, without first notifying the Company and receiving appropriate PUC approval, if any is required. If the PUC (or any other entity which has the authority to do so) finds that the Seller is an Affiliated Interest with the Company, the Seller shall have 60 days to take whatever action may be appropriate to render the relationship not to be an Affiliated Interest. The Company shall have the right to terminate the Amended PPC, including this Third Amendment and any future amendments, if the PUC 2 prohibits the Company from recovering any payments made to the Seller under this Amended PPC, as amended herein and from time to time, due to the effect of Section 269-19.5, Hawaii Revised Statutes, relating to affiliated interests. 4. Continuing Effect. To the extent not amended by this Third ----------------- Amendment, the Amended PPC shall remain in full force and effect. 5. Further Performance. Each Party hereto shall and does hereby ------------------- agree to make, execute, deliver and cooperate with each other, as the case may be, any and all agreements, instruments, documents, records and/or funds, as the case may be, whatsoever required, necessary and/or convenient to effect and consummate this Agreement and to permit performance of all acts required hereunder. 6. Counterparts/Facsimile Signatures. This Agreement may be --------------------------------- executed and delivered by the parties hereto in any number of counterparts, each of which shall be delivered an original or duplicate original, and all of which together shall constitute one and the same instrument or agreement. Counterparts may be exchanged by facsimile, which facsimile signatures shall be effective for all purposes and treated in the same manner as physical signatures. Notwithstanding the foregoing, the party using facsimile signatures agrees that it will promptly forward physically signed copies of this Agreement to the other party. 7. Effective Date. This Third Amendment becomes effective on the -------------- earlier of sixty (60) calendar days from the date first above written or when the PUC authorizes, by appropriate decision and order satisfactory to the Seller and the Company, the Company's energy payments to the Seller hereunder to be included in the Company's Fuel Clause pursuant to Rule 6-60-6, Standards For ------------- Electric and Gas Utility Service, Title 6, Chapter 60, of the Hawaii - -------------------------------- Administrative Rules, or in the Company's base rates pursuant to Section 269- 16(b), Hawaii Revised Statutes, whichever occurs first ("Effective Date"). 8. Denial Of Application. Notwithstanding anything in this --------------------- Agreement to the contrary, in the event that the Commission denies the Company's application to include energy payments to Seller in either the Company's Fuel Clause pursuant to Rule 6-60-6, Standards For Electric and Gas Utility Service, ---------------------------------------------- Title 6, Chapter 60, of the Hawaii Administrative Rules, or in the Company's base rates pursuant to Section 269-16(b), Hawaii Revised Statutes, within sixty (60) calendar days from the date first above written, then this Third Amendment shall be null and void and of no further force and effect. 3 IN WITNESS WHEREOF, the Company and the Seller have executed this Third Amendment as of the day and year first above written. HAWAII ELECTRIC LIGHT COMPANY, INC. By: /s/ Warren H. W. Lee -------------------- Name: Warren H. W. Lee Title: President By: /s/ Edward Y. Hirata -------------------- Name: Edward Y. Hirata Title: Vice President PUNA GEOTHERMAL VENTURE By AMOR VIII CORPORATION, a Delaware corporation, Its General Partner By: /s/ Joseph B. Fahrendorf ------------------------ Name: Joseph B. Fahrendorf Title: President By CE PUNA L.P., a Maryland limited partnership, Its General Partner By CE PUNA I, INC., a Maryland corporation, Its General Partner By: /s/ Nicholas A. Yancich ----------------------- Name: Nicholas A. Yancich Title: Vice President 4 STATE OF HAWAII ) ) SS. CITY AND COUNTY OF HONOLULU ) On this 7th day of March, 1995, before me personally appeared Warren H. W. Lee and Edward Y. Hirata to me personally known, who, being by me duly sworn, did say that they are the President and Vice President, respectively, of HAWAII ELECTRIC LIGHT COMPANY, INC., a Hawaii corporation, and that foregoing instrument was signed on behalf of HAWAII ELECTRIC LIGHT COMPANY, INC. by authority of its Board of Directors, and said officers acknowledged said instrument to be the free act and deed of HAWAII ELECTRIC LIGHT COMPANY, INC. /s/ Marion S. Leong - ------------------------------- Notary Public State of Hawaii My Commission expires: 3-5-96 STATE OF OREGON ) ) SS. COUNTY OF CLACKAMAS ) On this 3rd day of March, 1995, before me personally appeared JOSEPH B. FAHRENDORF to me personally known, who, being by me duly sworn, did say that he/she is the PRESIDENT of AMOR VIII CORPORATION, a Delaware corporation; that said corporation is a general partner of Puna Geothermal Venture, a Hawaii general partnership, named in the foregoing instrument; that said instrument was executed by said corporation as the duly authorized general partner of and on behalf of Puna Geothermal Venture, and acknowledged that the seal affixed to the foregoing instrument is the corporate seal of said corporation, and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors and in the name of and on behalf of Puna Geothermal Venture, and said officer and acknowledged said instrument to be the free act and deed of AMOR VIII Corporation as general partner of PUNA GEOTHERMAL VENTURE. /s/ Aurora Magana Notary Public State of Oregon My Commission expires: June 22, 1996 STATE OF MARYLAND ) ) SS. COUNTY OF HARFORD ) On this 3rd day of March, 1995, before me appeared Nicholas A. Yancich, to me personally known, who, being by me duly sworn, did say that he/she is the Vice President of CE PUNA I, INC., a Maryland corporation; that said corporation is a general partner of CE Puna Limited Partnership, a Maryland limited partnership; that said CE Puna Limited Partnership is a general partner of Puna Geothermal Venture, a Hawaii general partnership named in the foregoing instrument; that said instrument was executed by said corporation as the duly authorized general partner of and on behalf of CE Puna Limited Partnership, as the duly authorized general partner of and on behalf of Puna Geothermal Venture, and acknowledged that the seal affixed to the foregoing instrument is the corporate seal of said corporation, and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors and in the name of and on behalf of CE Puna Limited Partnership and in the name of and on behalf of Puna Geothermal Venture, and said officer acknowledged said instrument to be the free act and deed of said corporation and as said general partner of CE Puna Limited Partnership as the general partner of Puna Geothermal Venture. /s/ Janet R. Cunningham Notary Public State of Maryland My Commission expires: May 1, 1996 ATTACHMENT A TO THE THIRD AMENDMENT APPENDIX D ---------- POWER PURCHASES BY COMPANY -------------------------- (Interim Period) A. ENERGY PURCHASES BY THE COMPANY ------------------------------- 1. Subject to the other provisions of this Contract, including but not limited to Sections 6 and 7, the Company shall accept and pay for Energy generated by the Seller's Facility and delivered under a Legally Enforceable Obligation, all on-peak energy above the Legally Enforceable Obligation, and all on-peak Emergency Energy (as defined in APPENDIX F), by the Seller to the Company at the higher of: (a) the respective on-peak and off-peak energy rates set forth in Section A.3. of this APPENDIX D, or (b) the Minimum Purchase Rate set forth in Section A.4. of this APPENDIX D. All deliveries of off-peak Energy (including off-peak Emergency Energy (as defined in APPENDIX F) under which the Seller has no Legally Enforceable Obligation to supply shall be paid for at the off-peak energy rates set forth in Section A.3. of this APPENDIX D. The rate of delivery of such Energy may exceed the Allowed Capacity as set forth in APPENDIX A at any given time. 2. Energy furnished by Seller to the Company shall be metered by a time- of-day meter. The Company shall not pay for any Energy that may be delivered by the Seller prior to installation and operation of the Company's meters. The on-peak hours shall be those between 7:00 a.m. and 9:00 p.m. daily, and the off-peak hours shall be those between 9:00 p.m. on one day and 7:00 a.m. on the following day. 3. The respective on-peak and off-peak energy rates for Energy shall be one hundred percent (100%) of the Company's respective on-peak and off-peak Avoided Energy Costs (including avoided costs of fuel and operation and maintenance) in cents per kilowatthour, calculated in accordance with the provisions of the PUC's Standards, on file with the PUC and in effect for the month in which such Energy is delivered, as adjusted by the Transformer Loss Adjustment Factor that is to be determined pursuant to Paragraph 3(f)(ii) of APPENDIX B. ATTACHMENT A TO THE THIRD AMENDMENT 4. The Minimum Purchase Rate in this contract shall apply to all deliveries of Energy under a Legally Enforceable Obligation, and all on-peak energy above the Legally Enforceable Obligation, made by Seller to Company. The Minimum Purchase Rate shall not apply to deliveries of off-peak Energy under which the Seller has no Legally Enforceable Obligation to supply to HELCO. 5. During each payment period Seller shall be credited at the rate of $0.002 per kilovarhour for each kilovarhour furnished by the Seller to the Company in excess of .62 x kwh. The kvarh meters shall be adjusted to prevent reversal in the event the power factor is leading. 6. [Intentionally Left Blank] 7. The Seller shall deliver Energy under Company Dispatch pursuant to a Legally Enforceable Obligation as follows: a. On-Peak Period. During the 14 hour period from 7:00 a.m. to 9:00 -------------- p.m. each day, the Seller shall be obligated to deliver energy under the Company's Dispatch at a rate equal to the Seller's firm capacity obligation described in Paragraph 3 of APPENDIX B of this Contract. b. Off-Peak Period. During the 10 hour period from midnight to 7:00 --------------- a.m. and 9:00 p.m. to midnight each day, the Seller shall be obligated to deliver energy under the Company's Dispatch at a rate not less than the Minimum Delivery Guarantee. B. CAPACITY PURCHASES BY THE COMPANY --------------------------------- 1. As compensation for providing the firm capacity under Company Dispatch as described in Paragraph 3 of APPENDIX B, the Company will pay the Seller a capacity payment, payable monthly within 20 days after the last day of the calendar month in which the firm capacity was provided, of 1/12 of the Annual Capacity Payment Rate. 2. The Capacity Payment Rate shall be $4,000,000 per year beginning on July 1, 1990, or on the Commercial Operation date, whichever occurs first; provided that the Seller has satisfied the Acceptance Test 2 ATTACHMENT A TO THE THIRD AMENDMENT requirement of Paragraph 3(f)(i) of APPENDIX B; and subject to the sanction provision of Paragraph D.1. of APPENDIX D. 3. The Company shall not be required to pay any additional capacity payment for any additional power supplied by the Seller, either at the Company's or the Seller's request. 4. A failure by the Seller to provide the required firm capacity to the Company shall result in the reduction in the capacity payment due to the Seller from the Company in accordance with Paragraph D of APPENDIX D of this Contract. The Company shall not have any obligation to pay capacity payments to the Seller for periods in excess of twenty-four hours in which the Seller is unable to fulfill its obligations under the Contract, including but not limited to (i) circumstances which are subject to Paragraph 15 of this Contract relating to Force Majeure without fault, or (ii) for periods in which the Seller does not fulfill its obligations under Paragraph 3 of APPENDIX B of this Contract due to the Seller's "default," as such term is defined in APPENDIX E of this Contract. 5. If the Seller does not satisfy its firm capacity obligations as described in Paragraph 3 of APPENDIX B and Paragraph C of this APPENDIX D of this Contract, it shall pay sanctions as described in Paragraph D of this APPENDIX D. C. PERFORMANCE STANDARDS --------------------- 1. The Seller acknowledges and agrees that the Seller's generating facility is expected to meet the following minimum standards for satisfactory day-to-day performance during each contract year: (i) an On-peak Availability (excluding the four-week annual maintenance period and downtime due to a catastrophic equipment failure) of 95 percent or better; (ii) not more than 6 Plant Trips per year; and (iii) a forced outage rate of 5 percent or less. 2. The "On-peak Availability" of the Seller's Facility (in percent) is to be computed by adding the total Energy Under Company's Dispatch Subject to a legally Enforceable Obligation available from the Seller's unit during the contract year, multiplying the total by 100, and dividing by the product of 4,718 on-peak 3 ATTACHMENT A TO THE THIRD AMENDMENT hours per 48 week year (4,732 for leap years) times the firm capacity obligation (prorated on a daily basis, if necessary). 3. "Catastrophic Equipment Failure" means a sudden, unexpected failure of a major piece of equipment which (i) substantially reduces or eliminates the capability of the Seller's Facility to produce power, (ii) is beyond the reasonable control of the Seller and could not have been prevented by the exercise of due diligence by the Seller, and (iii) despite the exercise of all reasonable efforts, requires more than sixty (60) days to repair. 4. "Plant Trip" means the sudden and immediate removal of the Seller's Facility from service as a result of an immediate mechanical/ electrical/hydraulic control system trip or operator initiated trip/shutdown which requires the Company to take immediate steps to place an unscheduled generator on line to make up for the loss of output of the Seller's Facility; provided, however, that a Plant Trip shall not include: (i) any such removal which occurs within forty- eight (48) hours of the time at which the Seller's Facility is restarted following an outage; (ii) trips caused or initiated by the Company; or (iii) trips occurring during periods when the Seller has continued to furnish capacity to the Company at the request of the Company's Production Manager after the Seller has notified the Company's Production Manager that the Seller's Facility is likely to trip. 5. The "Forced Outage Rate" of the Seller's Facility during a contract year is to be computed by totaling the average megawatts unavailable for service due to forced outages or deratings on an hourly basis, multiplying the total by 100, and dividing by the product of 8,760 hours per year times the weighted average of the Seller's firm capacity obligation (prorated on a daily basis, if necessary). D. SANCTIONS --------- 1. The capacity payment is to be made on the basis of the full availability of the Seller's firm capacity obligation. When the Seller's full firm capacity obligation is not available, the Seller shall pay the Company $0.0339 per on-peak hour for each kilowatt of deficiency based on annual capacity payments of $4 million and 4,718 on-peak hours in a year. During 4 ATTACHMENT A TO THE THIRD AMENDMENT the period from July 1, 1990 to December 31, 1990, the sanction provided for in this paragraph shall not exceed the capacity payments provided for in Section B.2. of this APPENDIX D on a monthly basis. 2. For each contract year in which the On-peak Availability of the Seller's Facility is less than 95 percent, the Seller will pay $10,000 to the Company for each full percentage point of the shortfall unless the shortfall is due to a catastrophic equipment failure. 3. For each Plant Trip in excess of 6 per contract year, the Seller shall pay $10,000 to the Company. 4. The Company shall have the right to offset any payment due from the Seller under this Paragraph against any payments due to the Seller. 5. If the Seller does not deliver 12,500 kw of Firm Capacity as provided by Paragraph 3 of APPENDIX B, by December 31, 1990, the Seller shall pay the Company $0.0339 per on-peak hour for each kilowatt deficiency until the Seller satisfies the Acceptance Test provided in Paragraph 3(f)(i) for 12,500 kw of Firm Capacity; if the Seller does not deliver 25,000 kw of Firm Capacity as provided by Paragraph 3 of APPENDIX B, by March 1, 1991, the Seller shall pay the Company $0.0339 per on-peak hour for each kilowatt deficiency until the Seller satisfies the Acceptance Test provided in Paragraph 3(f)(i) for 25,000 kw of Firm Capacity. 6. Each party may exercise whatever legal or equitable remedies may be available to enforce the obligations of this Contract in the event of a default by the other party. 5 ATTACHMENT B TO THE THIRD AMENDMENT APPENDIX D POWER PURCHASES BY COMPANY (Subsequent to Interim Period) A. ENERGY PURCHASES BY THE COMPANY ------------------------------- 1. Subject to the other provisions of this Contract, including but not limited to Sections 6 and 7, the Company shall accept and pay for Energy generated by the Seller's Facility and delivered by the Seller to the Company at the higher of: (a) the respective on-peak and off- peak energy rates set forth in Section A.3. of this APPENDIX D, or (b) the Minimum Purchase Rate set forth in Section A.4. of this APPENDIX D; provided, however, that the rate of delivery of such Energy shall not exceed the Allowed Capacity as set forth in APPENDIX A at any given time. 2. Energy furnished by Seller to the Company shall be metered by a time- of-day meter. The Company shall not pay for any Energy that may be delivered by the Seller prior to installation and operation of the Company's meters. The on-peak hours shall be those between 7:00 a.m. and 9:00 p.m. daily, and the off-peak hours shall be those between 9:00 p.m. on one day and 7:00 a.m. on the following day. 3. The respective on-peak and off-peak energy rates for Energy shall be one hundred percent (100%) of the Company's respective on-peak and off-peak Avoided Energy Costs (including avoided costs of fuel and operation and maintenance) in cents per kilowatthour, calculated in accordance with the provisions of the PUC's Standards, on file with the PUC and in effect for the month in which such Energy is delivered, as adjusted by the Transformer Loss Adjustment Factor that is to be determined pursuant to Paragraph 3(f)(ii) of APPENDIX B. 4. The Minimum Purchase Rate in this contract shall apply to all deliveries of Energy made by Seller to Company during the term of this Contract and to all deliveries of Energy under a Legally Enforceable Obligation made by Seller to Company. 5. During each payment period Seller shall be credited at the rate of $0.002 per kilovarhour for each kilovarhour furnished by the Seller to the Company in ATTACHMENT B TO THE THIRD AMENDMENT excess of .62 x kwh. The kvarh meters shall be adjusted to prevent reversal in the event the power factor is leading. 6. Company shall accept and pay for Emergency Energy (as defined in APPENDIX F) generated by Seller's Facility and made available by Seller to Company, as follows: the respective on-peak and off-peak energy rates for Emergency Energy shall be three hundred percent (300%) of Company's on-peak and off-peak Avoided Energy Costs (including avoided costs of fuel and operation and maintenance) in cents per kilowatthour, calculated in accordance with the provisions of the PUC's Standards, on file with the PUC and in effect for the quarter in which such Energy is delivered. 7. The Seller shall deliver Energy under Company Dispatch pursuant to a Legally Enforceable Obligation as follows: a. On-Peak Period. During the 14 hour period from 7:00 a.m. to 9:00 -------------- p.m. each day, the Seller shall be obligated to deliver energy under the Company's Dispatch at a rate equal to the Seller's firm capacity obligation described in Paragraph 3 of APPENDIX B of this Contract. b. Off-Peak Period. During the 10 hour period from midnight to 7:00 --------------- a.m. and 9:00 p.m. to midnight each day, the Seller shall be obligated to deliver energy under the Company's Dispatch at a rate not greater than the Seller's firm capacity obligation described in Paragraph 3 of APPENDIX B of this Contract and not less than the Minimum Delivery Guarantee. B. CAPACITY PURCHASES BY THE COMPANY --------------------------------- 1. As compensation for providing the firm capacity under Company Dispatch as described in Paragraph 3 of APPENDIX B, the Company will pay the Seller a capacity payment, payable monthly within 20 days after the last day of the calendar month in which the firm capacity was provided, of 1/12 of the Annual Capacity Payment Rate. 2. The Capacity Payment Rate shall be $4,000,000 per year beginning on July 1, 1990, or on the Commercial Operation date, whichever occurs first; provided that the Seller has satisfied the Acceptance Test 2 ATTACHMENT B TO THE THIRD AMENDMENT requirement of Paragraph 3(f)(i) of APPENDIX B; and subject to the sanction provision of Paragraph D.l. of APPENDIX D. 3. The Company shall not be required to pay any additional capacity payment for any additional power supplied by the Seller, either at the Company's or the Seller's request. 4. A failure by the Seller to provide the required firm capacity to the Company shall result in the reduction in the capacity payment due to the Seller from the Company in accordance with Paragraph D of APPENDIX D of this Contract. The Company shall not have any obligation to pay capacity payments to the Seller for periods in excess of twenty-four hours in which the Seller is unable to fulfill its obligations under the Contract, including but not limited to (i) circumstances which are subject to Paragraph 15 of this Contract relating to Force Majeure without fault, or (ii) for periods in which the Seller does not fulfill its obligations under Paragraph 3 of APPENDIX B of this Contract due to the Seller's "default," as such term is defined in APPENDIX E of this Contract. 5. If the Seller does not satisfy its firm capacity obligations as described in Paragraph 3 of APPENDIX B and Paragraph C of this APPENDIX D of this Contract, it shall pay sanctions as described in Paragraph D of this APPENDIX D. C. PERFORMANCE STANDARDS --------------------- 1. The Seller acknowledges and agrees that the Seller's generating facility is expected to meet the following minimum standards for satisfactory day-to-day performance during each contract year: (i) an On-peak Availability (excluding the four-week annual maintenance period and downtime due to a catastrophic equipment failure) of 95 percent or better; (ii) not more than 6 Plant Trips per year; and (iii) a forced outage rate of 5 percent or less. 2. The "On-peak Availability" of the Seller's Facility (in percent) is to be computed by adding the total Energy Under Company's Dispatch Subject to a legally Enforceable Obligation available from the Seller's unit during the contract year, multiplying the total by 100, and dividing by the product of 4,718 on-peak 3 ATTACHMENT B TO THE THIRD AMENDMENT hours per 48 week year (4,732 for leap years) times the firm capacity obligation (prorated on a daily basis, if necessary). 3. "Catastrophic Equipment Failure" means a sudden, unexpected failure of a major piece of equipment which (i) substantially reduces or eliminates the capability of the Seller's Facility to produce power, (ii) is beyond the reasonable control of the Seller and could not have been prevented by the exercise of due diligence by the Seller, and (iii) despite the exercise of all reasonable efforts, requires more than sixty (60) days to repair. 4. "Plant Trip" means the sudden and immediate removal of the Seller's Facility from service as a result of an immediate mechanical/ electrical/hydraulic control system trip or operator initiated trip/shutdown which requires the Company to take immediate steps to place an unscheduled generator on line to make up for the loss of output of the Seller's Facility; provided, however, that a Plant Trip shall not include: (i) any such removal which occurs within forty- eight (48) hours of the time at which the Seller's Facility is restarted following an outage; (ii) trips caused or initiated by the Company; or (iii) trips occurring during periods when the Seller has continued to furnish capacity to the Company at the request of the Company's Production Manager after the Seller has notified the Company's Production Manager that the Seller's Facility is likely to trip. 5. The "Forced Outage Rate" of the Seller's Facility during a contract year is to be computed by totaling the average megawatts unavailable for service due to forced outages or deratings on an hourly basis, multiplying the total by 100, and dividing by the product of 8,760 hours per year times the weighted average of the Seller's firm capacity obligation (prorated on a daily basis, if necessary). D. SANCTIONS --------- 1. The capacity payment is to be made on the basis of the full availability of the Seller's firm capacity obligation. When the Seller's full firm capacity obligation is not available, the Seller shall pay the Company $0.0339 per on-peak hour for each kilowatt of deficiency based on annual capacity payments of $4 million and 4,718 on-peak hours in a year. During the period from July 1, 1990 to December 31, 1990, 4 ATTACHMENT B TO THE THIRD AMENDMENT the sanction provided for in this paragraph shall not exceed the capacity payments provided for in Section B.2. of this APPENDIX D on a monthly basis. 2. For each contract year in which the On-peak Availability of the Seller's Facility is less than 95 percent, the Seller will pay $10,000 to the Company for each full percentage point of the shortfall unless the shortfall is due to a catastrophic equipment failure. 3. For each Plant Trip in excess of 6 per contract year, the Seller shall pay $10,000 to the Company. 4. The Company shall have the right to offset any payment due from the Seller under this Paragraph against any payments due to the Seller. 5. If the Seller does not deliver 12,500 kw of Firm Capacity as provided by Paragraph 3 of APPENDIX B, by December 31, 1990, the Seller shall pay the Company $0.0339 per on-peak hour for each kilowatt deficiency until the Seller satisfies the Acceptance Test provided in Paragraph 3(f)(i) for 12,500 kw of Firm Capacity; if the Seller does not deliver 25,000 kw of Firm Capacity as provided by Paragraph 3 of APPENDIX B, by March 1, 1991, the Seller shall pay the Company $0.0339 per on-peak hour for each kilowatt deficiency until the Seller satisfies the Acceptance Test provided in Paragraph 3(f)(i) for 25,000 kw of Firm Capacity. 6. Each party may exercise whatever legal or equitable remedies may be available to enforce the obligations of this Contract in the event of a default by the other party. 5 EX-10.6(B) 6 AMENDMENT NO. 2 TO PURCHASE POWER AGREEMENT HECO Exhibit 10.6(b) -------------------- CONTRACT NO: C06931(B) Amendment No. 2 to "Purchase Power Contract Between Hawaiian Electric Co., Inc. and City and County of Honolulu Dated March 10, 1986" By mutual agreement, sections 2(c) and 2(d) of the subject Contract are replaced by sections 2(c), 2(d), 2(e), and 2(f) of this Amendment No. 2 to reflect a modification of the deadlines for billing and payment for energy and capacity received by Hawaiian Electric Company. (c) By the fifth working day (i.e. excluding Saturdays, Sundays and legal holidays of either the federal government or the Hawaii state government) of each calendar month, the Company shall provide the Seller or its designated agent with the appropriate data for the Seller to compute the energy charge for electricity delivered to the Company in the preceding calendar month as determined in accordance with this Contract. (d) By the tenth working day of each calendar month, the Seller shall submit to the Company an invoice that contains (1) an energy charge for energy purchased by the Company in the preceding month; (2) a capacity charge for the available capacity in the preceding month; and (3) the metering charge as set forth in Section 5 of this Contract. Each invoice shall include the Seller's backup data for the computation of the capacity charge. (e) By the twentieth working day of each calendar month (but no later than the last working day of that month if there are less than twenty working days in that month), the Company shall make payment on such invoice, or provide to the Seller an itemized statement of its objections to all or any portion of such invoice and pay any undisputed amount. (f) Notwithstanding all or any portion of such invoice in dispute, any payment not made to the Seller after the twentieth working day of each calendar month (or the last working day of that month if there are less than twenty working days in that month), shall accrue interest at the maximum rate allowed by law until the outstanding interest and invoiced amounts are paid in full. Partial payments shall be applied first to outstanding but unpaid interest and then to outstanding but unpaid invoice amounts. This Amendment shall become effective on the Effective Date of the Firm Capacity Amendment to Purchase Power Contract Dated March 10, 1986, dated April 8, 1991. -1- This Amendment covers billing and payment dates only and is in no way intended to affect the pricing mechanisms established in the Contract. HAWAIIAN ELECTRIC COMPANY, INC. ("Company") By /s/ Edward Y. Hirata 4/28/92 -------------------------- --------- Its Vice President Date By /s/ George T. Iwahiro 4-28-92 -------------------------- --------- Its Vice President Date CITY AND COUNTY OF HONOLULU ("Seller") By /s/ Glen S. Nonaka JUN 04 1992 --------------------------- ----------- For Its Director of Finance Date By /s/ C. Michael Street MAY 27 1992 --------------------------- ----------- Its Director-Chief Engineer, Date Department of Public Works -2- EX-10.7 7 POWER PURCHASE AGREEMENT BETWEEN ENCOGEN & HELCO HECO Exhibit 10.7 ----------------- POWER PURCHASE AGREEMENT between ENCOGEN HAWAII, L.P. and HAWAII ELECTRIC LIGHT COMPANY, INC. TABLE OF CONTENTS I. ARTICLE I - DEFINITIONS.......................................................... 2 II. ARTICLE II - SCOPE OF AGREEMENT................................................. 13 2.1 General Description........................................................ 13 A. Basic Concept.......................................................... 13 B. Facility Specifications................................................ 13 C. Site................................................................... 14 D. Electric Specifications................................................ 14 E. Fuel and Other Expendables............................................. 14 2.2 Effective Date/Regulatory Approval......................................... 14 A. Effective Date of Agreement............................................ 14 B. Effect of Delay or Denial of PUC Approval.............................. 14 C. Effect of Delay in Obtaining Non-Appealable PUC Approval Order........................................................ 15 D. Effect of Partial Approval of Payments Terms........................... 15 E. Conditional PUC Approval............................................... 16 F. PUC Approval Date...................................................... 16 G. Effect of Reconsideration or Appeal of PUC Approval Order.............. 17 H. Obligations of Parties Upon Termination................................ 18 2.3 Conditions Precedent....................................................... 19 A. HELCO Conditions Precedent............................................. 19 (1) Following the Execution Date..................................... 19 (2) On or Before Closing Date........................................ 19 (3) On or Before Phase 1 In-Service Date............................. 19 (4) On or Before Phase 2 In-Service Date............................. 20 B. Failure of HELCO Conditions Precedent.................................. 20 (1) Right to Declare an Event of Default............................. 20 (2) SELLER's Declaration Requirements................................ 20 (3) HELCO's Declaration Requirements................................. 21 2.4 Failure to Meet Milestone Dates............................................ 21 A. Right to Declare Event of Default...................................... 21 (1) Failure to Achieve Milestones.................................... 21 (2) Dispute Over HELCO'S Determination............................... 22 B. Late Charges........................................................... 22 C. Arbitration............................................................ 23 (1) Time of the Essence.............................................. 23 (2) Designation of Arbitrator........................................ 23 (3) Timing of Arbitrator's Decision.................................. 24 (4) Standard to be Applied........................................... 24 (5) Effect of Arbitrator's Decisions................................. 24 (6) Cost of Arbitration.............................................. 24 2.5 No Waiver.................................................................. 24
i 2.6 Term....................................................................... 24 A. Extension of Term...................................................... 25 B. Post Term.............................................................. 25 2.7 SELLER Financing........................................................... 25 III. ARTICLE III - SPECIFIC RIGHTS AND OBLIGATIONS OF THE PARTIES.................................................................. 26 3.1 Rights and Obligations of Both Parties..................................... 26 A. Sale and Purchase of Power............................................. 26 B. Protection of Facilities............................................... 26 C. Good Engineering and Operating Practices............................... 26 D. Interconnection Facilities............................................. 26 E. Security Documents..................................................... 26 3.2 Rights and Obligations of SELLER........................................... 27 A. Design and Construction of Facility.................................... 27 (1) General.......................................................... 27 (2) Milestone Dates.................................................. 27 (3) In-Service Date Deadlines........................................ 28 (4) Permits and Licenses............................................. 28 (5) Review of Facilities............................................. 28 (6) Facility Protection Equipment.................................... 29 (7) Progress Reports................................................. 30 B. Operation and Maintenance of Facility.................................. 30 (1) Standards........................................................ 30 (2) Functioning Protective Equipment................................. 31 (3) Personnel and System Safety...................................... 31 (4) Operating Records................................................ 32 (5) Maintenance Records.............................................. 32 (6) Major Outages.................................................... 33 C. Delivery of Power to HELCO; Dispatch Constraints....................... 33 (1) Delivery Voltage Standards....................................... 33 (2) Frequency Standards.............................................. 33 (3) Reactive kVAR Standards.......................................... 33 (4) Generator H Constant............................................. 34 (5) Entire Output Delivered.......................................... 34 (6) Interconnection.................................................. 34 (7) Operation of Synchronizing Breakers.............................. 34 (8) Schedule of Outages.............................................. 35 (9) Minimum Load Capability.......................................... 35 (10) Short Circuit Ratio............................................. 35 (11) Open Circuit Transient Field Time Constant...................... 35 (12) Generator Step-Up Transformer Impedance......................... 35 (13) Response Ratio.................................................. 35 (14) Ceiling Voltage................................................. 35
ii (15) Excitation Source Immunity...................................... 35 (16) Static Regulator................................................ 35 (17) Field Forcing Ability........................................... 35 (18) Droop Characteristic............................................ 35 (19) Over/Under-Speed................................................ 35 (20) Control Systems................................................. 35 (21) Regulation Capability........................................... 36 (22) Capacity Tests.................................................. 36 (23) Cycling of the Heat Recovery Steam Generators 36 and the Steam Turbine........................................... (24) Startup Periods................................................. 36 (25) Ramp Rates...................................................... 36 (26) QLPU............................................................ 36 (27) Simple Cycle Operation.......................................... 36 D. Warranties and Guarantees of Performance............................... 38 (1) Equivalent Availability Factor................................... 38 (2) Equivalent Forced Outage Rate.................................... 38 (3) Firm Capacity.................................................... 39 (4) Quality.......................................................... 39 (5) Unit Trips....................................................... 39 (6) Exclusive Warranties............................................. 39 E. Metering............................................................... 39 (1) Meters........................................................... 39 (2) Communications, Telemetering and Remote Control Equipment................................................ 40 (3) Meter Testing.................................................... 40 (4) Corrections...................................................... 40 F. Fuel and Other Materials............................................... 40 G. Waste Handling......................................................... 41 H. Emissions.............................................................. 41 I. Compliance with Laws................................................... 41 J. Adequate Spare Parts................................................... 41 K. Periodic Meetings...................................................... 41 L. Maintenance of Qualifying Facility (QF) Status......................... 42 M. Notice of Certain Events............................................... 42 N. Labor Disputes......................................................... 43 3.3 Rights and Obligations of HELCO............................................ 43 A. Dispatch of Facility Power............................................. 43 (1) Routine Dispatch................................................. 43 (2) Demonstration of Loading and Unloading Ramp Rates................ 44 (3) Dispatch Notices................................................. 45 B. HELCO Right to Buyout.................................................. 45 (1) General.......................................................... 45 (2) Ownership of Unsalvageable Items................................. 46 C. HELCO Right to Defer................................................... 46
iii (1) Prior to the PUC Approval Date................................... 46 (2) Prior to the Closing Date........................................ 47 (3) On or After the Closing Date and Prior to Phase I 48 In-Service Date.................................................. (4) Adjustments to Times............................................. 48 (5) Benefits to Others............................................... 49 (6) No Material Adverse Impact....................................... 49 (7) Impact on PSD Permit............................................. 49 (8) Changed Circumstances............................................ 49 D. HELCO Right to Require Independent Engineering Assessment............................................................ 50 (1) Implementation of Independent Engineering Assessment....................................................... 50 (2) Qualified Independent Engineers List............................. 51 IV. ARTICLE IV - SUSPENSION OR REDUCTION OF DELIVERIES.............................. 51 4.1 Initiation by HELCO........................................................ 51 A. Facility Problems...................................................... 52 B. HELCO System Problem................................................... 52 4.2 No Obligation to Accept Energy............................................. 52 4.3 Initiation by SELLER....................................................... 53 V. ARTICLE V - RATES FOR PURCHASE................................................... 53 5.1 Capacity and Energy Purchased by HELCO..................................... 53 A. Energy Charge.......................................................... 53 B. Capacity Charge........................................................ 58 (1) Calculation of the Monthly Capacity Charge........................ 58 (2) Acceptance Tests.................................................. 59 (3) Capacity Shortfall; Corrective Period............................. 59 C. Hawaii General Excise Tax.............................................. 60 D. No Payment of Emission Fees............................................ 60 E. No Payment of Other Taxes or Fees...................................... 60 VI. ARTICLE VI - BILLING AND PAYMENT................................................ 60 6.1 Monthly Invoice............................................................ 60 6.2 Payment...................................................................... 61 6.3 Adjustments................................................................ 61 6.4 Other Payments............................................................. 61
iv VII. ARTICLE VII - DEFAULT.......................................................... 61 7.1 Events of Default.......................................................... 61 A. Default by SELLER...................................................... 61 B. Default by HELCO....................................................... 65 C. Right to Cure Default.................................................. 66 7.2 Rights and Obligations of the Parties Upon Default......................... 66 A. Notice of Default...................................................... 66 B. Right to Terminate..................................................... 66 C. Right to Demand Independent Engineering Assessment and Modification....................................................... 67 D. Other Rights Upon Default.............................................. 68 VIII. ARTICLE VIII - LIQUIDATED DAMAGES FOR FAILURE TO ATTAIN WARRANTED PERFORMANCE; BONUSES......................................... 68 8.1 Liquidated Damages......................................................... 68 A. Equivalent Availability Factor......................................... 68 B. Equivalent Forced Outage Rate.......................................... 69 C. Ramp Derating Penalty.................................................. 69 D. Excessive Unit Trips................................................... 70 8.2 Payment of Liquidated Damages.............................................. 70 8.3 Maintenance Account........................................................ 70 8.4 Adjustments................................................................ 71 IX. ARTICLE IX - HELCO'S INSPECTION OF FACILITY OPERATION AND USE OF FACILITY SITE; OPTION FOR SITE REPRESENTATIVE........................ 71 9.1 Inspection of Facility Operation........................................... 71 9.2 Entry For Work On Site..................................................... 72 9.3 Provision of Site Space.................................................... 72 9.4 No Ownership Interest...................................................... 72 9.5 HELCO Site Representative Option........................................... 72 X. ARTICLE X - AUDIT RIGHTS......................................................... 73 10.1 Rights of HELCO........................................................... 73 10.2 Rights of SELLER.......................................................... 73 XI. ARTICLE XI - INDEMNIFICATION.................................................... 73 11.1 Indemnification of HELCO.................................................. 73 11.2 Indemnification of SELLER................................................. 75 XII. ARTICLE XII - CONSEQUENTIAL DAMAGES............................................ 76
v XIII. ARTICLE XIII - INSURANCE....................................................... 76 13.1 Required Coverage......................................................... 76 13.2 Additional Insureds....................................................... 76 13.3 Evidence of Policies Provided to HELCO.................................... 76 13.4 Deductibles............................................................... 76 XIV. ARTICLE XIV - DISPUTE RESOLUTION............................................... 77 14.1 Good Faith Negotiations................................................... 77 14.2 Dispute Resolution Procedures............................................. 77 A. Initiation of Arbitration............................................. 77 B. Appointment of Arbitrator............................................. 77 C. Arbitration Procedures................................................ 78 D. Arbitrator Limitations................................................ 79 E. Decision Binding on the Parties....................................... 79 F. Cost of Arbitration................................................... 79 XV. ARTICLE XV - FORCE MAJEURE...................................................... 79 15.1 Definition................................................................ 79 15.2 Notice of Force Majeure................................................... 80 15.3 Excuse of Obligation; Extension of Milestone Dates and In-Service 80 Date Deadlines............................................................ 80 15.4 Right To Terminate Due To Force Majeure or Catastrophic Equipment Failure......................................................... 81 15.5 Obligations Remaining After Event of Force Majeure........................ 81 15.6 Extension of Term......................................................... 81 XVI. ARTICLE XVI - ELECTRIC SERVICE SUPPLIED BY HELCO............................... 81 XVII. ARTICLE XVII - ASSIGNMENT..................................................... 81 17.1 Assignment by SELLER...................................................... 81 17.2 Assignment by HELCO....................................................... 82 17.3 Binding on Assigns........................................................ 82 XVIII. ARTICLE XVIII - CHANGE IN COMMITTED CAPACITY OF FACILITY...................... 82 XIX. ARTICLE XIX - SALE OF FACILITY BY SELLER....................................... 82 19.1 HELCO's Right of First Refusal............................................ 82 19.2 No Exercise of Right by HELCO............................................. 83
vi XX. ARTICLE XX - ESCROW ACCOUNT.......................................................... 83 XXI. ARTICLE XXI - GUARANTEE............................................................. 83 21.1 Guarantee(s).................................................................. 83 21.2 Guaranteed Amount............................................................. 84 XXII. ARTICLE XXII - REIMBURSEMENT OF CERTAIN HELCO ADMINISTRATIVE COSTS............................................................... 84 XXIII. ARTICLE XXIII - MISCELLANEOUS..................................................... 85 23.1 Recovery of Payments.......................................................... 85 23.2 Notices....................................................................... 85 23.3 Entire Agreement.............................................................. 86 23.4 Further Assurances............................................................ 86 23.5 Severability.................................................................. 86 23.6 No Waiver..................................................................... 86 23.7 Modification or Amendment..................................................... 87 23.8 Governing Law and Interpretation.............................................. 87 23.9 Counterparts.................................................................. 87 23.10 Computation of Time........................................................... 87 23.11 Thermal Energy Sales Contract................................................. 87 23.12 Review of Financing Documents; Project Financing.............................. 87 23.13 Confidential and Proprietary Information...................................... 88 23.14 PUC Approval.................................................................. 88 23.15 Change in Standard System or Organization..................................... 89 A. Consistent with Original Intent........................................... 89 B. Eliminated or Inconsistent with Original Intent........................... 89 23.16 No Party Deemed Drafter....................................................... 90 23.17 Headings...................................................................... 90 Attachment A. Diagram of Interconnection................................................. A-1 Attachment B. Milestone Events Attachment C. Selected Portions of NERC GADS............................................. C-1 Attachment D. Facility Functional Description............................................ D-1 Attachment E. Form of Interconnection Agreement.......................................... E-1 Attachment F. Facility Location and Layout............................................... F-1 Attachment G. Form of Maintenance Summary Report......................................... G-1 Attachment H. Qualified Independent Engineers List....................................... H-1 Attachment I. Adjustment of Charges...................................................... I-1 Attachment J. Required Insurance......................................................... J-1 Attachment K. Calculation of Ramp Derating Penalty....................................... K-1 Attachment L. Capacity Testing Procedures................................................ L-1 Attachment M. Unit Incident Report....................................................... M-1 Attachment N. Intentionally Omitted...................................................... N-1
vii Attachment O. Design Materials........................................................ O-1 Attachment P. Sample Energy Payment Calculation....................................... P-1 Attachment Q. SELLER's Permits........................................................ Q-1 Attachment R. Intentionally Omitted................................................... R-1 Attachment S. HELCO's Schedule "J" Tariff............................................. S-1 Attachment T. Form of Guarantee....................................................... T-1
viii POWER PURCHASE AGREEMENT between ENCOGEN HAWAII, L.P. and HAWAII ELECTRIC LIGHT COMPANY, INC. THIS AGREEMENT ("Agreement") is made as of this 22nd day of October, 1997 ("Execution Date"), by and between HAWAII ELECTRIC LIGHT COMPANY, INC. ("HELCO"), a Hawaii corporation, with principal offices in Hilo, Hawaii, and ENCOGEN HAWAII, L.P. ("SELLER"), a Delaware limited partnership, with principal offices in Dallas, Texas, doing business in Hawaii. W I T N E S S E T H : WHEREAS, HELCO is a regulated public utility engaged in the business of generation, purchase, transmission and distribution of electric power to customers on the Island of Hawaii, Hawaii; and WHEREAS, pursuant to the terms and conditions set forth herein, HELCO desires to purchase electric power from SELLER and dispatch such electric power; and WHEREAS, SELLER is organized for the purpose of designing, constructing, owning, operating and maintaining a sixty megawatt (60 MW) (net) cogeneration facility on property leased or purchased by SELLER at Haina, Hawaii; and WHEREAS, SELLER intends to operate such facility as a Qualifying Facility as defined in PURPA, 18 Code of Federal Regulations ("CFR") Part 292, and Title 6, Chapter 74 of the Hawaii Administrative Rules; and WHEREAS, HELCO's willingness to enter into this Agreement and to purchase electricity at the rate set forth in this Agreement is based upon the expectation that HELCO will recover capacity and energy payments made to SELLER through electric rates paid by its customers and adjusted to reflect changing purchased energy costs by means of a periodic rate adjustment mechanism such as the Energy Cost Adjustment Clause authorized by the Hawaii Public Utilities Commission ("PUC"); and WHEREAS, HELCO's willingness to enter into this Agreement is based on SELLER's assurances that SELLER can and will perform all of its obligations hereunder in a manner that will ensure no degradation in the quality of service provided HELCO's customers because of SELLER's construction, ownership, operation, and maintenance of the Facility or in any other manner. 1 NOW THEREFORE, in consideration of these premises and of the mutual promises contained herein, the parties hereto agree that the following terms and conditions shall govern the sale and transfer of electricity by SELLER and the purchase and acceptance of such electricity by HELCO and other related transactions: ARTICLE I - DEFINITIONS For the purposes of this Agreement, the following terms shall have the meanings as indicated below: Allowance for Funds Used During Construction (AFUDC) - The capital carrying costs incurred by HELCO during the development and construction of a capital project which are capitalized as a cost of plant on the books of HELCO in accordance with methods approved by the PUC. Allowed Simple Cycle Period - Shall have the meaning set forth in Section 3.2C(27). American National Standards Institute Code for Electricity Metering - The publication of the American National Standards Institute which establishes acceptable performance criteria for new types of watt hour meters, demand meters, demand registers, instrument transformers and auxiliary devices. It states acceptable in-service performance levels for meters and devices used in revenue metering. It also includes information on related subjects, such as recommended measurement standards, installation requirements and test schedules. Annual Dispatch Notice - The notice provided by HELCO to SELLER each calendar year in accordance with Section 3.3A(3), which shows the amount of capacity and energy HELCO expects the Facility to produce on an hourly basis for the following calendar year. Audit Period - Shall have the meaning in Section 3.3B(1). Billing Period - For any computation of Capacity Charge or Energy Charge payments, the immediately preceding Calendar Month. Business Day - Any day other than a Saturday, Sunday or legal holiday of either the United States or the State of Hawaii. Buyout Payment - Shall have the meaning in Section 3.3B(1). Calendar Month - The period commencing at 12:01 a.m. on the first day of any month and terminating at midnight on the last day of the same month. Capacity Charge - The amount to be paid by HELCO to SELLER pursuant to Section 5.1B of this Agreement. Capacity Rate - The rate by which Capacity Charge is calculated pursuant to Section 5.1B of this Agreement. 2 Capacity Test - The Initial Acceptance Test performed by SELLER in accordance with Section 3.2C(22) prior to the Phase 1 In-Service Date and the Phase 2 In-Service Date, as the case may be, to determine Firm Capacity, or a subsequent Capacity Test. Catastrophic Equipment Failure - Either (A) a sudden unexpected failure of a major piece of equipment which (1) substantially reduces or eliminates the capability of the Facility to produce power, (2) is beyond the reasonable control of SELLER and could not have been prevented by the exercise of reasonable due diligence by SELLER, and (3) despite the exercise of all reasonable efforts, actually requires more than 60 days to repair (if the determination of whether a Catastrophic Equipment Failure has occurred is being made more than 60 days after the failure) or is reasonably expected to require more than 60 days to repair (if such determination is being made within 60 days after the failure); or (B) a sudden, unexpected failure of a combustion turbine blade or a steam turbine blade which requires opening a gas turbine (or compressor) or steam turbine casing to repair and which meets the criteria in both (A)(1) and (A)(2) above. Closing Date - The date on which the closing of long-term, non-recourse construction and term financing of the Facility under the Financing Documents occurs. Committed Capacity - During the Phase 1 Period, twenty-two thousand kilowatts (22,000 kW) of reliable electrical capacity which SELLER agrees herein to make available to HELCO from the Facility at the Metering Point under HELCO Dispatch. During the Phase 2 Period, sixty thousand kilowatts (60,000 kW) of reliable electrical capacity which SELLER agrees herein to make available to HELCO from the Facility at the Metering Point under HELCO Dispatch, unless adjusted as a result of a subsequent Capacity Test at the end of the Corrective Period pursuant to Section 5.1B, if any, or by agreement of the parties. Conditions Precedent - The conditions listed in Section 2.3A. Consent to Assignment - Shall have the meaning in Section 23.12. Consents - All necessary consents to be executed in favor of HELCO in order for HELCO to establish, exercise and enforce its rights under the Security Agreement, the Mortgage, and the other Security Documents, as such consents may be amended from time to time in accordance with the terms thereof. Consultation Period - The period defined in Section 3.3C(2). Contract Year - A 12 Calendar Month period which begins on the first day of the calendar year following the Phase 2 In-Service Date; provided, however, that -------- ------- if the Phase 2 In-Service Date does not occur on January 1 of a given year, the initial Contract Year shall consist of the period from the Phase 2 In-Service Date to December 31 of that calendar year. Corrective Period - The period defined in Section 5.1B(3)(a) CT - Shall mean combustion turbine and related equipment. 3 Deferral Costs - Shall have the meaning in Section 3.3C(1). Deferral Fee - Shall have the meaning in Section 3.3C(1). Dispatch Constraints - The constraints and procedures with respect to the operation of the Facility set forth in Section 3.2C, which shall include equipment-related constraints on HELCO's ability to dispatch the Facility. Dispatch Notice - The notice given to SELLER by HELCO in accordance with Section 3.3A(3), instructing SELLER to operate the Facility at a requested capacity, expressed in kW, until modified by a subsequent Dispatch Notice. DoH - The State of Hawaii Department of Health. Dollars - The lawful currency of the United States of America. End of Phase 2 Start-Up - The date that is 12 months following the Phase 2 In-Service Date. Energy Charge - The amount to be paid by HELCO to SELLER pursuant to Section 5.1A of this Agreement for the energy delivered to HELCO's electrical system from the Facility as measured at the Metering Point. Energy Cost Adjustment Clause - The cost recovery mechanism established by the PUC rules whereby the base electric energy rates charged to retail customers are adjusted to account for fluctuations in the costs of fuel and purchased energy or such successor provision that may be established from time to time. EMS (Energy Management System) - The real-time, computer-based control system, or any successor thereto, used by HELCO, now or in the future, to manage the supply and delivery of electrical energy to its consumers. It provides power system operators with an integrated set of manual and automatic functions necessary for the operation of the power system under both normal and emergency conditions. The major functions of the EMS include security monitoring (system surveillance), supervisory control, generation control (automatic generation control, economic dispatch control, and generation dispatch studies) and security (on-line load-flow analysis and contingency evaluation). EAF (Equivalent Availability Factor) - The ratio (in percent) calculated in accordance with the formula, terms and concepts defined by NERC GADS, based on the Net Maximum Capacity of the Facility, unless otherwise defined in this Agreement. EFOR (Equivalent Forced Outage Rate) - The ratio (in percent) calculated in accordance with the formula, terms and concepts defined by NERC GADS, based on the Net Maximum Capacity of the Facility, unless otherwise defined in this Agreement. Event of Default - An event or occurrence specified in Section 7.1A or 7.1B. 4 EWG (Exempt Wholesale Generator) - Shall have the meaning given it in the Energy Policy Act of 1992, 15 U.S.C. Section 79z-5a. Execution Date - The date referred to in the first paragraph of this Agreement. Facility - All real estate, equipment, fixtures and property owned, leased, controlled, operated or managed in connection with the production and delivery of electric energy by SELLER to HELCO's electrical system including, without limitation, that cogeneration facility more fully described in Sections 2.1A and B to be designed, built, owned and operated under this Agreement by SELLER on the site leased or purchased by SELLER at Haina, Hawaii, together with all equipment, fuel and other expendables, transformers, switchgear, protective devices, fuel handling and residue disposal infrastructure, and other associated property, both real and personal, necessary for proper operation of the Facility, up through SELLER's step-up transformer high voltage bushing cable connector. Notwithstanding the above, between the time of the Phase 1 In- Service Date and the Phase 2 In-Service Date, the Facility shall consist of that portion of the Facility necessary to produce a net electrical generating capability at the Metering Point of approximately twenty-two thousand kilowatts (22,000 kW). Facility Functional Description - The description of the Facility as described in Section 2.1B. Financing Documents - The loan agreements, notes, indentures, security agreements, leases (including cross-border leases or leases involving sale- leaseback transactions) and other agreements, documents and instruments relating to the construction financing and permanent financing (including refinancing and amendments) of the Facility by SELLER, as the same may be modified or amended from time to time in accordance with the terms thereof. Financing Parties - Any and all lenders and equity investors, other than the Guarantor(s), or any person affiliated therewith, providing construction financing or permanent financing (including refinancing) for the Facility and any and all nominees, trustees and collateral agents associated therewith. For purposes of any notices herein required to be delivered by HELCO to the Financing Parties, it shall be sufficient for HELCO to deliver such notices to the party designated under the Financing Documents as the collateral agent, agent, trustee or nominee for such Financing Parties. Firm Capacity - The amounts of capacity which SELLER declares for the Facility in accordance with Section 3.2C(22): (i) at the time of the Phase 1 In- Service Date and Phase 2 In-Service Date, respectively; (ii) at the end of the Corrective Period pursuant to Section 5.1B(3)(c); or (iii) at the time of subsequently agreed-upon test periods in which SELLER proposes to adjust the Firm Capacity in accordance with the procedures set forth in "Attachment L"; provided, however, that HELCO's System Operator may specify a lower level of - -------- ------ electric output for portions of the forty-eight (48) hour test period and the Firm Capacity may still be declared without taking into account the reduction specified by HELCO's System Operator if the Facility thereafter returns to the declared level during the test period or the level requested by HELCO's 5 System Operator, whichever is lower. The Firm Capacity shall not exceed Committed Capacity except as otherwise provided in this Agreement, or by agreement of the parties. Fixed O&M Component - Shall have the meaning in Section 5.1B. Force Majeure - Any event defined in Section 15.1 as a Force Majeure event. Fuel - Naphtha or No. 2 fuel oil or any replacement or substitute fuel determined by SELLER to be suitable for the operation of the Facility in accordance with this Agreement, applicable permits and equipment manufacturer specifications relating to the Facility. Fuel Supply Agreement - The agreement, a copy of which is delivered to HELCO pursuant to Section 2.3A(2)(i), under which SELLER obtains Fuel for the Facility. General Manager - The person appointed by SELLER to act as general manager for the Facility. Good Engineering and Operating Practices - The practices, methods and acts engaged in or approved by a significant portion of the electric utility industry for similarly situated U.S. facilities, considering geographic and other characteristics, that at a particular time, in the exercise of reasonable judgment in light of the facts known or that reasonably should be known at the time a decision is made, would be expected to accomplish the desired result in a manner consistent with law, regulation, reliability, safety, economy and expedition. With respect to the Facility, Good Engineering and Operating Practices include, but are not limited to, taking reasonable steps to ensure that: 1. Adequate materials, resources and supplies, including Fuel, are available to meet the Facility's needs under normal conditions and reasonably anticipated abnormal conditions. 2. Sufficient operating personnel are available and are adequately experienced and trained to operate the Facility properly, efficiently and within manufacturer's guidelines and specifications and are capable of responding to emergency conditions. 3. Preventive, predictive, routine and non-routine maintenance and repairs are performed on a basis that ensures reliable, long-term and safe operation consistent with manufacturer's recommendations, and are performed by knowledgeable, trained and experienced personnel utilizing proper equipment, tools, and procedures. 4. Appropriate monitoring and testing is done to ensure that equipment is functioning as designed and to provide assurance that equipment will function properly under both normal and emergency conditions. 5. Equipment is operated in a manner safe to workers, the general public and the environment and in accordance with equipment manufacturer's specifications, including, without limitation, defined limitations such as steam pressure, temperature, moisture content, chemical 6 content, quality of make-up water, operating voltage, current, frequency, rotational speed, polarity, synchronization, control system limits, etc. GDPIPD (Gross Domestic Product Implicit Price Deflator) - The value shown in the United States Department of Commerce, Bureau of Economic Analysis' publication entitled "Survey of Current Business" for the percentage change in prices over each quarter of the year associated with the Gross Domestic Product for the immediately preceding quarter, or, a successor publication or index. Guarantee(s) - The Guarantee Agreement(s) in the form of Attachment T between HELCO and Guarantor(s), as the same may be modified or amended from time to time in accordance with the terms thereof. Guaranteed Amount - The amount described in Section 21.2. Guarantor(s) - The entity or entities which guarantee SELLER's obligations under this Agreement in accordance with the Guarantee(s) and with Article XXI hereof. Hawaiian Electric Industries, Inc. - The holding company incorporated in 1983 under the laws of Hawaii and having Hawaiian Electric Company, Inc., the parent company of HELCO, and other companies as its subsidiaries. HELCO Dispatch - HELCO's right, through supervisory equipment or otherwise, to direct or control (if EMS is applicable) both the capacity and the energy output of the Facility subject to the Dispatch Constraints, which dispatch shall include real power, reactive power, voltage, frequency, the number of Facility units on-line to meet an electrical output requirement, including the determination to cycle a unit or units off-line, require a unit to run in simple cycle mode when not able to operate in combined cycle mode, the distribution of electrical output among the Facility units on-line, the droop control setting of each on-line unit, the ramp rate setting of each on-line unit, and other characteristics of such energy output whose parameters are normally controlled or accounted for in a utility dispatching system. HELCO's System Operator - The individual designated by job position as HELCO's representative to act on behalf of HELCO on all issues regarding the daily dispatch of all generation being supplied to HELCO's electrical system. In-Service Date Deadline(s) - The date(s) described as such in Section 3.2A(3). Initial Acceptance Test -- The initial acceptance test for Phase 1 or Phase 2, performed in accordance with the procedure set forth in "Attachment L". Independent Engineering Assessment - the determination by a Qualified Independent Engineer made pursuant to Section 3.3D(1). Interconnection Agreement - the agreement between HELCO and SELLER in the form attached as "Attachment E" which sets forth the parties' respective rights and obligations with 7 respect to the design, installation, operation, ownership and cost responsibility for the facilities necessary to interconnect the Facility with HELCO's electrical system. Interconnection Facilities - Shall have the meaning attributed to it in the Interconnection Agreement. kVAR - Kilovar(s) kVARh - Kilovar-hour(s) kW - kilowatt(s). kWh - kilowatt-hour(s). Late Charges - Shall have the meaning set forth in Section 2.4B. Liquidated Damages - Shall mean any of the Liquidated Damages provided for in Article VIII. Maintenance Account - Shall have the meaning set forth in Section 8.3. Major Equipment Overhaul - Shall mean combustion-turbine hot section overhaul or replacement, complete turbine overhaul or replacement, steam turbine overhaul or replacement or other major scheduled maintenance conducted (i) in accordance with the equipment manufacturer's recommendations or (ii) otherwise in the judgment of SELLER in accordance with Good Engineering and Operating Practices. Metering Point - The physical point located on the high side of the step up transformer, as depicted in "Attachment A" at which HELCO's metering is connected to the Facility for the purpose of measuring the output of the Facility in kilowatts, kilowatt-hours, kilovars and kilovarhours. Milestone Dates - The dates in "Attachment B" for completion of certain critical path activities. Milestone Events - The events described in "Attachment B." Monthly Fuel Oil Adjusted Factor Filing - HELCO's filing, from time to time, which includes certain charges relating to the cost of delivered No. 2 fuel oil at Keahole, Hawaii. Monthly Invoice - The monthly billing document described in Section 6.1. Mortgage - The mortgage, assignment of rents and security agreement to be executed by SELLER, in accordance with Section 3.1E, in favor of HELCO, granting to HELCO a mortgage and a lien on, among other things, SELLER's right, title and interest in and to the Facility, the Site (including any lease or sublease associated therewith, together with assignment of rents 8 under any such lease or sublease) and the rights and interests of SELLER associated therewith, as the same may be modified or amended from time to time in accordance with the terms thereof. Motion for Reconsideration - a motion to the PUC for reconsideration, rehearing, further hearing, or modification, suspension, vacation, or a combination thereof, of a PUC Order. MW - Megawatt(s). Net Electric Energy Output - For any period of time, the total electric energy output of the Facility in kWh (net of auxiliaries) as measured at the Metering Point of the Facility. Net Maximum Capacity - The maximum capacity the Facility can sustain over a specified period of time when not restricted by seasonal or other deratings less capacity utilized for the Facility's station service or auxiliaries, as measured at the Metering Point, plus transformer losses (which for purposes of this Agreement shall be deemed zero); provided that, in no event shall the Net Maximum Capacity exceed the Firm Capacity. Net Salvage Proceeds - Shall have the meaning set forth in Section 3.3B(1). NERC GADS (North American Electric Reliability Council Generating Availability Data System) - The data collection system called "Generating Availability Data System" which is utilized by the North American Electric Reliability Council, a voluntary organization formed by the electric utility industry to promote the reliability and adequacy of the bulk power supply of the electric utility systems in North America. For purposes of this Agreement, the version of NERC GADS dated October, 1996 (selected portions of which are attached hereto as "Attachment C") shall be used whenever reference is made to NERC GADS. In the event that the definition of a term contained in this Article I is inconsistent with the definition of the term under NERC GADS, the definition contained in this Article I shall control. Non-appealable PUC Approval Order - A PUC Approval Order that is a Non- appealable PUC Order. Non-appealable PUC Order - (1) A PUC Order that is not subject to appeal to any Circuit Court of the State of Hawaii or the Supreme Court of the State of Hawaii, because the thirty (30) day period permitted for such an appeal has passed without the filing of notice of such an appeal, or (2) a PUC Order that was affirmed on appeal to any Circuit Court of the State of Hawaii or the Supreme Court, or the Intermediate Appellate Court upon assignment by the Supreme Court, of the State of Hawaii, or was affirmed upon further appeal or appellate process, and that is not subject to further appeal, because the jurisdictional time permitted for such an appeal (and/or further appellate process such as a motion for reconsideration or an application for writ of certiorari) has passed without the filing of notice of such an appeal (or the filing for further appellate process). Phase 1 - The portion of the Facility consisting of the first combustion turbine generator and related facilities, put into commercial operation with a Firm Capacity as determined at the Phase 1 In-Service Date. 9 Phase 1 In-Service Date - The date, after satisfying the applicable Conditions Precedent, on which SELLER declares Phase 1 of the Facility as ready to be placed in service, based on actual operation of the Facility, under HELCO Dispatch and in accordance with all the terms and conditions of this Agreement, at an electric output level of at least nineteen thousand kilowatts (19,000 kW) (net) at the Metering Point, and at such other lower levels consistent with Section 3.3A(1) as specified by HELCO's System Operator, during a Capacity Test, such Capacity Test having been scheduled on the start-up plan provided by SELLER to HELCO in accordance with Section 5.1. Phase 1 In-Service Date Deadline - The date described as such in Section 3.2A(3). Phase 1 Period - The time from the Phase 1 In-Service Date through the day before the Phase 2 In-Service Date. Phase 2 - The full Facility consisting of Phase 1 plus the second combustion turbine generator and the steam turbine generator, and related facilities, put into commercial operation with a Firm Capacity as determined at the Phase 2 In-Service Date. Phase 2 In-Service Date - The date on which SELLER declares Phase 2 of the Facility as ready to be placed in service, based on actual operation of the Facility, under HELCO Dispatch and in accordance with all the terms and conditions of this Agreement, at an electric output level of at least forty-two thousand kilowatts (42,000 kW) (net) at the Metering Point, and at such other lower levels consistent with Section 3.3A(1) as specified by HELCO's System Operator, during a Capacity Test, such Capacity Test having been scheduled on the start-up plan provided by SELLER to HELCO in accordance with Section 5.1. Phase 2 In-Service Date Deadline - The date described as such in Section 3.2A(3). Phase 2 Period - The time from the Phase 2 In-Service Date through the end of the Term. Point of Interconnection - Shall have the meaning attributed to it in the Interconnection Agreement. Pre-Deferral Estimate - Shall have the meaning in Section 3.3C(1). Prime Rate - The base interest rate for large commercial loans to credit- worthy entities charged by the Bank of Hawaii in Honolulu, Hawaii and announced as its Prime Rate, as such rate may be in effect from time to time. Project Costs Incurred - Shall have the meaning attributed to it in Section 3.3B(1). Project Documents - This Agreement, the Thermal Energy Sales Contract, fee title or any ground lease or other lease in respect of the Site, all construction contracts to which SELLER is or becomes a party thereto, fuel supply contracts to which SELLER is or becomes a party thereto, operation and maintenance agreements, interconnection agreements in respect of the Facility and all other agreements, documents and instruments to which SELLER is or becomes a 10 party thereto in respect of the Facility, other than the Financing Documents and the Security Documents, as the same may be modified or amended from time to time in accordance with the terms thereof. PSD Permit - That "Covered Source/Prevention of Significant Deterioration" permit/authority to construct to be issued in favor of the Facility by the DoH. PUC (Public Utilities Commission) - The Public Utilities Commission of the State of Hawaii. PUC Approval Date - The date defined in Section 2.2F. PUC Approval Order - The decision and order of the PUC approving the application or motion filed by the parties seeking approval of this Agreement as described in Section 23.14. PUC Order - The decision and order of the PUC responding to the application or motion filed by the parties seeking approval of this Agreement as described in Section 23.14. PUC Order Date - The date upon which the PUC Order is issued. PUC Submittal Date - The date of submittal of HELCO's complete application or motion for approval of this Agreement pursuant to Section 23.14. PURPA - Public Utility Regulatory Policies Act of 1978 (P.L. 95-617) as amended from time to time and as applied in Hawaii by the Public Utilities Commission. QF Requirements - As defined in Section 3.2L. Qualified Independent Engineer - Any engineer listed on the Qualified Independent Engineer's List, as such list is amended from time to time. Qualified Independent Engineer's List - The list of Qualified Independent Engineers attached hereto as "Attachment H" and created and modified from time to time pursuant to Section 3.3D(1). QF (Qualifying Facility) - A facility that meets the criteria established under PURPA and 18 CFR Part 292, and Title 6, Chapter 74 of the Hawaii Administrative Rules. QLPU (Quick Load Pick Up) - The ability of a generating unit to pick up and sustain a stated percentage of its Spinning Reserve within a given number of seconds. Reserve Shutdown - The status of a generator that has been taken off-line at the direction of HELCO's System Operator, as determined in accordance with NERC GADS. Salvage Period - Shall have the meaning in Section 3.3B(1). Second Notice - The notice described in Section 3.3D(1). 11 Security Agreement - The Security Agreement to be executed by SELLER in favor of HELCO in accordance with Section 3.1E granting HELCO a security interest in, among other things, all of SELLER's right, title and interest in and to the Facility, the Project Documents, all accounts established pursuant to the Project Documents, all insurance proceeds in respect of the Facility and all proceeds of the foregoing, as the same may be modified or amended from time to time in accordance with the terms thereof. Security Documents - The Security Agreement, the Mortgage, and the Consents, together with all uniform commercial code financing statements and other agreements, consents, documents and instruments executed in connection therewith, as the same may be modified or amended from time to time in accordance with the terms thereof. Settlement Date - The date defined in Section 3.3B(1). Simple Cycle - The operation of the Facility without the ST operating. Site - The contiguous piece of real property upon which the electric operation and related non-real property portions of the Facility are located, as further described in Section 2.1C. Site Rep - HELCO's representative as described in Section 9.5. Spinning Reserve - The difference between the load currently carried on the Facility while synchronized and on-line and the Facility's Net Maximum Capacity, both measured at the same instant in time. Substation - The assemblage of equipment that switches and/or changes or regulates the voltage of electricity delivered to HELCO's electrical system from the Facility as indicated in "Attachment A." ST - The steam turbine and related equipment. Subordination Agreement - Shall have the meaning in Section 3.1E(1). Term - The term of this Agreement as defined in Section 2.6. Thermal Energy Sales Contract(s) - The contract(s) between SELLER and an industrial thermal energy buyer for the sale by SELLER of thermal energy. Transition Period - The period of time between the End of Phase 2 Start-Up and the start of the next Contract Year. Unit Trips - The sudden and immediate removal of one (1) or more of the Facility's generator(s) from service as a result of immediate mechanical/electrical/hydraulic control system trips or operator initiated action which causes a similar immediate removal from service; provided, however, -------- ------- that Unit Trips shall not include: (1) any removal of a generator which occurs within one (1) hour of when that particular unit was synchronized or resynchronized; or (2) trips caused or initiated by HELCO other than pursuant to Section 4.1 in circumstances 12 described in Section 4.1A. Unit Trips shall be counted as follows for each incident, whether or not during an incident the loss of multiple generators is simultaneous: (i) two (2) Unit Trips result when two (2) combustion turbines go off-line; (ii) two (2) Unit Trips result when one (1) combustion turbine and the steam turbine go off-line unless at the time of the incident only one (1) combustion turbine was on-line and in that event, only one (1) Unit Trip results; (iii) one (1) Unit Trip results when one (1) combustion turbine goes off-line; and, (iv) one (1) Unit Trip results when the steam turbine goes off- line. (Until such time that HELCO is operating its electrical system under a criteria that mandates Spinning Reserve to cover loss of the largest unit on the system, the removal of any of the Facility;s boilers or generators that is (1) not in conformance with HELCO Dispatch and (2) directly results in HELCO having to temporarily disrupt the delivery of electric service to any HELCO customers shall also be considered a Unit Trip.) U.S. EPA - The United States Environmental Protection Agency. Variable O&M Component - Shall have the meaning in Section 5.1A. Weekly Unit Commitment Schedule - The written notice delivered in accordance with Section 3.3A(3), stating for each day of the following week the times at which all generating facilities on HELCO's electrical system shall start up and shut down. 60-Month Schedule - Shall have the meaning in Section 3.2C(8). ARTICLE II - SCOPE OF AGREEMENT 2.1 General Description ------------------- A. Basic Concept ------------- SELLER will design, construct, own, operate and maintain an approximately sixty thousand kilowatt (60,000 kW) (net) cogeneration facility to produce electricity and thermal energy at Haina, Hawaii. The Facility will be constructed in two phases. Phase 1 is intended to be placed in commercial operation prior to Phase 2 and will consist of a single CT. Phase 2 of the Facility will consist of two CTs and an ST. Following the Phase 1 In-Service Date and during the Term of this Agreement, electricity from the Facility will be sold to HELCO under HELCO Dispatch for use in HELCO's electrical system. The Facility shall be designed, constructed, operated and maintained by SELLER so that it will be available on the schedule provided for herein and shall thereafter be available for service within the parameters set forth herein. B. Facility Specifications ----------------------- The Facility Functional Description is attached to this Agreement as "Attachment D." The single-line diagram in "Attachment A" shall expressly identify the Point of 13 Interconnection of the Facility to HELCO's electrical system. The Facility Functional Description includes all facilities required for importation, receipt, storage and handling of fuel, waste collection, interim and final waste disposal, condenser cooling water and any other facilities necessary for proper operation of the Facility, except as herein provided. C. Site ---- The Site for the Facility will be located at Haina, Hawaii. The location and Facility layout are more particularly described in "Attachment F." D. Electric Specifications ----------------------- Power supplied by SELLER hereunder shall be in the form of three- phase, 60 Hertz alternating current, at a nominal operating voltage of thirteen thousand eight hundred (13,800) volts and power factor dispatchable in the range of 0.85 lagging to 0.98 leading as measured at the Metering Point to maintain system operating parameters as specified by HELCO, with a minimum net generation design capacity of sixty thousand kilowatts (60,000 kW) for the full Facility in combined cycle mode. Not later than thirty (30) days after the PUC Approval Date, SELLER and HELCO shall reasonably mutually agree in writing to additional standards, if any, for the quality of electricity, including but not limited to standards for voltage flicker and generation of harmonic frequencies, that shall apply to the electricity generated by SELLER. E. Fuel and Other Expendables -------------------------- SELLER will contract for, acquire or otherwise provide for a reliable supply of Fuel and other expendables necessary to operate the Facility. 2.2 Effective Date/Regulatory Approval ---------------------------------- A. Effective Date of Agreement --------------------------- This Agreement shall become effective on the Execution Date, provided, --------- that, notwithstanding the foregoing, prior to the PUC Approval Date (i) in no - ---- event shall SELLER be obligated to sell capacity and energy to HELCO, or have any other obligations to HELCO other than those set forth in Sections 2.2, 2.3A, 2.7, 3.2A(1) (only as to obligations with respect to design and acquiring land rights) (2) (4) and (5), 3.3B, 3.3C, Articles XI, XIII, XIV, XV, XVII, XIX, XXII and XXIII and (ii) in no event shall HELCO be obligated to make any payments provided for herein to Seller or have any other obligations to SELLER other than those set forth in Sections 2.2, 2.3B, 2.7, 3.1E, 3.2A(4) and (5), 3.3B and 3.3C and Articles XI, XIV, XV, XVII, XIX, XXII and XXIII. B. Effect of Delay or Denial of PUC Approval ----------------------------------------- If, despite the best efforts of the parties, neither a PUC Approval Order nor a PUC Order partially or conditionally approving this Agreement that is subject to Section 2.2D or Section 2.2E hereof, is obtained within twelve (12) months of the PUC Submittal Date, HELCO 14 or SELLER may, by written notice delivered within thirty (30) days of such date, declare this Agreement null and void and the parties hereto shall thereafter be free of all obligations hereunder and shall pursue no further remedies against one another, except as provided in Article XI and Section 2.2H hereof; provided, -------- however, that, notwithstanding delivery of such notice, the date specified above - ------- may be extended by a subsequent written agreement. During the period until twelve (12) months following the PUC Submittal Date, and any period of extension, SELLER and HELCO shall be each obligated to continue performance of their obligations under this Agreement which are by their terms applicable prior to the PUC Approval Date. If neither party elects to terminate within the time frame stated above, this Agreement shall continue in full force and effect, subject to the other provisions of the Article II. C. Effect of Delay in Obtaining Non-Appealable PUC Approval Order -------------------------------------------------------------- If, despite the best efforts of the parties, a Non-appealable PUC Approval Order is not obtained within twenty-four (24) months from the PUC Submittal Date, SELLER may, by written notice delivered to HELCO within thirty (30) days of such date, declare this Agreement null and void and the parties shall thereafter be free of all obligations hereunder and shall pursue no further remedies against one another, except as provided in Article XI and Section 2.2H hereof; provided, however, that, if SELLER does not elect to -------- ------- terminate within the time frame stated above, this Agreement shall continue in full force and effect, subject to the other provisions of Article II. D. Effect of Partial Approval of Payment Terms ------------------------------------------- In the event that the initial PUC Order does not allow for the recovery by HELCO of the full power purchase costs under this Agreement (i.e., capacity payments and energy payments as well as other costs) in HELCO's base rates and/or Energy Cost Adjustment Clause, as the case may be, in the amounts agreed to in this Agreement, but the PUC Order is otherwise satisfactory to HELCO and SELLER in all other material respects, then SELLER has the option to (1) accept such lower payment rates as are approved by the PUC, in which case the parties shall make conforming changes to this Agreement; (2) seek reconsideration, which Motion shall be filed no later than 30 days after the issuance date for the PUC Order, and, if unsuccessful, appeal the PUC's determination, in which case, SELLER shall have accepted such lower power purchase costs provided for in the PUC Order, pending the outcome of such actions; or (3) terminate this Agreement by written notice delivered within thirty (30) days of the earlier of (i) the issuance date of such initial PUC Order, or (ii) the date twenty-four (24) months following the PUC Submittal date, without further liability or obligation except as provided in Articles XI and Section 2.2H hereof. If SELLER elects to proceed under clause (2) above, and is unsuccessful in obtaining a Non-appealable PUC Approval Order, then SELLER shall be deemed to have accepted the lower power purchase costs provided for in the final PUC Order, in which case the parties shall make conforming changes to this Agreement. If SELLER does not elect to proceed under clause (2) above, and does not terminate this Agreement by timely written notice under clause (3) above, SELLER shall be deemed to have elected to proceed under clause (1) above, provided that if higher allowed power purchase costs are ------------- subsequently 15 authorized by the PUC, HELCO shall be obligated to pay SELLER such additional amounts for which actual recovery subsequently has been approved by the PUC. E. Conditional PUC Approval ------------------------ If the initial PUC Order requires any material change to this Agreement, imposes any material condition upon such approval, or rejects a material provision of this Agreement, the parties shall promptly meet to determine in good faith whether it is in the parties' mutual interest to seek reconsideration from the PUC. If the parties do not determine within thirty (30) days of the PUC Order to seek reconsideration, or the parties determine to proceed with such reconsideration but are not successful in obtaining a PUC Approval Order without such change, condition or rejection within ninety (90) days of the PUC Order, either party may, by written notice delivered to the other party within ten (10) days after expiration of the foregoing thirty (30) day or ninety (90) day periods, as applicable, elect to renegotiate this Agreement. If such notice of intent to renegotiate this Agreement is delivered, the parties shall (A) use their best efforts and negotiate in good faith to agree within three (3) months from such notice upon a mutually satisfactory amendment to this Agreement, which to the extent possible eliminates any material adverse effect on either party and preserves the economic and operational arrangements between the parties as set forth in this Agreement, and (B) resubmit this Agreement, as so amended, to the PUC for approval of the Agreement, as amended. If, despite good faith efforts, the parties are unable to reach agreement on a satisfactory amendment within such three (3) month period, or obtain PUC approval of such amended agreement within six (6) months of the date of submittal to the PUC, or if a notice of intent to renegotiate this Agreement is not delivered, the party which is materially adversely affected by such change, condition or rejection may, upon written notice delivered to the other party within thirty (30) days of the earlier of (i) expiration of the foregoing three (3) month, six (6) month, or ten (10) day periods, as applicable, or (ii) the date twenty-four (24) months following the PUC Submittal Date, elect to terminate this Agreement, without any further liability or obligation to the other party except as provided in Article XI and Section 2.2H hereof. If a party that is materially adversely affected by such material change, condition or rejection does not terminate this Agreement by timely written notice, the materially adversely affected party shall be deemed to have accepted such material change, condition or rejection, and the parties shall make conforming changes to this Agreement. F. PUC Approval Date The PUC Approval Date shall be defined as follows: ----------------- (1) If a PUC Approval Order is issued, and is not made subject to a Motion for Reconsideration or an appeal, the PUC Approval Date shall be thirty (30) days after the issuance date of the PUC Approval Order. (2) If the PUC Approval Order becomes subject to a Motion for Reconsideration, and the Motion for Reconsideration is denied or the PUC Approval Order is affirmed after reconsideration, and such order is not made subject to an appeal, the PUC Approval Date shall be deemed to be the issuance date of the order denying reconsideration of or affirming the PUC Approval Order. 16 (3) If the initial PUC Order is subject to Section 2.2D or Section 2.2E, and this Agreement is not terminated pursuant to the provisions of such Sections, the PUC Approval Date shall be the earlier of (i) the date upon which the right to terminate pursuant to Section 2.2D or Section 2.2E, as the case shall be, shall cease, or (ii) the date twenty-four (24) months following the PUC Submittal Date. (4) If the PUC Approval Order, or an order denying reconsideration of the PUC Approval Order or affirming approval of the PUC Approval Order after reconsideration, becomes subject to an appeal, then the PUC Approval Date shall be the earlier of (i) the date upon which the PUC Approval Order becomes a Non- appealable PUC Approval Order, or (ii) the date twenty-four (24) months following the PUC Submittal Date. G. Effect of Reconsideration or Appeal of PUC Approval Order --------------------------------------------------------- (1) If the PUC Approval Order is vacated or reversed in whole or in material part, or is materially modified, by the PUC after reconsideration, such that the resulting PUC Order is no longer a PUC Approval Order, and is not a PUC Order partially or conditionally approving this Agreement that would be subject to Section 2.2D or Section 2.2E hereof if it were an initial PUC Order (in which event the parties shall proceed in accordance with Section 2.2D or Section 2.2E, as the case may be), the parties shall seek reinstatement of the PUC Approval Order. If such efforts are not successful within twenty-four (24) months from the PUC Submittal Date, HELCO or SELLER may, by written notice delivered within thirty (30) days of such date, declare this Agreement null and void and the parties shall thereafter be free of all obligations hereunder and shall pursue no further remedies against one another, except as provided in Article XI and Section 2.2H hereof. In seeking reinstatement of the PUC Approval Order, HELCO may, but shall not be required to, initiate or join in a Motion for Reconsideration or an appeal from the resulting PUC Order, unless HELCO is a required or necessary party to such Motion for Reconsideration. (2) If the PUC Approval Order is vacated, reversed or held invalid, void or unlawful in whole or in material part, or the PUC Approval Order is materially modified such that the resulting PUC Order is no longer a PUC Approval Order, and is not a PUC Order partially or conditionally approving this Agreement that would be subject to Section 2.2D or Section 2.2E hereof if it were an initial PUC Order (in which event the parties shall proceed in accordance with Section 2.2D or Section 2.2E, as the case may be), within twenty-four (24) months after the PUC Submittal Date as a result of an appellate order, the parties shall seek reinstatement of the PUC Approval Order. If such efforts are not successful within twenty-four (24) months from the PUC Submittal Date, HELCO or SELLER may, by written notice delivered within thirty (30) days of the date of such appellate order, declare this Agreement null and void and the parties shall thereafter be free of all obligations hereunder and shall pursue no further remedies against one another, except as provided in Article XI and Section 2.2H hereof. Nothing herein shall be construed to require HELCO to initiate or join in a Motion for Reconsideration or an appeal from a PUC Order issued in response to the parties' efforts to seek reinstatement of the PUC Approval Order, unless HELCO is a required or necessary party to the Motion for Reconsideration or appeal. 17 (3) If the PUC Approval Order is vacated, reversed or held invalid, void or unlawful in whole or in material part, or is materially modified, as a result of an appellate order (i.e., as a result of an order by a court of competent jurisdiction after appeal, or by the PUC upon remand after appeal) at a date later than twenty-four (24) months from the PUC Submittal Date, and SELLER does not terminate this Agreement pursuant to Section 2.2C, the parties shall jointly seek reinstatement of the PUC Approval Order. If such efforts are not successful within twenty-four (24) months thereafter, this Agreement shall be amended to eliminate any material adverse impact on HELCO of the appellate order, or of the PUC Order issued upon further PUC proceedings, including but not limited to any adverse impact on HELCO's ability to recover the full power purchase costs under this Agreement, and to preserve to the extent possible, the economic and operational arrangements between the parties as set forth in this Agreement. (4) Pending resolution of the parties' efforts to reinstate the PUC Approval Order, and the issuance of a final PUC Order upon further proceedings, HELCO's obligation to make payments to SELLER under this Agreement shall be limited to the amount of the power purchase costs that HELCO is allowed to recover. If the final PUC Order issued upon further proceedings does not allow for the recovery by HELCO of the full power purchase costs under this Agreement, HELCO's obligation to make payments to SELLER thereafter under this Agreement shall be limited to the amount of the power purchase costs that HELCO is allowed to recover pursuant to such PUC Order. If higher allowed power purchase costs are subsequently authorized by the PUC, HELCO thereafter shall be obligated to pay SELLER such additional amounts for which actual recovery has been approved by the PUC. If HELCO has paid or becomes obligated to pay SELLER any amounts pursuant to this Agreement prior to the date the final PUC Order issued upon further proceedings becomes a Non-appealable PUC Order that HELCO has not been able and/or will not be able to recover through its base rates or Energy Cost Adjustment Clause, and/or if HELCO has recovered such amounts but is or will be required to refund to its customers amounts attributable to this Agreement, SELLER shall repay such amounts to HELCO within thirty (30) days of receipt of HELCO's written demand for repayment. (5) If the initial PUC Order is subject to Section 2.2D or Section 2.2E, and the Agreement is not terminated pursuant to the provisions of such sections, then the initial PUC Order, or a subsequent PUC Order or PUC Approval Order if the initial PUC Order is amended as a result of a Motion for Reconsideration filed by SELLER or by the parties, shall be deemed to be a PUC Approval Order for purposes of Section 2.2F and 2.2G. H. Obligations of Parties Upon Termination. --------------------------------------- If pursuant to Section 2.2B, 2.2C, 2.2D, 2.2E, or 2.2G, a party exercises its right to terminate, this Agreement shall be terminated and null and void and the parties hereto shall be free of all obligations hereunder, other than as provided under Article XI, except that if SELLER exercises its right to terminate, then SELLER shall reimburse HELCO for its reasonable, documented out-of-pocket costs in seeking PUC Approval as provided in Article XXII. 18 2.3 Conditions Precedent. -------------------- A. HELCO Conditions Precedent. -------------------------- Subject to and consistent with the provisions of Sections 2.2, 2.3B, 2.4 and 2.5, HELCO's obligation to purchase energy and/or capacity from SELLER pursuant to this Agreement, and any and all obligations of HELCO which are ancillary to that purchase, including, without limitation, HELCO's obligations under Articles IV, V and VI and Sections 3.1, 3.2E, and 3.3A and B, are contingent upon the following: (1) Following the Execution Date - Within sixty (60) days after the PUC Submittal Date, SELLER shall provide HELCO with either, at SELLER's option, the available design materials listed in "Attachment O" or other evidence reasonably demonstrating that the Facility, if constructed, operated and maintained pursuant to the design materials and in accordance with Good Engineering and Operating Practices, can be reasonably expected to have a useful life at least equal to the Term. (2) On or Before Closing Date - On or before the Closing Date, SELLER shall provide HELCO with the following: (i) Copies of the following executed Project Documents, if applicable, in each case redacted to exclude any confidential or proprietary information: (A) the Thermal Energy Sales Contract (if SELLER intends to be a Qualifying Facility by selling useful thermal energy), which contract shall have an initial term of at least two (2) years; (B) the Fuel Supply Agreement; and (C) other contracts (if any) entered into by SELLER for the purchase of critical materials and services necessary for the operation and maintenance of the Facility; (ii) Copies of any and all then-required insurance policies (or binders as appropriate) procured by SELLER in accordance with Article XIII relating to the construction of the Facility, as the case may be; (iii) A certificate, executed by a duly authorized officer of SELLER certifying that: (A) SELLER has the right to locate the Facility at the Site for the Term and (B) SELLER has obtained all then-required permits, consents, licenses, approvals and other governmental authorizations needed to commence construction of the Facility. (3) On or Before Phase 1 In-Service Date - On or before the Phase 1 In-Service Date, SELLER shall provide HELCO with: (i) Copies of any and all then-required insurance policies (or binders as appropriate) provided by SELLER required pursuant to Article XIII to be in effect prior to operation of the Facility; and (ii) A certificate, executed by a duly authorized officer of SELLER certifying that: (A) SELLER has obtained all then-required permits, consents, licenses, approvals and other governmental authorizations needed to operate the Facility throughout the 19 Term or, if one or more such permits, consents, licenses, approvals or authorizations is not available at that time for the full Term, for such lesser period as is available; and (B) construction of Phase 1 of the Facility is substantially complete, that the Facility has been constructed substantially in compliance with the terms of this Agreement and with the information submitted pursuant to Section 2.3A(1) and (2), and that all operational testing has been satisfactorily accomplished and the Facility is ready to begin producing power on a commercial basis under the terms and conditions of this Agreement. SELLER shall also provide any other materials required by Sections 2.3A(1) and (2) if HELCO has, pursuant to 2.3B(1), extended the date for compliance with the Phase 1 In-Service Date. (4) On or Before Phase 2 In-Service Date - On or before the Phase 2 In-Service Date, SELLER shall provide HELCO with either, at SELLER's option, a certificate stating or other evidence reasonably demonstrating the items set forth in Section 2.3A(3), as such items relate to Phase 2. B. Failure of HELCO Conditions Precedent ------------------------------------- (1) Right to Declare an Event of Default - If SELLER fails to comply in full with any of the requirements of Section 2.3A and the requirements of this Section 2.3B(1), HELCO may declare such failure an Event of Default under Section 7.1A(3) and exercise its rights under Article VII. In the event that SELLER anticipates that it may fail to meet any of the requirements of Section 2.3A, SELLER shall be given a reasonable additional period to meet such requirements, if SELLER demonstrates that (i) SELLER is reasonably likely to achieve the Phase 1 In-Service Date on or before fifteen (15) months after the Phase 1 In-Service Date Deadline, as extended for Force Majeure, or as otherwise provided herein, and (ii) SELLER is reasonably likely to achieve the Phase 2 In- Service Date on or before fifteen (15) months after the Phase 2 In-Service Deadline, as extended for Force Majeure, or as otherwise provided herein. Upon completing the undertakings set forth in the immediately preceding sentence and not later than thirty (30) days prior to the applicable deadline for meeting any requirement under Section 2.3A (without regard to any extension which may be granted under this Section 2.3B(1)), SELLER shall certify to HELCO, in writing, that HELCO has been provided with all material information necessary for HELCO to make an informed decision with respect to such matters and that such information is true and correct in all material respects and in no way materially misleading. Within thirty (30) days of HELCO's receipt of such certification, HELCO shall give written notice to SELLER in which HELCO either agrees to a new deadline specified in such notice (either by reference to a fixed calendar date or to a defined event) for achieving compliance with the requirement involved or declares an Event of Default in accordance with the first sentence of this Section 2.3B(1). If SELLER fails to comply substantially with the requirements of Section 2.3A by such new deadline, HELCO may immediately declare such failure an Event of Default in accordance with the first sentence of this Section 2.3B(1). (2) SELLER's Declaration Requirements - Not later than ninety (90) days after the PUC Submittal Date, SELLER shall submit to HELCO a written statement declaring whether SELLER considers that it has complied with Section 2.3A(1) and shall identify with 20 particularity the submissions on which it relies and shall certify that such submissions are true and correct in all material respects and in no way materially misleading. On or before the Closing Date, SELLER shall submit to HELCO a written statement declaring whether SELLER considers that it has complied with Section 2.3A(2) and shall identify with particularity the submissions on which it relies and shall certify that such submissions are true and correct in all material respects and in no way materially misleading. Not later than fifteen (15) days following the Phase 2 In-Service Date, SELLER shall submit to HELCO a written statement declaring whether SELLER considers that it has complied with Section 2.3A(4) and shall identify with particularity the submissions on which it relies and shall certify that such submissions are true and correct in all material respects and are not materially misleading. (3) HELCO's Declaration Requirements - HELCO shall be deemed to have waived its right to declare any failure by SELLER to comply in full with the requirements of Sections 2.3A(1), 2.3A(3) or 2.3A(4) to be an Event of Default if (i) with respect to any extension requested by SELLER under Section 2.3B(1), HELCO fails to deliver to SELLER written notice in accordance with Section 2.3B(1) or (ii) with respect to all other requirements under Section 2.3B(1), HELCO fails to declare an Event of Default within 30 days of receiving the written statement required under Section 2.3B(2) relating to Sections 2.3A(1), (3) or (4). Within thirty (30) days of receiving SELLER's written statement pursuant to Section 2.3B(2), HELCO shall provide SELLER with either a written declaration that SELLER has satisfied the requirements of Section 2.3A(2), or a written statement setting forth the requirements HELCO believes have not been met by SELLER. HELCO's failure to provide SELLER with such written declaration or statement within the foregoing thirty (30) day period shall be deemed a waiver of its right to declare an Event of Default with respect to the requirements set forth in Section 2.3A(2). HELCO shall not be deemed to have waived its right to declare an Event of Default if SELLER knew or should have known that any of its submissions or declarations to HELCO under Section 2.3 were materially incomplete, inaccurate or misleading. 2.4 Failure to Meet Milestone Dates ------------------------------- A. Right to Declare Event of Default --------------------------------- (1) Failure to Achieve Milestones - If SELLER fails to achieve any Milestone Event within three (3) months after its Milestone Date as set forth in "Attachment B," as extended for reasons of Force Majeure or as otherwise provided in this Agreement, SELLER shall within thirty (30) days thereafter submit for HELCO's review and approval, which approval shall not be unreasonably withheld, a detailed plan which describes (i) the reasons why such Milestone Event was not achieved, (ii) SELLER's proposed measures for achieving such Milestone Event as soon as practicable thereafter, and (iii) SELLER's proposed measures for meeting the Phase 1 In-Service Date and Phase 2 In-Service Date by not more than six (6) months after the Phase 1 In-Service Date Deadline and Phase 2 In-Service Date Deadline, respectively. Until such Milestone Event is met, SELLER shall provide HELCO with monthly progress reports as to the status of SELLER's efforts to achieve such Milestone Event. 21 If SELLER thereafter fails to achieve any Milestone Event within nine (9) months after its Milestone Date as set forth in "Attachment B" as extended for reasons of Force Majeure or as otherwise provided in this Agreement, and if HELCO reasonably determines that such failure makes it unlikely that the Facility will achieve the Phase 1 In-Service Date by fifteen (15) months after the Phase 1 In-Service Date Deadline or the Phase 2 In-Service Date by fifteen (15) months after the Phase 2 In-Service Date Deadline, HELCO may, at any time after nine (9) months after such Milestone Date, declare such failure to achieve a Milestone Date an Event of Default and exercise its rights provided for in Article VII; provided that, if HELCO does not exercise such right to declare an -------- ---- Event of Default within fifteen (15) months after such Milestone Date, it shall be deemed to have waived its rights to declare an Event of Default in connection with such failure. (2) Dispute Over HELCO's Determination - If SELLER disputes HELCO's determination that SELLER has failed to achieve any task within the required time period or disputes the reasonableness of HELCO's determination that the Facility is unlikely to achieve the Phase 1 In-Service Date or Phase 2 In- Service Date, as the case may be, within the stated periods provided in Section 2.4A(1), SELLER may call for expedited arbitration of the issue in accordance with Section 2.4C, and any related declaration of an Event of Default by HELCO shall be stayed until such arbitration is concluded. If the arbitrator finds that SELLER has not failed to achieve such task within such time period or the arbitrator rejects HELCO's determination as unreasonable, then any HELCO declaration of an Event of Default hereunder shall be null and void. B. Late Charges ------------ In the event the Facility has not achieved either In-Service Date Deadline by three (3) months after such In-Service Date Deadline, as extended for reasons of Force Majeure or as otherwise provided in this Agreement, SELLER shall pay to HELCO Late Charges as follows: (1) if either or both In-Service Date Deadlines are missed, the total amount of $10,000 per day, commencing on the day following such three (3) month period, until the earlier of: (X) the date on which the Facility achieves the Phase 1 In-Service Date or Phase 2 In-Service Date, as the case may be, associated with such missed In-Service Date Deadline; (Y) the date nine (9) months after the Phase 2 In-Service Deadline; or (Z) the date on which HELCO terminates this Agreement under Section 7.2; and (2) if either or both of the In-Service Date Deadlines are missed, the total amount of $20,000 per day commencing on the date which is nine (9) months after the Phase 2 In-Service Deadline, until the earlier of (X)the date on which the Facility achieves the Phase 1 In-Service Date or the Phase 2 In- Service Date, as the case may be, associated with such missed In-Service Date Deadline, or (Y) the date on which HELCO terminates this Agreement under Section 7.2; Notwithstanding anything to the contrary in this Section 2.4B, if HELCO does not exercise its termination right under Section 7.2 by the end of the fifteenth (15th) month after the missed In- 22 Service Date Deadline (or if both In-Service Date Deadlines are missed, the fifteenth (15th) month after the first missed In-Service Date Deadline), the aforesaid Late Charges shall thereupon terminate unless prior to the end of that period HELCO provides written notice to SELLER that it will refrain from exercising its termination right under Section 7.2 for a further stated period of time (not to exceed six (6) months without SELLER's written consent) to be fixed by HELCO in said notice, based on HELCO's reasonable estimate of the time required to achieve the Phase 1 In-Service Date and/or Phase 2 In-Service Date, as applicable, in which case the aforesaid Late Charges shall continue during the stated period of time thus fixed by HELCO. Late Charges shall be made in immediately available funds on Monday of each week for amounts due with respect to the previous seven (7) days except in the event of termination of this Agreement in accordance with Section 7.2, in which event Section 7.2D shall apply; provided, however, that in the event SELLER does not make any or all of -------- ------- such payments to HELCO on or before the due date for the initial Capacity Charge payment under Section 5.1B, HELCO shall have the right to offset any unpaid portion of such Late Charge against such initial Capacity Charge payment and, if necessary, against each succeeding Capacity Charge payment until such Late Charge is paid in full. Unless HELCO declares an Event of Default and terminates this Agreement for SELLER's failure to meet the Phase 1 In-Service Date and/or Phase 2 In-Service Date in accordance with Section 7.1A(1), then, so long as HELCO accepts delay of the Phase 1 In-Service Date and/or Phase 2 In- Service Date, the payment of Late Charges as provided herein shall be HELCO.s sole and exclusive remedy and SELLER's sole liability for damages for SELLER's delay in achieving the Phase 1 In-Service Date and/or Phase 2 In-Service Date. C. Arbitration ----------- (1) Time of the Essence The parties agree that time is of the essence in resolving any dispute regarding the declaration of an Event of Default by HELCO pursuant to Section 2.4A. Accordingly, arbitration pursuant to this Section 2.4C shall be the exclusive mechanism for resolving any such dispute, and the timetable set out in this Section 2.4C shall be adhered to strictly. (2) Designation of Arbitrator If SELLER disputes the declaration of an Event of Default by HELCO pursuant to Section 2.4A, SELLER shall give written notice to HELCO of such dispute within seven (7) days after receipt of said declaration of an Event of Default. Upon such written notice by SELLER, a single Qualified Independent Engineer shall be designated as a single arbitrator to consider and resolve such dispute as provided for herein. The selection of such single arbitrator shall be made from the list established in Section 3.3D(2) and the provisions of Article XIV shall not apply to the selection of such arbitrator or to the conduct of such arbitration. If HELCO and SELLER do not agree upon the arbitrator to be employed within seven (7) days after SELLER's notice of dispute, SELLER shall designate the arbitrator from the list provided for under Section 3.3D(2) not later than the seventh (7th) day following receipt by HELCO of SELLER's notice of dispute. 23 (3) Timing of Arbitrator's Decision The arbitrator shall complete all proceedings and issue his decision with regard to the declaration of an Event of Default under Section 2.4A within thirty (30) days of the date on which he is designated unless the arbitrator determines that additional time is required in order to give adequate consideration to the matter. In such case the arbitrator shall state in writing his reasons for believing that additional time is needed and shall specify the additional period required. Such additional period shall not in any event exceed thirty (30) days. (4) Standard to be Applied After hearing the parties' positions, the arbitrator shall determine whether HELCO has exercised reasonable judgment in determining that SELLER's failure to achieve a Milestone Event by the Milestone Date has made it unlikely that the Facility will achieve the Phase 1 In-Service Date or Phase 2 In-Service Date, as the case may be, by the periods set forth in Section 2.4A(1). (5) Effect of Arbitrator's Decisions Unless the parties otherwise agree, the arbitrator's decision shall become binding upon the parties at such time as the decision is confirmed by order of a court of competent jurisdiction pursuant to Chapter 658, Hawaii Revised Statutes. (6) Cost of Arbitration The parties shall each pay fifty (50) percent of the cost of the arbitration. 2.5 No Waiver --------- Except as otherwise provided herein, failure by HELCO to invoke its rights under Sections 2.3 or 2.4A with respect to any particular Condition Precedent or Milestone Event shall in no way diminish HELCO's rights upon the failure of SELLER to achieve any subsequent Condition Precedent or Milestone Event prior to its applicable Milestone Date. Notwithstanding any other provision hereof, HELCO's failure to declare an Event of Default during the time periods provided for in this Agreement shall not constitute a waiver if such failure is the direct or indirect result of SELLER's misstatement of a material fact or SELLER's omission of a material fact which is necessary to make any representation, warranty, certification, guarantee or statement made (or notice delivered) by SELLER to HELCO in connection with this Agreement (whether in writing or otherwise) not misleading. 2.6 Term ---- Subject to issuance of the PUC Order referred to in Section 23.14 and the provisions of Sections 2.2A and 2.3A, the Term of this Agreement shall commence upon the Execution Date and, unless extended pursuant to Section 2.6A below or for periods of Force Majeure occurring 24 after the Phase 2 In-Service Date, or as otherwise provided in this Agreement, this Agreement shall terminate on the 30th anniversary of the Phase 2 In-Service Date of the Facility. A. Extension of Term ----------------- HELCO shall have the first opportunity to negotiate with SELLER to purchase the capacity and/or Net Electric Energy Output of the Facility for periods beyond the Term. At the request of HELCO, SELLER shall enter into such good faith negotiations at any time after the beginning of the fifth (5th) calendar year prior to the end of the Term, shall attempt in good faith to reach agreement with HELCO, and shall not negotiate with any other entity unless no agreement has been reached between HELCO and SELLER as of thirty-six (36) months prior to the end of the Term. Unless otherwise specifically stated in writing by HELCO, any negotiations commenced within such five (5) year period shall be considered terminated as of the end of the Term. B. Post Term --------- Upon expiration of the Term and any extensions thereof, the parties hereto shall no longer be bound by the terms and conditions of this Agreement, except to the extent necessary to enforce the rights and obligations of the parties arising under this Agreement before the end of the Term. However, should the original Term end with the parties hereto actively negotiating for the purchase of the Facility pursuant to Article XIX or the capacity and/or Net Electric Energy Output of the Facility, then such Term shall be automatically extended on a month-to-month basis under the same terms and conditions as contained in this Agreement for so long as said negotiations continue in good faith. The month-to-month Term extensions shall end sixty (60) days after either party notifies the other in writing that said negotiations have terminated. 2.7 SELLER Financing ---------------- Notwithstanding any other provisions in this Agreement, if within eight (8) months from the Execution Date, SELLER has been unable, despite its reasonable best efforts, to obtain a firm commitment (subject to customary conditions including, without limitation, receipt of all required permits and approvals) by a prospective lender or underwriter for construction and term non-recourse project financing for the Facility on commercially reasonable terms and conditions, taking into account the Facility's size, fuel type, technology, geographic location and intended use of tax-exempt financing, then SELLER, at its option, may terminate this Agreement without any liability or further obligation on the part of either party under this Agreement, except as provided in Articles XI and XXII and Section 2.2H; provided however, that HELCO shall -------- ------- have the option, upon the request of SELLER, to participate in good faith negotiations with potential financing parties for a period of not less than thirty (30) days to modify any terms of this Agreement as needed to acquire financing on satisfactory terms and conditions; provided further, that -------- ------- (A) during such negotiations the Milestone Dates and the In-Service Date Deadlines shall be extended on a day-to-day basis; and (B) any such termination under the terms of this Section 2.7 must occur, if at all, within the later of (i) nine (9) months after the Execution Date; (ii) forty-five (45) days after the PUC Order Date; (iii) sixty (60) days after the PUC Order Date if the PUC Order amends any material provision of this Agreement; or (iv) the earlier of sixty (60) days after 25 the date of filing of any Motion for Reconsideration of, or appeal from, the PUC Order, or ten (10) days after the date such Motion for Reconsideration or appeal is resolved. SELLER shall reimburse HELCO for any out-of-pocket costs incurred in connection with HELCO's participation in good faith negotiations with potential financing parties pursuant to this Section 2.7. ARTICLE III - SPECIFIC RIGHTS AND OBLIGATIONS OF THE PARTIES 3.1 Rights and Obligations of Both Parties -------------------------------------- A. Sale and Purchase of Power -------------------------- SELLER shall produce, supply and sell to HELCO and HELCO shall take from SELLER and pay for the Firm Capacity and Net Electrical Energy Output as determined hereunder under the terms and conditions established in this Agreement. B. Protection of Facilities ------------------------ Each party shall be responsible for protecting its own facilities from possible damage by reason of electrical disturbances or faults caused by the operation, faulty operation or non-operation of the other party's facilities, and such other party shall not be liable for any such damage so caused. C. Good Engineering and Operating Practices ---------------------------------------- HELCO and SELLER and all their employees, agents, assigns and contractors shall act in accordance with Good Engineering and Operating Practices in carrying out all actions under this Agreement. D. Interconnection Facilities -------------------------- Simultaneously herewith, SELLER and HELCO have entered into the Interconnection Agreement. E. Security Documents ------------------ Concurrent with the Closing Date, SELLER and HELCO shall comply with the following requirements: (1) SELLER shall execute and deliver to HELCO the Security Agreement and the Mortgage, which shall contain terms and conditions reasonably satisfactory to the Financing Parties and HELCO, to secure the performance by SELLER of its payment obligations under this Agreement; provided, that HELCO -------- ---- shall concurrently execute and deliver to Financing Parties and SELLER a subordination agreement (the "Subordination Agreement") which shall contain terms and conditions generally required by lenders of long-term, non-recourse project loans and 26 provided further, that such terms and conditions shall be reasonably - -------- ------- ---- satisfactory to Financing Parties and HELCO, which shall use best efforts to complete such documentation within sixty (60) days of the commencement of negotiations. The Subordination Agreement shall subordinate, in all respects, the Security Agreement and the Mortgage to the mortgage and security interest provided to the Financing Parties in an amount and to the extent that such security interest and mortgage secure such credit extended by the Financing Parties to SELLER as shall be required for the development, construction and operation of the Facility. (2) SELLER and HELCO shall each execute and deliver to the other or shall cause to be executed and delivered to the other any required consents. (3) SELLER shall request the original Financing Parties and any additional or substitute Financing Parties to become parties to such documentation as is reasonably necessary to give effect to this Section 3.1E. (4) SELLER and HELCO shall each execute and deliver to the other favorable legal opinions of counsel, in reasonably satisfactory form and substance, to the effect that this Agreement has been duly authorized and executed by that party and constitutes a legally enforceable obligation binding against that party in accordance with its terms, subject to customary exceptions. (5) SELLER and HELCO shall each execute and deliver to the other such other documents and instruments, and take such other actions as may be reasonably necessary (A) for HELCO to establish and perfect its rights under the Security Documents and to obtain and give full effect to the security interest, mortgage and priority contemplated hereby and (B) for SELLER to carry out the transactions contemplated by the Financing Documents, as reasonably requested by the Financing Parties. 3.2 Rights and Obligations of SELLER -------------------------------- A. Design and Construction of Facility ----------------------------------- (1) General - SELLER shall furnish all financial resources, labor, tools, materials, equipment, transportation, supervision, and other goods and services necessary to completely design and build the Facility as more particularly described in Section 2.1B. SELLER shall also be responsible for acquiring any and all necessary land rights for the Facility as well as for fuel handling and waste disposal infrastructures. The design and construction of the Facility as well as the acquisition of other necessary infrastructures shall take place using Good Engineering and Operating Practices. (2) Milestone Dates - Due to the critical nature of HELCO's energy needs, the attainment of all Milestone Events, on or prior to applicable Milestone Dates established as of the date of this Agreement and specified in "Attachment B" as extended due to Force Majeure or as otherwise provided, is essential, and SELLER will make all reasonable efforts to meet the Milestone Dates. Unless a change in such dates is agreed to in writing between the parties, a 27 failure to achieve a Milestone Event within three (3) months after its Milestone Date shall be treated in accordance with the provisions of Section 2.4 and Article VII, if applicable to such condition. (3) In-Service Date Deadlines - The Phase 1 In-Service Date shall occur no later than fourteen (14) months after the Execution Date or eight (8) months after the PUC Approval Date, whichever is later (the "Phase 1 In-Service Date Deadline") and the Phase 2 In-Service Date shall occur no later than eighteen (18) months after the Execution Date or twelve (12) months after the PUC Approval Date, whichever is later (the "Phase 2 In-Service Date Deadline") unless extended as a result of Force Majeure or as otherwise provided in this Agreement. A failure to achieve the Phase 1 In-Service Date or Phase 2 In- Service Date by the dates specified in Section 7.1A(1) shall be treated in accordance with the provisions of Section 2.4 and Article VII, if applicable to such failure. (4) Permits and Licenses - SELLER shall assume full responsibility for the acquisition of all permits and licenses required for the construction and operation of the Facility; provided that, HELCO shall cooperate with and shall -------- ---- not oppose SELLER's efforts in connection therewith. Notwithstanding anything to the contrary, if SELLER does not obtain all permits necessary for construction of the Facility within eight (8) months of the PUC Approval Date, SELLER shall have the right to terminate this Agreement within thirty (30) days thereafter, effective upon written notice to HELCO, and SELLER shall thereafter have no further liability or obligations to HELCO, except as provided in Articles XI and XXII; provided, that such right to terminate must be exercised no later than -------- ---- twenty-four (24) months after the PUC Submittal Date. (5) Review of Facilities - SELLER shall make readily available to HELCO, during normal business hours, non-proprietary, detailed engineering and as-built drawings relating to the design and construction of the Facility within a reasonable time after such drawings are available. HELCO shall have an opportunity, from time to time, as reasonably requested by HELCO, to (a) review and comment on the design of the Facility, (b) to observe the construction of the Facility and the equipment to be installed therein and (c) to inspect the Facility and related equipment following the completion of construction and/or installation of Phase 1 and Phase 2; provided that, such activities do not materially interfere with SELLER's construction or operation of the Facility. Unless otherwise agreed to by the parties, HELCO shall, as soon as practicable, but in no event later than thirty (30) days following provision to it of (i) any design materials or (ii) any opportunity for inspection by it of the construction of the Facility, review and provide comments thereon, and SELLER shall, as soon as practicable, but in no event later than thirty (30) days after receipt of such comments, respond in writing, either noting agreement and action to be taken or reasons for disagreement. If SELLER disagrees with HELCO, it shall note alternatives it will take to accomplish the same intent, or provide HELCO with a reasonable explanation as to why no action is required by Good Engineering and Operating Practices. In no event shall any review, comment or failure to comment by HELCO be deemed to be an endorsement, warranty or waiver of any right by HELCO or create any obligation by SELLER; provided, however, -------- ------- that HELCO shall be deemed to have waived its right to review, comment and inspect under this Section 3.2A(5) with respect to any specific design materials or inspection opportunity provided to it if it fails to exercise such specific rights 28 within the thirty (30) day period referred to in this Section 3.2A(5) and such subsequent untimely exercise of such specific rights would delay construction of the Facility or cause material prejudice to SELLER. In no event, however, shall any failure by HELCO to exercise its rights under this Section 3.2A(5) constitute a waiver by HELCO of, or otherwise release SELLER from, any other provision of this Agreement. In areas of common concern, such as the type and settings of SELLER's protective relaying equipment, SELLER shall submit such concerns, designs and settings for HELCO's review and comment. (6) Facility Protection Equipment - (i) SELLER shall, at its own cost, furnish, install, operate and maintain internal breakers, relays, switches, synchronizing equipment and other associated protective and control equipment necessary to maintain the standard of reliability, quality and safety of electricity production suitable for parallel operation with HELCO's electrical system as required by Good Engineering and Operating Practices. The Facility shall be designed so that it does not trip for an electrical fault or transient condition in HELCO's electrical system that will be cleared by primary protection. HELCO shall have the right, but not the obligation, to review and accept the design of all such equipment and protective relay settings as soon as practicable, and in no event later than forty-five (45) days prior to the Closing Date and shall present any comments relating thereto to SELLER, as soon as practicable and in no event later than sixty (60) days after receiving such design information. HELCO shall have the right, but not the obligation, to review, inspect and comment on any future action by SELLER to modify or replace such equipment, or change such settings, as soon as practicable, and in no event later than least forty-five (45) days prior to such future action; provided, however, HELCO shall present -------- ------- any comments relating thereto to SELLER as soon as practicable, and in no event later than forty-five (45) days after receiving information relating to such future action. HELCO shall have the right, but not the obligation, to review, inspect and accept the installation, construction and setting of all such equipment in order to ensure consistency with the design submitted by SELLER for HELCO's review. If HELCO exercises such right, HELCO shall inform SELLER as soon as practicable, and in no event later than forty-five (45) days after such review or inspection, of any problems it believes exist and any recommendations it has for correcting such problems. HELCO's inspection and acceptance of SELLER's equipment and settings shall not be construed as endorsing the design thereof, nor as any warranty of the safety, durability or reliability of said equipment and settings, nor as a waiver of any of HELCO's rights or constitute any obligation of SELLER; provided, however, that HELCO shall be deemed to have -------- ------- waived its right to review, inspect and accept under this Section 3.2A(6)(i), with respect to any specific design materials, settings, or inspection opportunity provided to it, if it fails to exercise such specific rights within the forty-five (45) day periods referred to in this Section 3.2A(6)(i). In no event, however, shall any failure by HELCO to exercise its rights under this Section 3.2A(6)(i) constitute a waiver by HELCO of, or otherwise release SELLER from, any other provision of this Agreement. SELLER and HELCO shall cooperate with each other in good faith in agreeing upon design standards for any equipment or settings referred to in this Section 3.2A(6)(i). (ii) Within a reasonable time after receipt of HELCO's comments referred to in Section 3.2A(6)(i) or notification by HELCO of problems related to SELLER's 29 obligations under Section 3.2A(6)(i) but no later than ninety (90) days after such notification (unless such condition is causing a safety hazard or damage to HELCO's electrical system or HELCO's customer's facilities, in which event the correction must be promptly made by SELLER), SELLER shall either implement HELCO's proposals or SELLER's alternatives to accomplish the same purpose, and shall inform HELCO of such action, or provide HELCO with a reasonable explanation as to why such actions are not required by Good Engineering and Operating Practices. Notwithstanding the foregoing, SELLER shall utilize relay settings prescribed by HELCO, which may be changed over time within the design capability of the equipment as HELCO's electrical system's requirements change. If SELLER demonstrates that the utilization of such relay settings would likely result or shall have resulted in an event normally requiring Liquidated Damages or an Event of Default, SELLER shall be excused from same. (7) Progress Reports - On the first day of each month following approval of this Agreement by the PUC under Section 23.14 and continuing until the Phase 2 In-Service Date, SELLER shall provide HELCO with monthly progress reports containing a reasonable level of detail on the status of each specific Condition Precedent contained in Section 2.3A and the status of efforts to meet each Milestone Date. If, during any month, SELLER has reasonable cause to believe that it will be unable to achieve any Milestone Date, it shall so inform HELCO in the next monthly progress report. At HELCO's request, SELLER shall provide an opportunity for HELCO to meet with appropriate personnel of SELLER or its contractors to discuss and assess any such monthly progress report. B. Operation and Maintenance of Facility ------------------------------------- (1) Standards - SELLER shall operate the Facility in accordance with Good Engineering and Operating Practices. Subject to those standards, SELLER shall deliver to HELCO the available Net Electric Energy Output of the Facility under HELCO Dispatch and shall use all reasonable efforts to operate the Facility in a manner that maximizes the overall reliability of HELCO's electrical system. The Facility shall not trip for an electrical fault or transient condition in HELCO's electrical system of less than 18 cycles duration, or a resulting trip shall be considered a Unit Trip which shall count towards the number of allowable Unit Trips under Section 3.2D(5). While a generator is on Reserve Shutdown, SELLER may not perform any maintenance, inspections or repairs that could delay start-up of that generator or impair that generator's ability to reach maximum electrical output, if so directed by HELCO's System Operator. Section 3.2C specifies performance criteria for the start-up of a generator(s) in Simple Cycle and combined cycle mode from Reserve Shutdown status. SELLER shall seek permission from HELCO's System Operator before SELLER voluntarily removes a generator from Reserve Shutdown status; if such change in generator status by SELLER is involuntary, SELLER shall promptly advise HELCO's System Operator. Failure by SELLER to promptly advise HELCO's System Operator of such a change from Reserve Shutdown status shall be considered an unreported derating per Section 8.1C. HELCO may request SELLER to certify that the activities of SELLER during Reserve Shutdown conform to the definition of Reserve Shutdown. 30 (2) Functioning Protective Equipment - SELLER shall operate the Facility with all applicable installed system protective equipment in service whenever the generator is connected to or is operated in parallel with HELCO's electrical system, except for normal testing purposes in accordance with Good Engineering and Operating Practices. SELLER shall have qualified personnel test and calibrate all protective equipment at regular intervals not to exceed one (1) calendar year. A unit functional trip test (which shall include an overspeed trip test on the steam turbine) shall be performed annually in accordance with industry standards. Following a Major Equipment Overhaul, a functional trip test shall be performed and shall simulate abnormal trip conditions separately at each primary element that initiates a trip and shall demonstrate that the trip system produces the appropriate equipment response. In no event shall any trip test conducted pursuant to this Section 3.2B(2) constitute a Unit Trip. If at any time HELCO has reason to doubt the integrity of the Facility's protective equipment and reasonably suspects that such purported loss of integrity would jeopardize the reliability of HELCO's supply of electrical energy to its customers, SELLER shall be required to reasonably demonstrate to HELCO's satisfaction the correct calibration and operation of the equipment in question. HELCO shall not be liable for any damage to SELLER's equipment resulting from the failure of Facility protective equipment. (3) Personnel and System Safety - SELLER shall provide, at a location approved by HELCO, a manual disconnect device which provides a visible break to electrically separate the Facility from HELCO's electrical system. Such disconnect device shall be lockable in the OPEN position and accessible to HELCO personnel at all times. Notwithstanding any other provision of this Agreement, if at any time HELCO determines that the continued operation of the Facility (i) is substantially likely to endanger the safety of persons and/or property, (ii) is substantially likely to endanger the integrity of HELCO's electrical system or (iii) is substantially likely to have an adverse effect on the equipment of HELCO's customers and can be reasonably demonstrated to have such adverse effect, then in each case (i) through (iii), HELCO shall have the right to disconnect the Facility from HELCO's electrical system, giving as much advance notice to SELLER as is practicable under the given circumstances. If the Facility is separated from HELCO's electrical system for any reason, under no circumstances shall SELLER reclose into HELCO's electrical system without first obtaining specific approval to do so from HELCO's System Operator which approval shall be granted promptly upon the removal of the cause stated in sub-clauses (i) through (iii) above. The Facility shall remain disconnected until such time that the condition specified under (i), (ii) or (iii) above has been corrected, and HELCO shall not be obligated to accept or pay for any energy which might otherwise have been received from the Facility during such Period. If HELCO disconnects the Facility from HELCO's electrical system, it shall immediately notify SELLER by telephone or hotline and thereafter confirm in writing the reasons for the disconnection. The claim of occurrence of any event as described in this Section 3.2B(3) shall be subject to verification by SELLER. SELLER shall be paid the Capacity Charge regardless of the causes of disconnection. If it is determined that HELCO did not have a valid reason for disconnecting the Facility, the duration of the period of separation will not be counted against EAF or EFOR or for the purpose of calculating any other performance standard. 31 (4) Operating Records - SELLER shall maintain, at least daily, a log in which it shall record all pertinent data that will indicate whether the Facility is being operated in accordance with Good Engineering and Operating Practices. These data shall include, but not be limited to, all maintenance and inspection work performed at the Facility, circuit breaker trip operations, relay operations including target indications, megavar and megawatt recording charts (and/or equivalent computer records), all unusual conditions experienced or observed and any reduced capability and the reasons therefor and duration thereof. SELLER shall provide HELCO access to SELLER'S records which identify the priority, as internally assigned by SELLER, of specific preventive or corrective maintenance activities. These records shall include items for which SELLER has deferred the inspection or corrective action to a future scheduled plant outage. In addition, SELLER shall provide copies of all written correspondence between SELLER and the Financing Parties or SELLER and the insurance underwriters for the Facility equipment pertaining to maintenance practices, procedures and scheduling (including deferral) of maintenance at the Facility. In addition, SELLER shall, within ten (10) Business Days, provide HELCO with subsequent written confirmation any time SELLER experiences a Unit Trip or other unplanned outages or deratings. Such written confirmation shall contain information in sufficient detail for HELCO to analyze the incident, including the date and time of occurrence as well as the cause of the Unit Trip, if such cause is known. "Attachment M" is an example of a written confirmation. HELCO shall have the right to request reasonable additional information if necessary to evaluate the incident. In addition, if so requested by HELCO, SELLER shall by 9:00 a.m. Hawaii Standard Time of each day provide HELCO with hourly, electric output data for the prior day. Correction of any errors in this data shall be provided to HELCO by noon Hawaii Standard Time of the following day. Any and all records, correspondence, memoranda and other documents or electronically recorded data related to the fueling, operation and maintenance of the Facility shall be maintained by SELLER for a period of not less than six (6) years. HELCO shall have the right to review and copy any such items upon request. (5) Maintenance Records - Prior to February 1 of each year, SELLER shall submit, or make available to HELCO for inspection at the Site, a summary in a format similar to the example provided in "Attachment G" of all maintenance and inspection work performed in the prior calendar year. The summary shall present the requested data in a meaningful and informative manner consistent with the cooperative exchange of information between the parties. If available and practicable, such summary shall be provided in electronic format with sufficient software so that HELCO can group activities for specific process areas of the Facility and be able to view the maintenance history of a specific equipment item. Such summary shall also include SELLER's proposals for correcting or preventing recurrences of identified equipment problems and for performing such other maintenance and inspection work as is required by Good Engineering and Operating Practices. Within sixty (60) days of receiving such summary, and after any reasonable inspection desired by HELCO of the Facility and consultation with SELLER, HELCO may provide written recommendations for specific operation or maintenance actions or for changes in the operation or maintenance program of the Facility. HELCO's making or failing to make recommendations with respect to operation and maintenance of the Facility shall not be construed as endorsing the operation and maintenance thereof or as any warranty of the safety, durability or reliability of the Facility nor as a waiver of any HELCO right. Within a reasonable time after HELCO makes such recommendations, not to exceed 32 ninety (90) days, SELLER shall implement HELCO's recommendations or SELLER's alternatives to accomplish the same purpose, and shall so inform HELCO, or explain to HELCO in writing why such actions are not reasonably required to ensure that the short-term and long-term operation of the Facility are not materially adversely affected or impaired, or why such actions are not required by Good Engineering and Operating Practices. (6) Major Outages - If SELLER believes that a major outage is required to prevent a Catastrophic Equipment Failure, SELLER shall notify HELCO as soon as practicable and HELCO shall promptly act, upon SELLER's request, to approve such outage, which approval shall not be unreasonably withheld, delayed or conditioned. If an outage under this Section 3.2B(6) does not occur until after the next weekend period, it shall be considered a maintenance outage and shall not count against SELLER for purposes of determining EFOR. C. Delivery of Power to HELCO; Dispatch Constraints ------------------------------------------------ (1) Delivery Voltage Standards - Electricity generated by SELLER shall be delivered to HELCO at the Point of Interconnection in the form of 3-phase, 60 Hertz alternating current at a nominal operating voltage of 69 KV with a maximum limit of 72.45 KV and a minimum limit of 65.55 KV or such change in standards as the parties mutually agree. The actual operating voltage will be under the control of HELCO's System Operator, subject to the above limits. (2) Frequency Standards - The electrical frequency of electric energy delivered to HELCO by SELLER shall not vary by more than one-tenth (0.1) Hertz from 60.00 Hertz, except during unavoidable momentary fluctuations. Frequency will normally be controlled by HELCO's EMS. HELCO shall have the right to utilize the Facility to regulate frequency on HELCO's electrical system consistent with this Section 3.2C. (3) Reactive kVAR Standards - HELCO's System Operator shall specify the reactive kVAR requirements (power factor) with respect to the real power delivered by SELLER to HELCO. Reactive kVAR requirements will be from 0.98 leading to 0.85 lagging power factor delivered by SELLER to HELCO. SELLER will dispatch kVARs within this range as specified by HELCO's System Operator. HELCO will not be obligated to purchase reactive kVARhs from SELLER. SELLER will deliver or curtail delivery of reactive kVARhs as directed by HELCO's System Operator consistent with Section 3.2 and the Dispatch Constraints. Under special conditions when SELLER is delivering kilowatts to HELCO, SELLER shall, if HELCO so requests, consume reactive kVARs up to 0.98 leading power factor being delivered by SELLER to HELCO. (4) Generator H Constant - In recognition of HELCOOs electrical system's stability concerns, the Facility generator shall have an H constant of 1.2 or higher. A lower value of H constant may be accepted by HELCO if supported by a system stability study performed by HELCO and paid for by SELLER. In any case, SELLER must obtain HELCO's written approval, which approval shall not be unreasonably withheld, of the H constant in the installed equipment. 33 (5) Entire Output Delivered - During the Term, SELLER shall deliver to HELCO in accordance with HELCO Dispatch the entire Net Electric Energy Output associated with the Firm Capacity. (6) Interconnection - SELLER shall deliver the electricity contracted for under this Agreement to HELCO's electrical system at the Point of Interconnection. (7) Operation of Synchronizing Breakers - SELLER shall have the ability to trip and close its generator synchronizing breakers located at the Facility. HELCO will have trip control only and breaker status indication and current telemetry over certain breakers, as shown in "Attachment A." SELLER shall notify HELCO of all operations of these breakers, in advance of such operation if practicable. (8) Schedule of Outages - Prior to July 1 of each year, SELLER shall submit for review and comment by HELCO an initial schedule of expected energy delivery periods for the sixty (60) month period beginning with January of the following year (the "60-Month Schedule"). The 60-Month Schedule shall supersede any previous 60-Month Schedule and state the periods of operation, the dates and duration of all scheduled shutdowns, reductions of output, and scheduled maintenance, and the reasons therefor, including the scope of work for the maintenance requiring shutdown or reduction in output of the Facility. SELLER shall (i) revise such 60-Month Schedule to accommodate reasonable requests made by HELCO no later than December 1 of the year preceding the year in which a scheduled revision is requested to take place; provided that, if the requested -------- ---- revision is one of timing, the revised date(s) shall be within the same calendar year as scheduled, so long as such revised schedule is consistent with Good Engineering and Operating Practices and does not, or is not reasonably likely to, have a material adverse effect on the performance of the Facility; and (ii) use its reasonable best efforts, consistent with Good Engineering and Operating Practices, to accommodate any subsequent changes in such 60-Month Schedule (either delaying or advancing such 60-Month Schedule) reasonably requested by HELCO in the event that HELCO is experiencing or expecting to experience a short-term shortage of supply of energy, capacity or both or any other operational or electrical problems with HELCO's electrical system, in which case HELCO shall reimburse SELLER for any net incremental costs of changing the 60- Month Schedule to accommodate HELCO; provided that SELLER provides written -------- ---- documentation of such net incremental cost and makes a reasonable effort to include potential savings (for example, an improved heat rate) attributable to the change in schedule. The normal annual maintenance requirements for the Facility are the equivalent of two (2) weeks of full plant sixty (60) MW outage. Notwithstanding the foregoing, SELLER shall not take units down for maintenance such that the capability of the Facility falls below thirty (30) MW at any given time, except with HELCO's prior approval, which shall not be unreasonably withheld. SELLER shall not schedule any maintenance not listed on the 60-Month Schedule that will reduce or eliminate electric output of the Facility without coordination with 34 and approval of HELCO, which approval shall not be unreasonably withheld, delayed or conditioned, and shall use all reasonable efforts to provide HELCO with as much advance notice as is practicable prior to removing the Facility from service for such maintenance. Such removal from service will be treated as a forced outage if so required under NERC GADS. (9) Minimum Load Capability - Subject to the Dispatch Constraints, when on- line, the Facility shall provide the following net minimum load capability: one (1) CT, Simple Cycle mode - five (5) MW; one (1) CT, combined cycle mode - seven (7) MW; two (2) CTs, Simple Cycle mode - ten (10) MW; two (2) CTs, combined cycle mode - sixteen (16) MW. (10) Short Circuit Ratio - The short circuit ratio shall be between 0.4 and 1.0 inclusive. (11) Open Circuit Transient Field Time Constant - The open circuit transient field time constant shall be thirteen (13) seconds or less. (12) Generator Step-Up Transformer Impedance - The generator step-up transformer impedance shall be between seven percent (7%) and nine percent (9%), inclusive, on transformer OA rating. (13) Response Ratio - The excitation system response ratio shall be 1.0 or higher. (14) Ceiling Voltage - The excitation system ceiling voltage shall be one hundred fifty percent (150%) of rated main generator field voltage. (15) Excitation Source Immunity - The excitation source shall be immune to variations in system voltage. (16) Static Regulator - The excitation system shall have a static regulator. (17) Field Forcing Ability - The excitation system shall have field forcing ability. (18) Droop Characteristic - The unit speed-droop characteristic shall have a nominal setting of five percent (5%) and variable settings between three percent (3%) and six (6%). (19) Over/Under-Speed - The over-speed/under-speed operating capability shall be +/- 1.5 Hz continuously and +/- 3 Hz for a minimum of six (6) seconds per occurrence. (20) Control Systems - The power source for control systems will be designed to be immune from system transients in accordance with Section 3.2A(6). 35 (21) Regulation Capability - The Facility shall be capable of operating in isochronous or droop mode. (22) Capacity Tests - SELLER shall conduct Initial Acceptance Tests for Phase 1 and Phase 2 and any subsequent Capacity Tests (subject to inspection by HELCO) in accordance with the testing procedures set forth in "Attachment L" to determine when Capacity Charge payments should begin or be adjusted in accordance with Section 5.1B. (23) Cycling of the Heat Recovery Steam Generators and the Steam Turbine - Within the limitations (if any) set forth in the PSD Permit regarding limits on starts or restarts, the generating units may be shut down and restarted as requested by HELCO pursuant to HELCO Dispatch; provided that, under normal -------- ---- (non-emergency) system conditions, neither heat recovery steam generator shall be shut down and restarted more than an average of once per day during any Calendar Month and provided, further, that the parties shall -------- ------- cooperate and use good faith efforts in seeking to remove such limitations (if any) set forth in the PSD Permits regarding starts or restarts. If a heat recovery steam generator is taken off-line and put back on-line within five (5) hours, such process shall not be deemed a "restart" for purposes of this Section 3.2C(23). If (to the extent permitted under the PSD Permit) HELCO shuts down and restarts either heat recovery steam generator more than thirty (30) times during any Calendar Month, HELCO shall pay to SELLER Five Hundred Dollars ($500) (1995 $) (as escalated by the factor of GDPIPD\CURRENT\GDPIPD\BASE\, as described in "Attachment I") for each restart thereafter during such Calendar Month as reimbursement for SELLER's start-up costs. Such amounts shall be included by SELLER in the next Monthly Invoice. (24) Startup Periods - The maximum time to full load under normal (non- emergency) system conditions shall be thirty (30) minutes for warm start-ups and two (2) hours for cold start-ups. When requested by HELCO under emergency conditions, SELLER shall use reasonable efforts to accelerate such start-up periods to the extent the Facility is capable of doing so within manufacturer's specifications and warranties. (25) Ramp Rates - The maximum ramp rate during normal (non-emergency) system conditions shall be 4.4EMW per minute, per CT up to 22 MW for each CT. When requested by HELCO under emergency conditions, SELLER shall use reasonable efforts to maximize such ramp rates to the extent the Facility is capable of doing so within manufacturer's specifications and warranties. (26) QLPU - If one CT is operating in Simple Cycle or combined cycle, the QLPU for any three (3) second period shall be the lesser of (i) 4.4 MW or (ii) 22.0 MW less the current output of such CT. If both CTs are operating in Simple Cycle or in combined cycle, the QLPU for any three (3) second period shall be the lesser of (i) 8.8 MW or (ii) 44.0 MW less the current cumulative output of such CTs. (27) Simple Cycle Operation - During the Phase 1 Period, the Facility shall run with one (1) CT in Simple Cycle, as requested by HELCO Dispatch. During the Phase 2 Period, 36 the Facility may be run with one (1) or two (2) CTs in Simple Cycle, as requested by HELCO Dispatch, subject to the following provisions: (i) HELCO and SELLER shall cooperate with each other in good faith to determine on a month-by-month basis, the extent to which the Facility may be dispatched by HELCO in Simple Cycle during the remainder of the calendar year, without jeopardizing the Facility's QF Status (the "Allowed Simple Cycle Period"). In addition, on a monthly basis, at least one (1) week prior to the end of the Calendar Month, SELLER shall provide HELCO with a calculation of the Facility's operating and efficiency standards as set forth in the QF Requirements based on the Facility's operation during the calendar year up to that point in time; provided, that, HELCO use such calculations and related -------- ---- information provided to HELCO under this Section only for purposes of determining the Allowable Simple Cycle Period and shall keep such calculations and related information confidential and shall not disclose such calculations and information to any third parties without the prior express written consent of SELLER. (ii) HELCO shall notify SELLER if it intends to request that the Facility run in Simple Cycle. Upon receipt of such notice, SELLER shall promptly provide HELCO with an update of the Allowed Simple Cycle Period (if any, to the extent agreed by the parties) for the remainder of the calendar year (in writing or to be confirmed in writing). In the event that HELCO then requests that the Facility run in Simple Cycle and the Facility loses its QF status, HELCO shall indemnify, reimburse and make SELLER whole with respect to (A) the documented, incremental, reasonable, out of pocket costs and expenses of such loss of QF status, including the legal costs and other expenses of filings before federal and state regulatory agencies, if any, up to Fifty Thousand Dollars ($50,000) and (B) any reduction in the payments SELLER is entitled to receive pursuant to the order of such agencies or other adverse regulatory impact on SELLER's economic arrangements with HELCO as set forth in this Agreement (up to the amounts SELLER would have received under Article V herein), but only to the extent that SELLER demonstrates that such loss of QF status is due to Simple Cycle operation requested by HELCO and that the actual number of Simple Cycle hours the CTs ran exceeded the Allowed Simple Cycle Period for the remainder of the calendar year; provided, however, the foregoing indemnification -------- ------- with respect to clause (B) shall not apply if SELLER shall have received from the PUC or other applicable federal or state agency a satisfactory order to the effect that the Facility shall not be subject to rate regulation or any reduction in the payments SELLER is entitled to receive following any resulting loss of QF status. (iii) In the event that the Facility loses its QF status as described in clause (ii) above, HELCO shall cooperate with SELLER in seeking any necessary regulatory approvals with the intention of preserving the economic arrangements between the parties set forth herein. (iv) For any period during which HELCO requests the Facility to run in Simple Cycle, HELCO shall indemnify, reimburse and make SELLER whole with respect to any and all reasonable, documented, incremental, out-of-pocket costs (such as the incremental costs of providing an alternative source of thermal energy to the purchaser(s) under the Thermal Energy Sales Contract(s)) expenses, lost economic benefits (which shall include the difference 37 between revenues under the Thermal Energy Sales Contract(s) and this Agreement for such incremental energy) or liabilities to third parties under the Thermal Energy Sales Contract(s) resulting from such Simple Cycle operations, up to a limit of Five Thousand Dollars ($5,000) per diem for each day that the Facility runs in simple cycle pursuant to a HELCO request. Such reimbursement up to $5,000 per diem shall be subject to an overall limitation on HELCO's annual liability of Five Hundred Thousand Dollars ($500,000). (v) All requests by SELLER for indemnification or reimbursement under this Section shall be paid promptly by HELCO, subject to verification. (vi) For purposes of this Section, Simple Cycle operations in connection with normal startup of the Facility shall not be considered a request by HELCO that the Facility run in Simple Cycle. (vii) A failure by SELLER to operate the Facility in Simple Cycle at HELCO's request, as provided herein, shall count against SELLER for purposes of calculating EAF and EFOR, which shall be HELCO's exclusive remedy in the event of such failure to operate. (viii) In conjunction with the application or motion for approval of this Agreement, the parties shall petition the PUC for a declaratory order determining that SELLER will not be deemed to be a "public utility" within the meaning of Section 269-1, Hawaii Revised Statutes, in the event that HELCO requests that the Facility run in Simple Cycle, and the Facility loses its QF status due to Simple Cycle operation requested by HELCO. D. Warranties and Guarantees of Performance ---------------------------------------- (1) Equivalent Availability Factor - SELLER warrants and guarantees that the Facility will achieve an EAF of at least the following amounts: From the Phase 1 In-Service Date to the End of Phase 2 Start-Up - 85%; End of Phase 2 Start-Up to end of Transition Period and all Contract Years thereafter (except years in which there is a Major Equipment Overhaul) - 90%. Years in which there is a Major Equipment Overhaul - 89%. If a Force Majeure event(s) and/or a Catastrophic Equipment Failure(s) occur, the EAF calculation for purposes of computing Liquidated Damages or Event of Default criteria shall have a reduction to both the numerator and denominator equal to the number of equivalent full load hours of the Force Majeure event(s) and/or Catastrophic Equipment Failure(s) which occurred during the period represented by the calculation. (2) Equivalent Forced Outage Rate - SELLER warrants and guarantees that the Facility will not exceed an eight percent (8%) EFOR from the Phase 1 In- Service Date until 38 the End of Phase 2 Start-Up and a four percent (4%) EFOR from the End of Phase 2 Start-Up to the end of the Transition Period, and in each Contract Year thereafter. If a Force Majeure event(s) and/or a Catastrophic Equipment Failure(s) occur, the EFOR calculation for purposes of calculating Liquidated Damages or determining Event of Default criteria shall have a reduction to both the numerator and denominator equal to the number of equivalent full load hours of the Force Majeure event(s) and/or Catastrophic Equipment Failure(s) which occurred during the period represented by the calculation. (3) Firm Capacity - SELLER warrants and guarantees that after the first twelve (12) months following the Phase 2 In-Service Date, the Facility will have and maintain the capability to produce and deliver to the Metering Point, in accordance with the terms of this Agreement, the Firm Capacity. (4) Quality - SELLER warrants and guarantees that the Facility will produce power that meets the quality standards in Section 3.2C(1), (2), and (3). (5) Unit Trips - SELLER warrants and guarantees that the Unit Trips of the Facility per annum will not exceed twelve (12) per annum from the Phase 1 In- Service Date until the End of Phase 2 Start-Up and six (6) per annum from the End of Phase 2 Start-Up to the end of the Transition Period, and during any Contract Year thereafter. (6) EXCLUSIVE WARRANTIES - THE FOREGOING WARRANTIES CONSTITUTE THE EXCLUSIVE WARRANTIES UNDER THIS AGREEMENT AND OPERATE IN LIEU OF ALL OTHER WARRANTIES, WHETHER ORAL OR WRITTEN. SELLER AND HELCO DISCLAIM ANY OTHER WARRANTY, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. E. Metering -------- (1) Meters - HELCO shall purchase and own meters suitable for measuring the integrated Net Electric Energy Output of the Facility in kW and kWh on a time of use basis and of reactive power flow in kilovar and kilovarhours. HELCO will calibrate these devices in accordance with the latest edition of the American National Standards Institute Code for Electricity Metering. The kilovar hour meters shall be ratcheted to prevent reversal in the event the power factor is leading. HELCO shall install, maintain and annually test such meters and shall be reimbursed by SELLER for all reasonably incurred costs (including applicable sales taxes) for such installation, maintenance and testing work. SELLER shall furnish, install and maintain in accordance with HELCO's requirements and at no charge to HELCO, all conductors, service switches, fuses, meter sockets and cases, meter and instrument transformers, switchboard meter test switches, meter panels, steel structures and similar devices required for service connection and meter installations. HELCO shall install two (2) complete sets of metering equipment using the same instrument transformers for each metering station. SELLER may, at 39 its own expense, monitor (by electronic means or otherwise) any meters described in this Section 3.2E(1). (2) Communications, Telemetering and Remote Control Equipment - HELCO shall purchase, install and own such communications, telemetering and remote control equipment at the Facility as may reasonably be required in order to allow HELCO to dispatch the electrical energy from the Facility as required to optimize economic and reliable operation of HELCO's electrical system. Such equipment shall meet HELCO's reasonable specifications for transmission of metered data to locations specified by HELCO. If HELCO installs and maintains such communications, telemetering and remote control equipment at the Facility, SELLER shall reimburse HELCO for its reasonable procurement and installation costs related thereto up to One Hundred Thousand Dollars ($100,000) and maintenance costs related thereto, which shall be an up front fixed payment of Eighty-Two Thousand Dollars ($82,000) at the time such equipment is installed. Subsequent to the initial Facility design, HELCO may purchase and install such additional communications, telemetering, and remote control equipment and may require SELLER to install at HELCO's expense, any reasonably necessary additional transducers, test switches, AC and DC sources, telephone lines and interconnecting wiring at any time during the Term. (3) Meter Testing - HELCO shall provide at least twenty-four (24) hours notice to SELLER prior to any test it may perform on the metering or telemetering equipment. SELLER shall have the right to have a representative present during each such test. Either party may request additional tests in addition to the annual test provided for in Section 3.2E(1) and shall pay the cost of such additional test. If any of the metering equipment is found to be inaccurate at any time, HELCO shall promptly cause such equipment to be made accurate, and the period of inaccuracy, as well as the estimate for correct meter readings, shall be determined in accordance with Section 3.2E(4). (4) Corrections - If any test of metering equipment conducted by HELCO indicates that its meter readings are in error by one percent (1%) or more, the meter readings from such equipment shall be corrected as follows: (i) determine the error by testing the meter at approximately ten percent (10%) of the rated current (test amperes) specified for the meter; (ii) determine the error by testing the meter at approximately one hundred percent (100%) of the rated current (test amperes) specified for the meter; (iii) the average meter error shall then be computed as the sum of one-fifth (1/5) the error determined in (i) and four-fifths (4/5) the error determined in (ii). The average meter error shall be used to adjust the bills for the amount of electric energy supplied to HELCO for the previous six (6) months from the Facility, unless HELCO's or SELLER's records conclusively establish that such error existed for a greater or lesser period, in which case the correction shall cover such actual period of error, except as specified in Section 6.3. F. Fuel and Other Materials ------------------------ SELLER shall be responsible for acquiring, transporting and storing adequate supplies of Fuel and other materials used in the operation of the Facility during the Term. An 40 adequate supply of Fuel under normal conditions shall, at a minimum, include at least a twenty-four (24) day reserve on the Site, which shall be determined by SELLER in good faith based upon (i) the average level of HELCO Dispatch during the previous six (6) months and (ii) the expected level of HELCO Dispatch during the following month as indicated by HELCO. In the event either SELLER or HELCO has available excess Fuel which is not necessary for operations, and the other party is experiencing a fuel shortage, the parties shall, to the extent possible, cooperate on a temporary, emergency basis, by making available such excess Fuel to the other upon such party's request, subject to full reimbursement for all costs. G. Waste Handling -------------- SELLER shall be responsible for the handling and proper disposal of any waste products produced by the Facility, including but not limited to waste water and ash, or for any costs associated therewith. H. Emissions --------- SELLER shall be responsible for the control and consequences of any and all emissions produced as a result of operation of the Facility and for all costs associated therewith. I. Compliance with Laws -------------------- SELLER shall at all times comply with all valid and applicable federal, state and local laws, rules, regulations, orders, permit conditions and other governmental actions (where non-compliance may materially adversely impact SELLER's performance under this Agreement) and shall be responsible for all costs associated therewith. J. Adequate Spare Parts -------------------- SELLER shall at all times keep on hand or have ready access to sufficient spare parts to maintain the Facility in a manner which provides reasonable assurance, consistent with Good Engineering and Operating Practices, that the warranted performance of the Facility will be achieved. SELLER agrees to budget and maintain at least Five Hundred Thousand Dollars ($500,000) (1998$) worth (as escalated by the factor of GDPIPD\CURRENT\GDPIPD\BASE\, as described in "Attachment I") of such spare parts for the Facility. K. Periodic Meetings ----------------- The General Manager or an alternate satisfactory to HELCO shall attend periodic meetings with appropriate HELCO representatives and be prepared to discuss Facility operations and maintenance and interface with HELCO's electrical system operations. Such meetings may be regularly scheduled or called specifically to address particular problem areas. 41 L. Maintenance of Qualifying Facility (QF) Status ---------------------------------------------- SELLER shall use its reasonable best efforts to be in compliance with the criteria for qualifying cogeneration facilities as set forth in HAR Sections 6- 74-6 and 6-74-7 and 18 CFR Sections 292.205 and 292.206 (the "QF Requirements") following the Phase 2 In-Service Date, except to the extent HELCO requests that the Facility operate in a manner that would jeopardize its QF status (e.g., extended Simple Cycle operation). SELLER shall certify its compliance with the QF Requirements to HELCO each year (if applicable). Loss or forfeiture of QF status shall not affect the prices set forth in Article V or the parties' obligations hereunder; provided that, (i) upon the loss or forfeiture of QF ------------- status for reasons other than resulting from HELCO Dispatch, SELLER shall promptly seek FERC certification (if applicable) as an EWG under the Energy Policy Act of 1992; (ii) if, as a result of SELLER's loss or forfeiture of QF status, SELLER is able to deliver additional capacity to HELCO above the Firm Capacity, such additional capacity shall be offered to HELCO and HELCO shall have the option to purchase such additional capacity at a discount of twenty- five percent (25%) from the Capacity Rates set forth in Article V; and (iii) if, as a result of SELLER's loss or forfeiture of QF status, SELLER is able to realize cost savings resulting from a reduction or elimination of thermal energy deliveries, SELLER shall provide HELCO with a monthly rebate of fifty percent (50%) of such savings realized by SELLER. Except with respect to HELCO's indemnification obligations as provided for in Section 3.2C(27) and this Section 3.2L, any change in the QF status of the Facility after the Execution Date shall not affect either party's obligations under this Agreement. M. Notice of Certain Events ------------------------ To the extent any of the following events occur and could reasonably be likely to have a material adverse effect on SELLER's performance under this Agreement, SELLER shall provide HELCO with notice of the occurrence of such event and SELLER's proposed measures to ensure that such event will not lead to an Event of Default or otherwise materially impair SELLER's ability to perform its obligations under this Agreement: (1) SELLER shall fail to comply with any provision with respect to any obligations for borrowed money in excess of One Million Dollars ($1,000,000) if the effect of such failure to comply is to cause, or to permit the holder or holders of such obligations (or a trustee on their behalf), to cause such obligations to become due prior to their stated maturity, except to the extent that such failure to comply shall have been cured or waived prior to any acceleration of such obligations thereunder and said cure or waiver shall not have involved the receipt by any such holder or holders of any additional consideration, financial or otherwise. (2) Any final order, judgment or decree is entered in any proceeding, which final order, judgment or decree provides for the payment of money in excess of One Hundred Thousand Dollars ($100,000) by SELLER, and SELLER shall not discharge the same or provide for its discharge in accordance with its terms, or procure a stay of execution thereon within sixty (60) days from the entry thereof, and within such period of sixty (60) days, or such longer period during which execution on such judgment shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal. 42 (3) SELLER shall fail to make any payment for materials or labor used in the engineering, design, construction, maintenance or operation of the Facility within ninety (90) days after the due date thereof, except for payment obligations contested in good faith by SELLER or adequately bonded to the reasonable satisfaction of HELCO or contract retentions withheld during SELLER's review of a contractor's performance. (4) The Financing Parties shall declare an event of default under the Financing Documents. (5) SELLER shall have received any notice that it is not in compliance with any of the applicable permits that enable SELLER to operate the Facility and SELLER has not obtained a consent decree or equivalent agreement to allow the continued lawful operation of the Facility. N. Labor Disputes -------------- If, after the Phase 2 In-Service Date, SELLER experiences a work stoppage, work slowdown or walkout as a result of a labor dispute with its employees, or between any entity with which SELLER has subcontracted operational responsibility and the employees of such entity, SELLER shall provide an adequate, qualified workforce to operate and maintain the Facility within seventy-two (72) hours after such stoppage, slowdown or walkout begins. If SELLER fails to meet this obligation, it shall pay to HELCO the sum of Seven Thousand Five Hundred Dollars ($7,500) for each day or partial day during which such adequate, qualified workforce is not provided and there is a reduction in output below the level called for by normal HELCO Dispatch, up to a maximum period of fourteen (14) days. SELLER shall provide prompt written notice to HELCO as to the date and time at which it has met this obligation. If, at any time after the aforesaid seventy-two (72) hour period has expired, but during the continuation of the SELLER work stoppage, slowdown or walkout, the Facility is experiencing a reduction in output below the level called for by normal HELCO Dispatch, (i) it shall be presumed that such reduction is the result of a lack of an adequate, qualified workforce unless SELLER reasonably demonstrates that such reduction is attributable to other causes, and (ii) the Seven Thousand Five Hundred Dollar ($7,500) payment shall apply as set forth above and such payment shall constitute HELCO's sole remedy for a continued labor dispute. 3.3 Rights and Obligations of HELCO ------------------------------- A. Dispatch of Facility Power -------------------------- (1) Routine Dispatch - HELCO shall have the right to dispatch capacity and real and reactive power delivered from the Facility to its system as it deems appropriate in its reasonable discretion, subject only to and consistent with Good Engineering and Operating Practices, the Dispatch Constraints set forth in Section 3.2C of this Agreement and SELLER's maintenance schedule determined in accordance with Section 3.2C(8). HELCO Dispatch will either be by SELLER's manual control under the direction of HELCO's System Operator or by 43 computerized control by HELCO's Energy Management System (to the extent HELCO may utilize computerized control now or at a future date) in each case at HELCO's reasonable discretion. Unless otherwise agreed to, HELCO may request the maximum real power output at 0.85 lagging power factor from the Facility, but shall not reduce the load on the Facility below those standards specified in Section 3.2C(9) for each operating configuration. Refusal to comply with HELCO Dispatch shall result in an unreported derating, which shall be measured as the shortfall (if any) in the amount of electricity delivered by the Facility from the amount of electricity requested by HELCO Dispatch, from the time such dispatch request was received until such time as SELLER complies with such dispatch request. Upon request by SELLER, HELCO shall demonstrate that such dispatch instructions or signals were given to SELLER to accomplish the request made by HELCO Dispatch. SELLER shall utilize the full capability of the Facility to satisfy its obligation to deliver Firm Capacity in accordance with HELCO Dispatch by taking necessary actions, including but not limited to, the reduction or elimination of steam delivery to the thermal host. (2) Demonstration of Loading and Unloading Ramp Rates - HELCO shall have the right at any time, other than during start-up periods, maintenance or other outages, upon reasonable notice with "cause," to direct the Facility to demonstrate its ability to meet the maximum ramp rate specified in Section 3.2C(25). For purposes of this Section 3.3A(2), "cause" shall mean the failure of the Facility to meet the required loading or unloading ramp rates specified in accordance with HELCO Dispatch by HELCO's System Operator. A one (1) hour notice will be given to SELLER prior to the initial ramp rate test, which shall be performed by HELCO's System Operator testing the Facility by increasing or decreasing load at the maximum ramp rate. If the Facility passes the initial ramp rate test, subsequent ramp tests may be conducted by HELCO from that time to the end of the next weekend upon notice by telephone no less than five (5) minutes prior to commencement of each such test. If the Facility is unable to achieve either the loading (increasing) ramp rate or the unloading (decreasing) ramp rate, this event shall be considered a ramp derating in the amount of the difference between the Facility's load at the conclusion of the test and the load the Facility should have achieved in accordance with the maximum ramp rate. This ramp derating will be assumed to start at the end of the test and will end at the earlier of (i) when the Facility demonstrates that the maximum loading and/or unloading ramp rate has been restored or (ii) when SELLER declares to HELCO that the Facility is ready to be tested again (if the Facility subsequently passes such test); provided that, if SELLER takes an ------------- outage during such ramp derating period, no ramp derating penalty shall apply against SELLER for such outage period. The ramp derating period shall not count for purposes of calculating EAF or EFOR until SELLER declares an outage pursuant to this Section 3.3A(2), in which event, such outage shall count against EAF and EFOR, as applicable, starting from the earlier of the time SELLER declares such outage. Notwithstanding anything herein to the contrary, SELLER's total liability for any ramp derating hereunder shall not exceed Five Thousand Dollars ($5,000) during any calendar week or Two Hundred Fifty Thousand Dollars ($250,000) during any twelve (12) month period. In the event SELLER's total liability for any ramp derating hereunder exceeds One Hundred Fifty Thousand Dollars ($150,000) during any calendar year, such excess shall be deposited into the Maintenance Account and shall be disbursed in accordance with the provisions of Section 8.3. 44 (3) Dispatch Notices - HELCO shall provide SELLER with: (i) the Annual Dispatch Notice no later than sixty (60) days prior to the anticipated Phase 1 In-Service Date for the first Contract Year, and prior to September 1 for each Contract Year thereafter; and (ii) the Weekly Unit Commitment Schedule no later than Friday, 12:00 noon, Hawaii Standard Time of each week. HELCO's failure to comply with the foregoing notice provisions shall not affect HELCO's right to dispatch the Facility pursuant to this Section 3.3A. B. HELCO Right to Buyout --------------------- (1) General - At any time up until the Phase 1 In-Service Date, if HELCO reasonably determines that it no longer needs the capacity addition provided by the Facility, HELCO may choose to buyout this Agreement by giving SELLER written notice of its decision. Promptly upon receipt of such notice, SELLER shall take steps to cease all construction activity and proceed to take such steps as may be necessary to mitigate the losses due to such election. SELLER shall use its best efforts to salvage the value of any equipment or materials purchased or contracts signed for the Facility and the Interconnection Facilities. All such mitigation efforts shall be made in consultation with HELCO and shall cease (unless continued by HELCO as described below) one hundred and eighty (180) days after receipt of the buyout notice from HELCO (the "Salvage Period"). Upon the earlier of completion of all such mitigation efforts or the end of the Salvage Period, SELLER shall render an accounting to HELCO showing in detail: (i) the "Project Costs Incurred" up to the Settlement Date (as defined below), including estimated costs for the period from the date of such accounting to the Settlement Date, which shall be the aggregate amount expended or incurred by SELLER (or affiliates thereof) with regard to the acquisition, development and construction of the Facility and the Interconnection Facilities and the financing thereof, including without limitation (and without duplication) all amounts paid or payable with regard to the construction contract, Site preparation, interconnect and start-up costs, materials and equipment, fuel inventory, insurance, taxes, project development fees and expenses, construction management expenses and fees, fees or penalties, charges, costs or expenses under all Project Documents, all SELLER debt for financing the Facility and the Interconnection Facilities (including without limitation, principal, interest, fees, premiums, defeasance costs and penalties relating thereto), equity funds, if any, invested in the Project (including without limitation, fees, premiums and penalties relating thereto), fees and expenses incurred in arranging financing for the Facility and attorneys' fees and disbursements, but excluding fees to Guarantor(s) for providing the Guarantee(s) except to the extent such fees would normally be payable in an arms' length transaction, and (ii) the "Net Salvage Proceeds" which shall be the aggregate amount of proceeds received from the salvage efforts described above, less costs and expenses incurred in such efforts. After the accounting is rendered, HELCO shall have sixty (60) days (the "Audit Period") to audit such accounting only to verify that Project Costs Incurred were, in fact, incurred in direct relation to the Facility and the Interconnection Facilities and that Net Salvage Proceeds, in fact, reflect such net proceeds. Upon the later of thirty (30) days after the end of the Audit Period or satisfactory completion of the requirements of Section 3.3B(2) (the "Settlement Date"), HELCO shall pay to SELLER the sum of (X) Project Costs Incurred, where estimated amounts included in SELLER's accounting shall be replaced with actual amounts incurred or expended as reported to and verified by HELCO, plus (Y) the Buyout Payment (as defined below), minus (Z) Net Salvage Proceeds. For purposes 45 of this Agreement, the "Buyout Payment" shall be determined according to the following schedule, depending upon the date upon which the buyout notice is received. On or before the PUC Approval Date $ 5,000,000 On or before the Closing Date $ 8,000,000 On or before the Phase 1 In-Service Date $10,000,000 In the event mitigation efforts are not completed by the end of the Salvage Period, HELCO may at its own expense continue such efforts and retain the proceeds thereof. Once the payment to be made on the Settlement Date is made in full, this Agreement shall be deemed canceled and the parties shall have no further obligations hereunder. (2) Ownership of Unsalvageable Items - Upon termination of the Audit Period, SELLER, at HELCO's request, shall promptly take all actions as may be necessary (a) to convey to HELCO free and clear of all liens and encumbrances (other than those of HELCO and the Financing Parties) all of SELLER's right, title and interest in the Facility and to the Interconnection Facilities and any and all materials, equipment, design materials and supplies relating to the Facility and to the Interconnection Facilities, including without limitation, any such materials, equipment, design materials or supplies located at the Site or in transit to the Site, whether or not completed or ready for use or incorporated into the Facility and to the Interconnection Facilities, and any such materials, equipment, design materials or supplies being processed, fabricated, assembled or prepared off the Site for installation in the Facility or the Interconnection Facilities or for use at or in connection with the Facility or the Interconnection Facilities, and (b) to assign to HELCO, with such consents and undertakings as may be necessary to make such assignments fully effective, the Project Documents. SELLER shall use reasonable efforts to assure that it has sufficient rights with respect to materials, equipment, design materials and supplies purchased or contracted for by SELLER, and sufficient rights under all leases and contracts relating to Facility and the Interconnection Facilities, to enable SELLER to comply with its obligations pursuant to this Section 3.3B(2). In the event of such assignment, HELCO shall assume, as of the Settlement Date, all of SELLER's right, title, interest and obligations in the foregoing materials, equipment, design materials, supplies and Project Documents and SELLER shall be fully discharged from such obligations. C. HELCO Right to Defer -------------------- (1) Prior to the PUC Approval Date - At any time up until the PUC Approval Date, HELCO may once choose to defer the Phase 1 In-Service Date and the Phase 2 In-Service Date by up to eighteen (18) months beyond the then expected Phase 1 In-Service Date Deadline and Phase 2 In-Service Date Deadline, as applicable, by giving SELLER sixty (60) days written notice of its decision to defer and the extent of the deferral period, which shall commence at the end of such sixty (60) day period. Upon the written request (and at the expense) of HELCO given not more often than once in any six (6) month period and before a deferral notice under this Section 3.3C(1) has been given, SELLER shall within forty-five (45) days provide an 46 estimate ("Pre-Deferral Estimate") of the anticipated costs (to the extent then known by SELLER) to be paid by HELCO under this Section 3.3C(1) if a deferral notice were given at or about the time of such request. Consistent with the obligation set forth below to minimize such costs during the deferral period, SELLER shall take such steps as it reasonably deems necessary to assure the timely occurrence of the Phase 1 In-Service Date and the Phase 2 In-Service Date (as either or both may be so deferred), including obtaining or renewing applicable permits, contracts, rights or properties, and HELCO shall cooperate with SELLER in such efforts. Upon the commencement of the deferral period, SELLER shall take such steps as may be reasonably necessary to minimize out-of- pocket costs of the parties interested in participating in the Facility (including parties acting as suppliers of goods, services, financing or otherwise) which result from such deferral, excluding from such obligation to minimize, however, deferral fees, penalties or similar charges by such parties which have been agreed upon (and notice of which has been given to HELCO or included in any Pre-Deferral Estimate). HELCO shall bear all additional costs ("Deferral Costs") incurred by SELLER with respect to the Facility of each type includable in Project Costs Incurred which result from a deferral. SELLER shall, on a monthly basis, provide HELCO with an accounting of all Deferral Costs incurred by SELLER and then payable. HELCO shall pay to SELLER all Deferral Costs, together with a monthly deferral fee (the "Deferral Fee") equal to Fifty Thousand Dollars ($50,000) within thirty (30) days of such accounting. (2) Prior to the Closing Date - At any time after the PUC Approval Date and prior to the Closing Date, HELCO may, by giving SELLER sixty (60) days written notice of its decision to defer and the extent of the deferral period, which shall commence at the end of such sixty (60) day period, once request that the Phase 1 In-Service Date or Phase 2 In-Service Date, or both, be deferred beyond the then expected Phase 1 In-Service Date or Phase 2 In-Service Date, as applicable, by up to twelve (12) months (less the number of months of the deferral period, if any, elected under Section 3.3C(1) above). Upon the written request (and at the expense) of HELCO given not more often than once in any six (6) month period and before a deferral notice under this Section 3.3C(2) has been given, SELLER shall within forty-five (45) days provide a Pre-Deferral Estimate with respect to the anticipated costs (to the extent then known by SELLER) to be paid by HELCO under this Section 3.3C(2) if a deferral notice were given at or about the time of such request. Upon receiving a deferral request from HELCO in writing, SELLER and HELCO shall immediately commence consulting between themselves and among all the parties interested in the Facility, whether as suppliers of goods, services or financing or otherwise, with the intent of obtaining the consent of all such parties to such deferral on terms and conditions satisfactory to each of them, HELCO and SELLER. Such consultations shall continue until the earlier of (i) the commencement of such deferral only upon terms and conditions agreed upon by all the parties interested in the Facility or (ii) sixty (60) days after the giving of the deferral request by HELCO (the "Consultation Period"). During the Consultation Period, SELLER may continue to proceed towards reaching the Phase 1 In-Service Date and Phase 2 In- Service Date, as applicable, without taking into account the proposed deferral. HELCO shall bear all (i) reasonable additional out-of-pocket costs of SELLER and the other interested parties incurred during the Consultation Period as a result of such consultations; (ii) all Deferral Costs incurred by SELLER which result from the deferral, if implemented. SELLER shall, on a monthly basis, provide HELCO with an accounting of such out-of-pocket costs and 47 Deferral Costs incurred by SELLER and then payable. HELCO shall pay to SELLER all such costs together with the Deferral Fee (which shall be increased to Seventy-Five Thousand Dollars ($75,000) per month following the PUC Approval Date) within thirty (30) days of each such accounting. (3) On or After the Closing Date and Prior to Phase I In-Service Date - At any time on or after the Closing Date and prior to the Phase 1 In-Service Date, HELCO may, by giving SELLER sixty (60) days written notice of its decision to defer and the extent of the deferral period, which shall commence at the end of such sixty (60) day period, once request that the Phase 1 In-Service Date or Phase 2 In-Service Date, or both, be deferred beyond the then expected Phase 1 In-Service Date or Phase 2 In-Service Date, as applicable, by up to twelve (12) months (less the number of months of the deferral period, if any, elected under Sections 3.3C(1) or 3.3C(2) above). Upon the written request (and at the expense) of HELCO given not more often than once in any six (6) month period and before a deferral notice under this Section 3.3C(3) has been given, SELLER shall within forty-five (45) days provide a Pre-Deferral Estimate with respect to the anticipated costs (to the extent then known by SELLER) to be paid by HELCO under this Section 3.3C(3) if a deferral notice were given at or about the time of such request. Upon receiving a deferral request from HELCO in writing, SELLER and HELCO shall immediately commence consulting between themselves and among all the parties interested in the Facility, whether as suppliers of goods, services or financing or otherwise, with the intent of obtaining the consent of all such parties to such deferral on terms and conditions satisfactory to each of them, HELCO and SELLER. Such consultations shall continue for the Consultation Period. During the Consultation Period, SELLER may continue to proceed towards reaching the Phase 1 In-Service Date and Phase 2 In-Service Date, as applicable, without taking into account the proposed deferral. HELCO shall bear all (i) additional out-of-pocket costs of SELLER and the other interested parties incurred during the Consultation Period as a result of such consultations; (ii) all Deferral Costs incurred by SELLER which result from the deferral, if implemented. SELLER shall, on a monthly basis, provide HELCO with an accounting of such out-of- pocket costs and Deferral Costs incurred by SELLER and then payable. HELCO shall pay to SELLER all such costs together with the Deferral Fee (which shall be increased to One Hundred Fifty Thousand Dollars ($150,000) per month on or after the Closing Date) within thirty (30) days of each such accounting. (4) Adjustments to Times - Any deferral under Section 3.3C(1) or (2) shall result in each Milestone Date, In-Service Date Deadline or other deadline in this Agreement and the Guarantee(s) (including time milestones reflecting limits of liability in the Guarantee(s)) by which performance of SELLER is measured or affected to be deferred by a period equal to the duration of the actual delay (as mutually agreed upon by HELCO and SELLER) incurred by SELLER as a result of such deferral, plus any additional period of time as is reasonably necessary to equitably reflect SELLER's need to cease and restart efforts, as established by documentary evidence, related to such Milestone Date, In-Service Date Deadline, or other deadline, which additional period shall not be less than ninety (90) days. Any obligation of SELLER under this Agreement shall be excused to the extent and for the period that its inability to perform results from the actual delay it incurs as a result of any deferral under Section 3.3C(1) or (2). 48 (5) Benefits to Others - All obligations of HELCO to make payments under Sections 3.3C(1) or (2) or Section 3.3B shall accrue (without duplication) to the benefit of SELLER and each other party to which such payment would in turn be made by SELLER. (6) No Material Adverse Impact - Notwithstanding anything in this Section 3.3C to the contrary, HELCO's right to defer the Phase 1 In-Service Date or the Phase 2 In-Service Date shall be limited to that extent that SELLER reasonably demonstrates that such deferral would have a material adverse effect on SELLER's ability to develop and finance the Facility on such deferred basis, including without limitation, SELLER's ability to obtain or maintain any permit, to meet a Milestone Date or In-Service Date in the future (as re-set in accordance with this Section for such deferral) or to utilize special purpose revenue bonds (if any) which are designated, authorized, or allocated to SELLER for use in connection with the financing of Facility. In the event SELLER reasonably demonstrates that HELCO's deferral request under this Section would cause such material adverse effect, SELLER shall use reasonable good faith efforts to mitigate or eliminate the cause of the material adverse effect, which may include re-applying for or obtaining modifications to permits or financing arrangements; provided that (i) HELCO shall reimburse SELLER for its costs in -------- ---- connection with such efforts, (ii) HELCO shall cooperate and assist SELLER with such efforts to the extent requested by SELLER, and (iii) SELLER shall not be required to re-apply for or seek modification of any permit or financing if SELLER reasonably demonstrates that such process would subject the Facility to material delays, interference or increased costs not borne by HELCO. (7) Impact on PSD Permit - In the event that, pursuant to the terms of this Section 3.3C(7), SELLER shall not be required to re-apply for or obtain modifications to the PSD Permit, HELCO's right to defer the Phase 1 In-Service Date or the Phase 2 In-Service Date shall be given effect to the extent possible under such PSD Permit then in effect. Notwithstanding anything contained herein to the contrary, HELCO shall not exercise its deferral rights in a manner or to the extent that would jeopardize PUC approval of this Agreement or the rates to be paid by HELCO for capacity or energy contained herein. (8) Changed Circumstances - In the event HELCO exercises its deferral rights under this Agreement and there subsequently occurs or is reasonably likely to occur, by the passage of time, a change in law or a change in circumstance beyond SELLER's control (e.g. interest rate changes), which would cause a material adverse impact on the development schedule or economics of the Facility, then either the deferral period shall be shortened so as to prevent such material adverse effect or HELCO shall reimburse SELLER for the costs and expenses, including lost economic benefits directly related to such material adverse effect, associated with exercising such deferral right; provided that, ------------- in such event, SELLER shall use reasonable good faith efforts to mitigate or eliminate the cause of the material adverse impact, which may include re- applying for or obtaining modifications to permits or financing arrangements, subject to (i) SELLER's 49 right to reimbursement from HELCO for its costs in connection with such efforts, (ii) HELCO's obligation to cooperate and assist SELLER with such efforts to the extent requested by SELLER, and (iii) SELLER's right to refuse to re-apply for or seek modification of any permit or financing if it reasonably demonstrates that such process would subject the Facility to material delays, interference or increased costs not borne by HELCO. D. HELCO Right to Require Independent Engineering Assessment --------------------------------------------------------- (1) Implementation of Independent Engineering Assessment - If (A) HELCO has "reasonable cause" to believe that SELLER is failing to operate or maintain the Facility in accordance with Good Engineering and Operating Practices and that such failure is likely to result in a failure to meet the performance standards set forth in Section 3.2C, (B) SELLER is in breach of this Agreement with respect to the performance or operation of the Facility and has not cured such breach within the time limits specified in Article VII; or (C) if otherwise required by Article VII, HELCO may require that the practices in question be assessed by a qualified professional engineering firm to be chosen from the Qualified Independent Engineers List attached to this Agreement as "Attachment H" and revised from time to time under Section 3.3D(2). For purposes of this Section 3.3D(1), "reasonable cause" shall mean SELLER's failure to operate the Facility in accordance with Section(s) 2.1D, 3.2A(6), 3.2B(1-3) and 3.2C(1-4, 9- 21, 24-26), which HELCO brings to SELLER's attention and which SELLER fails to remedy in accordance with Good Engineering and Operating Practices within ninety (90) days thereafter. The parties shall promptly undertake to agree on a firm to be used from the Qualified Independent Engineers List; provided, however, that -------- ------- if such agreement is not reached within seven (7) days after HELCO gives notice to SELLER that it is invoking its rights under this Section 3.3D, the firm shall be chosen from the Qualified Independent Engineers List by HELCO. The engineering firm selected shall make its determination (an "Independent Engineering Assessment") as to whether the practices in question conform to Good Engineering and Operating Practices as promptly as possible under the circumstances. If such determination is that the practices in question do not so conform, the engineering firm shall recommend necessary actions by SELLER to bring it within Good Engineering and Operating Practices. If the engineering firm's recommendation requires action by SELLER to change its practices, SELLER shall take such actions. Where action by SELLER has been recommended, the engineering firm shall determine, after reasonable consultation with SELLER within thirty (30) days (or such longer period as deemed appropriate by such engineering firm) after its recommendation is first made, whether SELLER has taken adequate action to carry out such recommendation. If the engineering firm then certifies that SELLER has failed to take adequate action, HELCO shall notify SELLER and the Financing Parties in writing of such certification and the basis therefor. Such notice shall state in bold letters that failure to respond adequately can lead to termination of this Agreement within thirty (30) days. If within thirty (30) days of such actual written notice to SELLER and the Financing Parties, neither has begun to implement such recommendation, such failure shall be an Event of Default. If within such thirty (30) day period SELLER or any Financing Party does begin to implement such recommendation, the engineering firm shall monitor whether the implementation thereof is being diligently pursued. If, after reasonable consultation with the parties involved in such implementation, the 50 engineering firm determines that such implementation is not being diligently pursued, it shall promptly so certify to HELCO. HELCO shall thereupon promptly notify SELLER and the Financing Parties in writing of such certification and the basis therefor (the "Second Notice"). Such Second Notice shall state in bold letters that failure to respond adequately can lead to termination of this Agreement after thirty (30) days. If at any time after the thirty (30) day period commencing with receipt of the Second Notice by SELLER and the Financing Parties, the engineering firm again certifies to HELCO that implementation of its recommendation is not being diligently pursued, such certification shall constitute an Event of Default by SELLER. SELLER shall bear all costs of the engineering firm's services unless the firm's initial recommendation is that the practices in question were in accordance with Good Engineering and Operating Practices, in which case HELCO shall bear all costs of the engineering firm"s services. (2) Qualified Independent Engineers List - The Qualified Independent Engineers List attached hereto as "Attachment H" contains the names of engineering firms which both parties agree are fully qualified to perform the Independent Engineering Assessment under Section 3.3D(1). At any time, except when an Independent Engineering Assessment is being made under Section 3.3D(1), either party may remove a particular engineer from the Qualified Independent Engineers List by giving written notice of such removal to the other party. However, neither party may remove a name or names from the Qualified Independent Engineers List without approval of the other party if such removal would leave the Qualified Independent Engineers List without any names. During January of each year, both parties shall review the current Qualified Independent Engineers List and give notice to the other party of any proposed additions to the Qualified Independent Engineers List and any intended deletions. Intended deletions shall be effective upon receipt of notice by the other party, provided -------- that such deletions do not leave the Qualified Independent Engineers List - ---- without any names. Proposed additions to the Qualified Independent Engineers List shall automatically become effective thirty (30) days after notice is received by the other party unless written objection is made by such other party within said thirty (30) days. By mutual agreement between the parties, a new name or names may be added to the Qualified Independent Engineers List at any time. ARTICLE IV - SUSPENSION OR REDUCTION OF DELIVERIES 4.1 Initiation by HELCO ------------------- In the event that HELCO determines and notifies SELLER that a condition exists in the Facility which has a material adverse physical impact on HELCO's electrical system or the equipment of HELCO's customers and which, in HELCO's sole judgment, requires a change in electricity deliveries by SELLER, SELLER shall immediately suspend or reduce electricity deliveries as requested by HELCO's System Operator upon oral or written notice, as appropriate, to the extent required to eliminate such adverse impact. If HELCO's System Operator determines that an immediate danger to personnel or equipment exists, HELCO's System Operator may remotely separate the Facility from HELCO's electrical system by tripping the Facility's synchronizing breakers via the Energy Management System without prior notice. 51 A. Facility Problems ----------------- If the operation of the Facility is causing or substantially contributing to an adverse condition described in Section 4.1 due to the failure to meet the requirements of Section 2.1D, 3.2B(1), (2), or (3), or Good Engineering and Operating Practices, SELLER shall, at its own cost, modify its electric equipment or operations to the extent necessary to promptly resume full deliveries of electricity at the quality of electric service required. Upon SELLER's reasonable request, HELCO will modify its electrical system to assist SELLER in resuming full deliveries, provided that SELLER reimburses HELCO for -------- ---- all costs and expenses incurred by HELCO in making such modifications. HELCO and SELLER shall use all reasonable efforts to minimize the frequency and duration of any such conditions and shall seek to promptly restore full deliveries of electricity in accordance with the terms of this Agreement. B. HELCO System Problem -------------------- In the event that a system emergency, safety problem, forced outage or period of unscheduled maintenance on HELCO's electrical system which cannot reasonably be coordinated with SELLER's period of maintenance or shutdown is the cause of an adverse condition described in this Section 4.1, HELCO shall use all reasonable efforts to limit the duration of any such occurrence or take other appropriate action so that full deliveries of electricity by SELLER can be restored as soon as practicable. If HELCO suspends or reduces deliveries from the Facility pursuant to this Section 4.1B it shall, as soon as practicable, provide a written statement to SELLER setting forth the reasons for such suspension or reduction requests and the likely duration thereof. 4.2 No Obligation to Accept Energy ------------------------------ A. During periods in which SELLER has reduced or suspended deliveries of electricity as requested by HELCO or if the Facility has been separated from HELCO's electrical system pursuant to Section 4.1 in circumstances described in Section 4.1A, HELCO shall have no obligation to accept any energy which might otherwise have been received from the Facility during such period, and HELCO shall have no obligation to pay for energy which otherwise would have been available or received from the Facility during such period, and the Facility shall be considered unavailable during such period for purposes of calculating SELLER's EAF or other performance standards. B. During periods in which SELLER has reduced or suspended deliveries of electricity as requested by HELCO pursuant to Section 4.1, in circumstances described in Section 4.1B, HELCO shall have no obligation to accept any energy which otherwise would have been received from the Facility during such period. However, HELCO shall pay for energy (to the extent accepted) in accordance with Section 5.1, and the duration of the period of separation will not be counted against SELLER's EAF or EFOR or for the purpose of calculating any other performance standard. 52 C. SELLER shall be paid the Capacity Charge regardless of whether SELLER has reduced or suspended deliveries of electricity pursuant to Section 4.1, in circumstances described in either Section 4.1A or Section 4.1B. 4.3 Initiation by SELLER -------------------- If SELLER suspends, or can reasonably anticipate the need to suspend or substantially reduce, deliveries of electricity below the level called for by HELCO Dispatch pursuant to Section 3.3A for any reason other than a request by HELCO pursuant to Section 4.1B, it shall provide immediate oral notice and subsequent written notice to HELCO as soon as practicable, containing a reasonably detailed statement of the reasons for such suspension or reduction and the likely duration thereof. SELLER shall use its reasonable best efforts to restore full deliveries of electricity as soon as practicable. ARTICLE V - RATES FOR PURCHASE 5.1 Capacity and Energy Purchased by HELCO -------------------------------------- Subject to the other provisions of this Agreement, HELCO shall accept and pay for electrical energy generated by the Facility and delivered to HELCO and shall make capacity payments to SELLER as set forth herein. Electrical energy and capacity (demand) shall be metered in accordance with Section 3.2E and such metering shall constitute the official and legal measurements for any payments hereunder. Prior to the Phase 1 In-Service Date and the Phase 2 In-Service Date, HELCO will use its reasonable best efforts to accept energy from the Facility during the testing of each of the generation units. SELLER shall provide to HELCO a written, detailed, and comprehensive start-up plan thirty (30) days in advance of delivering any energy to HELCO and shall provide written notice to HELCO of any changes to such start-up plan as soon as reasonably practicable, but no less than three (3) days in advance of implementing those changes. SELLER shall use reasonable efforts to coordinate such start-up and testing so as to minimize any additional costs to HELCO by departing from economic dispatch in the operation of HELCO's electrical system. To the extent such costs are reasonably determined to exceed those which would have resulted from the testing of HELCO's own generating units of similar type and size, SELLER shall either modify its start- up and testing plan to accommodate HELCO's reasonable requests or reimburse HELCO for such additional costs. Electric energy delivered to HELCO pursuant hereto shall be considered non-firm, unscheduled energy, but must meet all of the quality standards established in this Agreement. HELCO shall only pay Energy Charges for any such energy actually delivered from the Facility. A. Energy Charge ------------- The monthly Energy Charge shall be computed by the following formula: 53 Energy Charge = (Fuel Component + Variable O&M Component) x (.98) where: Fuel Component = Fuel Component\BASE\ x Facility\PRICE/Fuel\BASE\ Variable O&M Component = Variable O&M Component\BASE\x GDPIPD\CURRENT/GDPIPD\BASE\ The terms in the above formula shall have the following meanings as stated: Fuel\BASE\: $4.35324/mmBtu, for Fuel defined as "#2 Diesel" (and a higher heating value of 5,860,000 BTU per barrel). Facility\PRICE: During the term of the Fuel Supply Agreement, the Facility Price (stated in $/mmBtu) shall be equal to HELCO's total cost of delivered No. 2 fuel oil at Keahole, including all ocean and land transportation charges, demand charges, storage charges, and taxes, duties and other charges as shown in HELCO's Monthly Fuel Oil Adjusted Factor Filing, or if such cost categories are not reflected in such filing, in a written statement prepared by HELCO and certified by an officer of HELCO which indicates each of the foregoing cost items for delivery of fuel in the volume required by a facility similar in size to the Facility. If such filing is not made on a timely basis, or is not accurate or does not represent generally available market conditions to SELLER, or upon the expiration or termination of the Fuel Supply Agreement, the Facility Price shall be the actual cost of Fuel delivered to the Facility, including all ocean and land transportation charges, demand charges, storage charges, and taxes, duties and other charges; provided that, upon expiration of the Fuel -------- ---- Supply Agreement HELCO shall have the option of supplying the Facility with Fuel pursuant to reasonable and mutually acceptable definitive terms and conditions. GDPIPD\CURRENT\: The meaning as described in Attachment I. GDPIPD\BASE\: The meaning as described in Attachment I. 54 Fuel Component\BASE\: The Fuel Component\BASE\ shall be calculated as described in the following respective equations: 1. When two (2) combustion turbines (CT) are in combined cycle operation under equal dispatch levels and the Facility is being dispatched at a level of at least twenty-four (24) MW: Fuel Component\BASE\ (2 CT) in dollars = /P/ (SIGMA) [(4.50943 x 10/-12/ x L\i\/2/ - 6.07269 /i=1/ x 10/-7/ x L\i\ + 5.51199 x 10/-2/) x KWH\i\] Where L\i\ is the integrated fifteen (15) minute load in kilowatts when SELLER has placed both combustion turbines in combined cycle operation, KWH\i\ is the amount of kilowatt-hours purchased by HELCO during the associated fifteen (15) minute period, and P is the total number of fifteen (15) minute periods during the Billing Period in which both combustion turbines are in combined cycle operation. 2. When two (2) combustion turbines (CT) are in combined cycle operation under equal dispatch levels and the Facility is being dispatched at a level of at least sixteen (16) MW but less than twenty-four (24) MW: Fuel Component\BASE\ (2 CT) in dollars = /P/ (SIGMA) [(4.35571 x 10/-11/ x L\i\/2/ - 2.45200 x /i=1/ 10/-6/xL\i\ + 7.71282 x 10/-2/) x KWH\i\] Where L\i\ is the integrated fifteen (15) minute load in kilowatts when SELLER has placed both combustion turbines in combined cycle operation, KWH\i\ is the amount of kilowatt-hours purchased by HELCO during the associated fifteen (15) minute period, 55 and P is the total number of fifteen (15) minute periods during the Billing Period in which both combustion turbines are in combined cycle operation. 3. When one (1) combustion turbine (CT) is in combined cycle operation: Fuel Component\BASE\ (1 CT) in dollars = /P/ (SIGMA) [(4.97822 x 10/-11/ x L\i\/2/ - 2.67373 x /i=1/ 10/-6/ x L\i\+ 7.37449 x 10/-2/) x KWH\i\] Where L\i\ is the integrated fifteen (15) minute load in kilowatts when SELLER has placed such combustion turbine in combined cycle operation, KWH\i\ is the amount of kilowatt-hours purchased by HELCO during the associated fifteen (15) minute period, and P is the total number of fifteen (15) minute periods during the Billing Period in which such combustion turbine is in combined cycle operation. 4. When one (1) combustion turbine (CT) is in Simple Cycle operation prior to the Phase 2 In-Service Date: Fuel Component\BASE\ (1 CT) in dollars = /P/ (SIGMA) [(7.49648 x 10/-11/ x L\i\/2/ - 3.32621 x /i=1/ 10/-6/ x L\i\ + 8.56126 x 10/-2/) x KWH\i\] Where L\i\ is the integrated fifteen (15) minute load in kilowatts when SELLER has placed such combustion turbine in Simple Cycle operation, KWH\i\ is the amount of kilowatt-hours purchased by HELCO during the associated fifteen (15) minute period, and P is the total number of fifteen (15) minute periods during the Billing Period in which such combustion turbine is in Simple Cycle operation. 56 5. After the Phase 2 In-Service Date, when only one (1) combustion turbine (CT) is in Simple Cycle operation: Fuel Component\BASE\ (CT) in dollars = /P/ (SIGMA) [(13.0662 x 10/-11/ x L\i\/2/ - 5.44047 x /i=1/ 10/-6/ x L\i\ + 0.107491) x KWH\i\] Where L\i\ is the integrated fifteen (15) minute load in kilowatts when SELLER has placed such combustion turbine in Simple Cycle operation, KWH\i\ is the amount of kilowatt-hours purchased by HELCO during the associated fifteen (15) minute period, and P is the total number of fifteen (15) minute periods during the Billing Period in which such combustion turbine is in Simple Cycle operation. 6. After the Phase 2 In-Service Date, if the Facility is operating both combustion turbines in Simple Cycle operation, the Fuel Component\BASE\ equation in (5) above shall be applied to the output of each combustion turbine individually. The two resultant Fuel Component calculations shall be summed to arrive at the total Fuel Component for the related Billing Period. 7. If the Facility is operating in combined cycle operation and HELCO's System Operator has requested that the combustion turbines operate at unequal dispatch levels, the Fuel Component equation in (3) above shall be computed separately for each combustion turbine and summed together to obtain the total Fuel Component for the related Billing Period; provided however, L\i\ for each calculation shall ---------------- represent the integrated fifteen (15) minute load in kilowatts for the output of the related combustion turbine plus its associated steam turbine output. Variable O&M Component\BASE\: The Facility's Variable O&M Component\BASE\ shall consist of: 57 (i) a "Variable Component" of $0.00092 per kWh (1995 $); and (ii) an "Overhaul Component" of $103.43 per combustion turbine operating hour (1995 $). Variable and Overhaul Components each shall be escalated annually by the factor of GDPIPD\CURRENT/GDPIPD\BASE\ as described in "Attachment I." In the computation of the Energy Charge, the Fuel Component\BASE\ (the quantity multiplied by the kWh purchased by HELCO in each fifteen (15) minute period in the Fuel Component equations above), and the Variable O&M Component\BASE\ shall each be rounded to six (6) places after the decimal (e.g.,0.123456). A sample of the Energy Payment calculation is provided in "Attachment P." B. Capacity Charge --------------- Prior to the Phase 2 In-Service Date, the monthly Capacity Charge shall be computed by the following formula: Capacity Charge = Firm Capacity (kW) x Capacity Rate + Fixed O&M Component On and after the Phase 2, In-Service Date, the monthly Capacity Charge shall be computed by the following formula: Capacity Charge = [Firm Capacity-2,000] (kW) x Capacity Rate + Fixed O&M Component The terms in the above formulas shall have the following meanings as stated: "Capacity Rate" - Subject to other provisions in this Section 5.1B, the monthly Capacity Rate shall be $15.43/kW/month. "Fixed O&M Component" - The Fixed O&M Component shall be $196,754.16 per month (1995 $) and shall be escalated annually by the factor of (GDPIPD\CURRENT/GDPIPD\BASE\), as described in "Attachment I." (1) Calculation of the Monthly Capacity Charge. The monthly Capacity Charge shall be based on the Firm Capacity of the Facility as determined in accordance with Section 3.2C(22) (minus two (2) MW of capacity during the Phase 2 Period for which there shall be no charge), regardless of the actual level of 58 dispatch of the Facility; provided that, if, at HELCO's request, the Facility ------------- provides additional capacity above the Firm Capacity, the Capacity Charge during such month shall be based on the higher level of capacity requested by HELCO and delivered to HELCO at the Metering Point. (2) Acceptance Tests. The Capacity Charge payments under this Section 5.1B, shall begin or be adjusted when the Facility has completed the acceptance tests referred to in Section 3.2C(22) and SELLER declares that the Facility has achieved the Phase 1 In-Service Date or Phase 2 In-Service Date, as the case may be. (3) Capacity Shortfall; Corrective Period. In the event the acceptance tests conducted in accordance with Section 3.2C(22) demonstrate that the Facility is unable to provide a Firm Capacity of at least fifty-seven (57) MW at the time of the Phase 2 In-Service Date, the following provisions shall apply: (a) If the Facility achieves a capacity level of between forty-two (42) MW and fifty-seven (57) MW, the Phase 2 In-Service Date Deadline will be deemed to be met, provided that SELLER shall, during the next twelve (12) months -------- ---- or such shorter period during which the Facility achieves Committed Capacity, if applicable (the "Corrective Period"), use its reasonable best efforts to increase the Facility's capacity level to the Committed Capacity. (b) During the Corrective Period, the Capacity Rate applicable for such period shall be reduced by one (1) percentage point for each one percent (1%) that such capacity level is below ninety percent (90%) of the Committed Capacity. (c) If, at the end of the Corrective Period, the Facility has not achieved a Firm Capacity level of at least fifty-four thousand (54,000) kW, (i) the Committed Capacity shall be reset at the Firm Capacity level achieved by the Facility during its most recent Capacity Test conducted pursuant to Section 3.2C(22) and (ii) until the Firm Capacity is revised by a subsequent Capacity Test in accordance with Attachment L, the Capacity Rate shall be reduced by the Corrective Amount to reflect the value of the diminished capacity level; provided however, the Firm Capacity shall not be adjusted after the -------- ------- Corrective Period without HELCO's prior consent. The Corrective Amount shall be calculated as follows: Corrective Amount (in $/kW/year) = 150 - 0.0025 X Firm Capacity (in kW) So long as the Facility has achieved a capacity level of at least forty-eight thousand (48,000) kW, the foregoing adjustments to the level of Committed Capacity and the Capacity Charge shall be HELCO's sole and exclusive remedy for the Facility's failure to achieve the guaranteed capacity level. If the Facility has not achieved a capacity level of at least forty-eight thousand (48,000) kW after the Corrective Period, then HELCO shall be entitled to all rights and remedies provided hereunder. 59 C. Hawaii General Excise Tax ------------------------- HELCO shall not be liable for payment of the applicable Hawaii General Excise Tax levied and assessed against SELLER as a result of this Agreement. The rates and charges in this Article V shall not be adjusted by reason of any subsequent increase or reduction of the applicable Hawaii General Excise Tax, except to the extent such tax applies to other generation units owned by HELCO. D. No Payment of Emission Fees --------------------------- HELCO shall not be liable for payment of the applicable air pollutant emission fees imposed by the DoH or U.S. EPA on SELLER as a result of operating or having the potential to operate the Facility. E. No Payment of Other Taxes or Fees --------------------------------- HELCO shall not be liable for payment of nor reimbursement of any SELLER payment of any new or modified tax or fee imposed by any governmental body, except to the extent such tax applies to other generation units owned by HELCO. ARTICLE VI - BILLING AND PAYMENT 6.1 Monthly Invoice --------------- As soon as practicable, but not later than the tenth (10th) Business Day of each Calendar Month, HELCO shall provide SELLER with the appropriate data for SELLER to compute the payment due for capacity provided and electricity delivered to HELCO in the preceding Calendar Month as determined in accordance with this Agreement. SELLER shall compute the Capacity Charge for the same Calendar Month and promptly thereafter submit an invoice ("Monthly Invoice") for the Capacity Charge and Energy Charge to be paid to SELLER for the preceding Calendar Month. Each Monthly Invoice shall include SELLER's backup data for the computation of the Capacity Charge and the Energy Charge. Unless and until HELCO designates a different address, the Monthly Invoice shall be delivered to: Hawaii Electric Light Company, Inc. 1200 Kilauea Avenue Hilo, Hawaii 96720-4295 Attention: Manager of Production (or such other individual as HELCO may designate in writing) 60 6.2 Payment ------- As soon as practicable, but in no event later than five (5) Business Days following HELCO's receipt of the Monthly Invoice from SELLER, HELCO shall pay, in immediately available funds, such monthly Capacity Charge and Energy Charge payments as computed in Article V, or provide to SELLER an itemized statement of its objections to all or any portion of such Monthly Invoice and pay any undisputed amount. If any Capacity Charge or Energy Charge payments are made more than five (5) Business Days after HELCO's receipt of the related Monthly Invoice, HELCO shall also include interest on such payments, which shall be computed at a rate equal to the Prime Rate plus two (2) percentage points per annum. 6.3 Adjustments ----------- In the event adjustments are required to correct inaccuracies in Monthly Invoices, the party requesting adjustment shall use the method described in Section 3.2E(4), if applicable, to determine the correct measurements, and shall recompute the amounts due during the period of such inaccuracies. Except as noted below, the difference between the amount paid and that recomputed for each Monthly Invoice affected shall be paid, or repaid, with interest from the date that such Monthly Invoice was payable until the date that such recomputed amount is paid at the average daily Prime Rate at the Bank of Hawaii for the period, or objected to by the party responsible for such payment within thirty (30) days following its receipt of such request. All claims for adjustments shall be waived for any deliveries of electricity made more than thirty-six (36) months preceding the date of any such request. Adjustments to correct Monthly Invoices resulting from escalation indices not being published at the time such Monthly Invoices were prepared shall be paid or refunded without interest. The escalation indices initially published by the appropriate governmental or industry body for the period covered by the invoice shall be the indices applied. 6.4 Other Payments -------------- Any amounts due from either party under this Agreement other than monthly Energy Charges and Capacity Charges shall be paid or objected to within thirty (30) days following receipt from either party of an itemized invoice from the other party setting forth, in reasonable detail, the basis for such invoice. ARTICLE VII - DEFAULT 7.1 Events of Default ----------------- A. Default by SELLER ----------------- The occurrence of any of the following events at any time during the Term of this Agreement shall constitute an "Event of Default" by SELLER: 61 (1) By (a) fifteen (15) months after the Phase 1 In-Service Date Deadline or Phase 2 In-Service Date Deadline, respectively and in each case, as extended for Force Majeure, the Facility has not achieved the Phase 1 In-Service Date or Phase 2 In-Service Date, respectively (including satisfaction of all conditions associated therewith in accordance with Section 2.3A(3) and (4)) or (b) thirty- six (36) months after the PUC Approval Date or fifty-four (54) months after the PUC Submittal Date, the Facility has not achieved the Phase 2 In-Service Date; provided, that the Events of Default referred to in this Section 7.1A(1) once - -------- ---- triggered shall not be subject to Section 7.2C. (2) HELCO declares an Event of Default in accordance with Section 2.4A(1). (3) HELCO declares an Event of Default pursuant to Section 2.3B(1). (4) SELLER shall fail to pay HELCO any amount as and when due under this Agreement (less any amounts disputed in good faith pursuant to Article XIV) and neither SELLER nor the Financing Parties remedy such non-payment within ten (10) days after written demand therefor by HELCO served upon SELLER with a copy served upon the Financing Parties. (5) SELLER shall fail to operate, maintain or repair the Facility in accordance with the terms of this Agreement such that a condition exists in the Facility which has an adverse physical impact on HELCO's electrical system or the equipment of HELCO's customers or which HELCO reasonably determines presents an immediate danger to personnel or equipment, and SELLER shall fail to initiate and diligently pursue reasonable action to cure such failure within seven (7) days after actual receipt by SELLER and the Financing Parties of demand therefor by HELCO; provided, that in the event SELLER fails to initiate and diligently pursue reasonable action to cure such failure within such seven (7) day period, HELCO may, after providing written notice to SELLER and Financing Parties, enter upon the Site, and undertake such reasonable action on behalf of SELLER, consistent within Good Engineering and Operating Practices, until either such adverse effect or danger is eliminated or HELCO is reasonably satisfied that SELLER has initiated and is diligently pursuing such reasonable action; and provided, further, that, such right, if exercised, shall be HELCOOs exclusive remedy for SELLER's failure to act within the period required herein. SELLER shall bear or reimburse HELCO for, as the case may be, for all reasonable, documented, out-of-pocket costs incurred by HELCO in connection with such reasonable actions taken by HELCO on behalf of SELLER as provided herein, and shall cooperate in good faith with HELCO in providing access to the Facility and the Site, in the event HELCO elects to undertake such action as provided herein. (6) SELLER shall abandon the Facility prior to the Phase 2 In-Service Date or shall fail to maintain continuous service to the extent required by this Agreement when it has the technical capability to do so for a period of seven (7) or more consecutive days, the last twenty-four (24) hours of which shall be after notice by HELCO to SELLER that it is not in compliance with this provision, unless such abandonment or failure is caused by Force Majeure or an Event of Default by HELCO. For purposes of this Section 7.1A(6), (i) abandonment of the Facility during the construction phase shall mean the failure by SELLER, after the PUC Approval Date, 62 to proceed with or prosecute in a diligent manner the planning, design, engineering, permitting, completion (including, without limitation, purchasing, accounting, training and administration) and start up of the Facility for a consecutive period of thirty (30) days, the last ten (10) days of which shall be after notice from HELCO to SELLER that it is not in compliance with this provision; and (ii) technical capability to maintain continuous service shall mean that the Facility could be operated in a safe manner at that time in accordance with Good Engineering and Operating Practices. (7) SELLER shall be found by the professional engineering firm retained from the Qualified Independent Engineers List to have failed to initiate and diligently pursue adequate action to comply with such firm's recommendations after proper notification as required by Section 3.3D(1). (8) SELLER shall fail to meet the performance requirements specified in Section 3.2D(1) or Section 3.2D(2) by more than five (5) percentage points on average in any two (2) full consecutive Contract Years or by more than ten (10) percentage points for any one (1) full Contract Year after the Phase 2 In- Service Date or shall fail to have the capability of supplying upon request of HELCO Dispatch the Firm Capacity specified in Section 3.2D(3) by ten percent (10%) or more for any two (2) full consecutive Contract Years unless such failure is due to a Force Majeure event, a Catastrophic Equipment Failure, or a major outage pre-approved by HELCO pursuant to Section 3.2B(6) as required to prevent a Catastrophic Equipment Failure. (9) SELLER shall fail to meet the performance requirements specified in Section 3.2D(5) by more than three (3) Unit Trips in each of any two (2) consecutive Contract Years, or the Facility experiences twelve (12) or more Unit Trips in any one (1) full Contract Year after the Phase 2 In-Service Date. (10) SELLER shall (a) be dissolved, be adjudicated as bankrupt, or become subject to an order for relief under any federal bankruptcy law; (b) fail to pay, or admit in writing its inability to pay, its debts generally as they become due; (c) make a general assignment of substantially all its assets for the benefit of creditors other than to the Financing Parties; (d) apply for, seek, consent to, or acquiesce in the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for itself or any substantial part of its property; (e) institute any proceedings seeking an order for relief or to adjudicate it as bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors; or (f) take any action to authorize or effect any of the foregoing actions. (11) Without the application, approval or consent of SELLER, a receiver, trustee, examiner, liquidator or similar official shall be appointed for SELLER, or any part of its property, or a proceeding described in Section 7.1A(10)(e) shall be instituted against SELLER and such appointment shall continue undischarged or such proceeding shall continue undismissed or unstayed for a period of sixty (60) consecutive days or SELLER shall fail to file in a timely manner, an answer or other pleading denying the material allegations filed against it in any such proceeding. 63 (12) Without the prior written consent of HELCO, SELLER shall transfer, convey, lose or relinquish its right to own the Facility or to occupy the Site to any person, except an entity to whom SELLER may assign this Agreement under Article XVII or Article XIX. (13) SELLER shall fail to make all reasonable efforts to restore the Facility to full or substantially full operating condition to the extent it is determined, after consultation with HELCO and the Financing Parties following settlement of any casualty loss, to be reasonable to do so and such failure continues for thirty (30) days after written demand therefor by HELCO. (14) HELCO shall declare an event of default under the Security Documents, which event of default shall not have been cured within the time permitted for such cure therein. (15) SELLER shall fail to maintain in full force and effect throughout the Term either the Guarantee(s) or a letter of credit or bond in substitution therefor in accordance with the provisions of Article XXI. (16) The Guarantor(s) or the issuer of the letter of credit or bond provided in substitution for the Guarantee(s) pursuant to Article XXI shall fail to pay to HELCO any amount as to which it has a proper claim, as and when due under such Guarantee(s), letter of credit or bond, respectively, and neither the Guarantor(s), such issuer nor the Financing Parties remedy such non-payment within forty-five (45) days after written demand therefor by HELCO served upon the Guarantor(s) or such issuer, as appropriate, with a copy served upon the Financing Parties. (17) SELLER shall fail to provide to HELCO in accordance with Article XXI an acceptable letter of credit or bond in substitution for the Guarantee(s) within thirty (30) days after the occurrence, with respect to the Guarantor(s), of any of the events specified in paragraphs (10) or (11) of this Section 7.1A as constituting an Event of Default upon the occurrence thereof with respect to Guarantor(s) instead of SELLER. (18) SELLER shall fail to comply with an arbitrator's decision under Article XIV within thirty (30) days after such decision becomes binding on the parties in accordance with Section 14.2E or, if such decision cannot be complied with within thirty (30) days, SELLER shall fail to have commenced efforts designed to comply and diligently continued such efforts until compliance is attained. (19) SELLER shall fail to perform a material obligation of this Agreement not otherwise specifically referred to in this Section 7.1A, which failure has a material adverse effect on SELLER's delivery of capacity and energy to HELCO in accordance with the terms of this Agreement and which failure shall continue for forty-five (45) days after written demand by HELCO for performance thereof. 64 B. Default by HELCO ---------------- The occurrence of any of the following at any time during the Term of this Agreement shall constitute an "Event of Default" by HELCO: (1) HELCO shall fail to pay SELLER any amount as and when due under this Agreement (less any amounts disputed in good faith pursuant to Section 6.2 or Article XIV) and shall fail to remedy such non-payment within ten (10) days after demand therefor from SELLER. (2) HELCO shall fail to construct, operate, maintain or repair the Interconnection Facilities for which HELCO is responsible for under the Interconnection Agreement, in accordance with the terms of this Agreement, such that the safety of persons or property, the Facility, SELLER's equipment, or SELLER's entitlement to payments hereunder for capacity or energy is adversely affected, and shall fail to cure such failure within fourteen (14) days after demand therefor from SELLER. (3) HELCO shall abandon the Interconnection Facilities or shall discontinue purchases of capacity and energy required under this Agreement, unless such discontinuance is caused by reasons of Force Majeure or an Event of Default by SELLER. (4) HELCO shall (a) be dissolved, be adjudicated as bankrupt, or become subject to an order for relief under any federal bankruptcy law; (b) fail to pay, or admit in writing its inability to pay, its debts generally as they become due; (c) make a general assignment of substantially all its assets for the benefit of creditors, other than to the Trustee under its First Mortgage Indenture dated December 1, 1938, as amended; (d) apply for, seek, consent to, or acquiesce in the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for itself or any substantial part of its property; (e) institute any proceedings seeking an order for relief or to adjudicate it as bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization, or relief of debtors or (f) take any action to authorize or effect any of the foregoing actions. (5) Without the application, approval or consent of HELCO, a receiver, trustee, examiner, liquidator or similar official shall be appointed for HELCO or any part of its respective property, or a proceeding described in Section 7.1B(4)(e) shall be instituted against HELCO and such appointment shall continue undischarged or such proceeding shall continue undismissed or unstayed for a period of sixty (60) consecutive days or HELCO shall fail to file timely an answer or other pleading denying the material allegations filed against it in any such proceeding. (6) HELCO shall fail to comply with an arbitrator's decision under Article XIV within thirty (30) days after such decision becomes binding on the parties in accordance with Section 14.2E or, if such decision cannot be complied with within thirty (30) days, HELCO shall fail to have commenced efforts designed to comply and diligently continued such efforts until compliance is attained. 65 (7) HELCO shall fail to perform a material obligation of this Agreement not otherwise specifically referred to in this Section 7.1B, which failure shall have a material adverse effect on its ability to accept and pay for, or SELLER's ability to deliver, capacity and energy in accordance with the terms of this Agreement and which failure shall continue for forty-five (45) days after written demand by SELLER for performance thereof. C. Right to Cure Default --------------------- (1) Cure Period - An Event of Default shall not be declared or deemed to exist if the defaulting party cures such Event of Default within forty-five (45) days of receipt of notice from the non-defaulting party or, if a cure may not be effected within such forty-five (45) day period, the defaulting party commences its reasonable best efforts to cure such Event of Default during such period and diligently pursues such efforts to completion. This provision shall not apply to an Event of Default under Sections 7.1A(1),(8),(9), (10), (11) or (18) or Sections 7.1B (4), (5) or (6). (2) Effect of Cure on Event of Default - If an Event of Default occurs (or if conditions exist which would permit HELCO or SELLER to declare an Event of Default) and if such Event of Default (or the conditions which would permit HELCO or SELLER to declare an Event of Default) is cured prior to any invocation of remedies therefor, remedies (other than the payment of damages associated with such Event of Default) for such Event of Default shall not thereafter be invoked. 7.2 Rights and Obligations of the Parties Upon Default -------------------------------------------------- A. Notice of Default ----------------- Upon the occurrence of an Event of Default specified in Section 7.1, the non-defaulting party shall deliver to the defaulting party (with a copy to the Financing Parties and/or the collateral agent designated therefor) a written notice which (i) declares that an Event of Default has occurred under Section 7.1 of this Agreement; and (ii) identifies the specific provision or provisions of such Section under which such Event of Default shall have occurred. B. Right to Terminate ------------------ If an Event of Default under Section 7.1 shall have occurred and not been cured within the cure periods provided in Section 7.1C, or, as to Events of Default under Sections 7.1A(8) or (9) pursuant to the remedial provisions described therein, or such other cure periods provided under the Financing Documents to which HELCO is a party, as applicable, the non-defaulting party shall have the right to terminate this Agreement by delivering a written notice of termination which shall be effective thirty (30) days from the date such notice is delivered; provided, that if such notice of termination is not given -------- ---- within thirty (30) days of the date such right to terminate is triggered, such termination shall not be effective. 66 C. Right to Demand Independent Engineering Assessment and Modification ------------------------------------------------------------------- (1) If an Event of Default described in Section 7.1A(8) or (9) occurs, HELCO shall, prior to exercising its rights under Section 7.2A or Section 7.2B on the basis thereof, give written notice to SELLER that it will obtain an Independent Engineering Assessment concerning the failure to meet the specified warranted levels. Within thirty (30) days after receipt by SELLER of such notice, a president, vice president, or other authorized delegate of HELCO and SELLER, both having full authority to settle the matter, shall personally meet in Hawaii and attempt in good faith to make the determination described in Section 7.2C(2). If these officials reach agreement on a determination, the provisions of 7.2C(3) and (4) shall apply thereto. If no meeting takes place within thirty (30) days of SELLER's receipt of the aforesaid written notice, or if agreement between these officials is not reached within forty-five (45) days of SELLER's receipt of such notice, HELCO may at any time thereafter require that an Independent Engineering Assessment be conducted in accordance with Section 3.3D except that in every instance all costs of such Independent Engineering Assessment shall be borne by SELLER. (2) The representatives of the parties or the Qualified Independent Engineer based on the Independent Engineering Assessment, as applicable, shall determine whether there are commercially reasonable changes in the Facility, or in the manner in which SELLER operates the Facility, which (i) could be implemented within two hundred and seventy (270) days (or such other time period which HELCO and SELLER mutually agree upon) after the Qualified Independent Engineer's or the representatives' decision, and (ii) could reasonably be expected to result in future operation of the Facility in each Contract Year at the following levels: (a) An EAF not less than ninety percent (90%) computed in accordance with Section 3.2D(1); (b) An EFOR not to exceed four percent (4%) computed in accordance with Section 3.2D(2); (c) The Facility shall have the capability, within Good Engineering and Operating Practices and within the design limitations of the Facility equipment, of producing not less than ninety percent (90%) of the Firm Capacity; or (d) No more than six (6) Unit Trips in any Contract Year. (3) If the representatives of the parties or the Qualified Independent Engineer based on the Independent Engineering Assessment, as applicable, determine that there are no commercially reasonable changes meeting the requirements of paragraph (2) above, HELCO may thereafter declare an Event of Default on the basis of the failure described in Section 7.1A(8) or (9) which preceded HELCO's request for an Independent Engineering Assessment. (4) If the representatives of the parties or the Qualified Independent Engineer based on the Independent Engineering Assessment, as applicable, determine that there are 67 commercially reasonable changes meeting the requirements of paragraph (2) above, HELCO may not declare an Event of Default on the basis of the failure described in Section 7.1A(8) or (9) which preceded HELCO's request for an Independent Engineering Assessment unless SELLER either (i) fails to diligently carry out such recommended changes as determined in accordance with the procedures and requirements set forth in Section 3.3D or (ii) implements such changes but the Facility nevertheless does not meet the standards of Section 7.2C(2) in the first full Contract Year after such changes are implemented; provided that, if -------- ---- such right to declare an Event of Default is not exercised within three (3) months after such first full Contract Year, HELCO shall be deemed to have waived such right. (5) The remedies provided in this Section 7.2C shall be HELCO's sole and exclusive remedy pending the determinations set forth herein and, if applicable, implementation of changes to the Facility as prescribed herein. D. Other Rights Upon Default ------------------------- Upon the occurrence of an Event of Default by either party, the non- defaulting party, subject to the rights described in Sections 7.1C, 7.2B, 7.2C and Article XIV of this Agreement, may exercise, at its election, any rights and claim and obtain any remedies it may have at law or in equity, including, but not limited to, compensation for monetary damages, injunctive relief and specific performance. ARTICLE VIII - LIQUIDATED DAMAGES FOR FAILURE TO ATTAIN WARRANTED PERFORMANCE; BONUSES Recognizing that HELCO must provide the ultimate service to its customers and that the capacity and energy produced by the Facility is needed to meet the requirements of HELCO's customers, and in order to avoid the difficulties of proof in connection with the damages HELCO would incur in the event of a failure of the Facility to meet the performance standards herein, the parties agree that the following Liquidated Damages for failure by SELLER to attain warranted performance (1) constitute a reasonable and good faith pre-estimate of the anticipated or actual loss or damage which would be incurred by HELCO as a result of such failure, (2) are not intended as a penalty, (3) may be invoked by HELCO to ensure that the Facility meets the performance standards established under this Agreement and (4) constitute HELCO's sole and exclusive remedy, except as otherwise specifically provided in Article VII. 8.1 Liquidated Damages ------------------ A. Equivalent Availability Factor ------------------------------ For each one-tenth (1/10) of a percentage point that the Equivalent Availability Factor falls below the guaranteed level specified in Section 3.2D(1) on average for the current Contract Year and previous Contract Year (minimum twenty-four (24) month continuous period is to be used) down to ten (10) percentage points below such guaranteed level, SELLER shall pay to HELCO 68 Liquidated Damages in the amount set forth in the following table (on a progressive basis) upon proper demand at the end of the current Contract Year in accordance with Section 8.2. Amount Below Guaranteed Level 0% - 4.9% $ 7,500 (1998 $) per 0.1% 5.0% - 9.9% $10,000 (1998 $) per next 0.1% and thereafter until 10.0% For each one-tenth (1/10) of a percentage point that the Equivalent Availability Factor of the Facility falls ten (10) percentage points or more below the guaranteed level specified in Section 3.2D(1) on average for the current Contract Year and previous Contract Year (minimum twenty-four (24) month continuous period is to be used) down to fifteen (15) percentage points below such guaranteed level, SELLER shall deposit in the Maintenance Account Twelve Thousand Dollars ($12,000) (1998 $) in accordance with Section 8.3. B. Equivalent Forced Outage Rate ----------------------------- For each one-tenth (1/10th) of a percentage point that the EFOR exceeds the guaranteed level in Section 3.2D(2) on average for the current Contract Year and the previous Contract Year (minimum twenty-four (24) month continuous period is to be used) up to ten percent (10%) above such guaranteed level, SELLER shall pay HELCO Liquidated Damages in the amount set forth in the following table (on a progressive basis) upon proper demand at the end of the current Contract Year, in accordance with Section 8.2. Amount Above Guaranteed Level 0% - 4.9% $3,000 (1998 $) per 0.1% 5.0% - 9.9% $4,000 (1998 $) per next 0.1% and thereafter until 10.0% For each one-tenth (1/10) of a percentage point that EFOR exceeds by ten (10) percentage points or more the guaranteed level specified in Section 3.2D(1) on average for the current Contract Year and previous Contract Year (minimum twenty-four (24) month continuous period is to be used) up to fifteen (15) percentage points above such guaranteed level, SELLER shall deposit in the Maintenance Account Five Thousand Dollars ($5,000) (1998 $) in accordance with Section 8.3. C. Ramp Derating Penalty ---------------------- The parties acknowledge and agree that it is essential that the Facility has the capability to ramp both upwards and downwards at the ramp rates specified in Section 3.2C(25). In the event the Facility cannot achieve these ramp rates in accordance with Section 3.3A(2), SELLER shall pay Liquidated Damages for the ramp derating in the month following the derating in accordance with the following formula as illustrated in "Attachment K": $0.01981/kWh X Ramp Derating (kWh) 69 This Liquidated Damage computation shall apply to the total period in which the derating persists; provided that, SELLER's liability under this Section 8.1C shall be subject to the limits set forth in Section 3.3A(2). D. Excessive Unit Trips -------------------- For each Unit Trip in excess of the limit set forth in Section 3.2D(5) on average for the current Contract Year and the previous Contract Year (minimum twenty-four (24) month continuous period is to be used), SELLER shall pay HELCO Liquidated Damages in the amount set forth in the following table (on a progressive basis) upon proper demand at the end of the current Contract Year, in accordance with Section 8.2: Excessive Unit Trips -------------------- 1 - 3 unit trips $5,000 per trip 4 - 7 unit trips $7,500 per next trip 8 or more unit trips $10,000 per next trip 8.2 Payment of Liquidated Damages ----------------------------- SELLER shall pay the aggregate amount of Liquidated Damages for each Contract Year within thirty (30) days after such Contract Year; provided that, at ------------- SELLER's option, SELLER may pay such amount in one-twelfth (1/12) increments per Calendar Month during the following Contract Year, along with a carrying charge on the balance of such amount computed at the Prime Rate plus three percent (3%) per annum. In the event SELLER fails to pay HELCO undisputed amounts of Liquidated Damages due under this Section 8.2 within thirty (30) days of receipt of HELCO's written demand, HELCO shall be entitled to seek payment under the Guarantee(s), or any replacement security provided in accordance with Article XXI, and, to the extent SELLER's obligations to pay undisputed Liquidated Damages are not fulfilled thereafter, HELCO may offset such undisputed amounts due against payments it is otherwise obligated to make under this Agreement. 8.3 Maintenance Account. -------------------- SELLER shall establish an escrow account (the "Maintenance Account") to be held by a Financing Party or other entity approved by the Financing Parties. SELLER shall deposit monies in the Maintenance Account in accordance with Sections 3.3A(2), 8.1 and this Section 8.3. The aggregate amount, if any, required pursuant to Sections 3.3A(2) and 8.1 for each Contract Year, shall deposited by SELLER into the Maintenance Account within thirty (30) days after such Contract Year. Notwithstanding anything to the contrary in Section 8.1 or in this Section 8.3, the amount held in the Maintenance Account shall not exceed Four Million Dollars ($4,000,000) (1998 $) at any time and SELLER shall not be required to deposit any monies to the Maintenance Account to the extent such deposit shall cause the amount held therein to exceed Four Million Dollars ($4,000,000) (1998 $). 70 Amounts held in the Maintenance Account shall be dedicated solely to fund maintenance, modification or repairs to the Facility on an expedited basis which are reasonably necessary to bring EAF or EFOR within guaranteed levels, to cure any problems giving rise to a ramp derating pursuant to Section 3.3A(2) or to otherwise enhance the Facility's ability to meet the performance standards in Section 3.2D of this Agreement; provided, however, SELLER shall be entitled to -------- ------- withdraw all amounts held therein upon the earlier of (i) once the EAF and EFOR levels are brought within such guaranteed levels for a period of two (2) consecutive years and any problems giving rise to a ramp derating are cured, or (ii) termination of this Agreement. Amounts held in the Maintenance Account shall be invested pursuant to SELLER's instructions. SELLER shall be entitled to draw against the Maintenance Account upon presentation of an officer's certificate, signed by the president, vice- president, or other authorized delegate of SELLER, stating: (a) the amount required to be disbursed; (b) the person to which the disbursement is to be paid; and (c) either (i) that the disbursement is to fund maintenance, modification or repairs to the Facility reasonably necessary to bring EAF or EFOR, as the case may be, within guaranteed levels, to cure problems giving rise to a ramp derating or to otherwise enhance the Facility's ability to meet in the performance standards in Section 3.2D of this Agreement and that no portion of the amount then being requested to be disbursed has been set forth in any previous certificate requesting disbursement; (ii) that the EAF or EFOR level, as the case may be, has been within guaranteed levels for a period of two (2) consecutive years and that any problems giving rise to a ramp derating have been cured; or (iii) that this Agreement has been terminated. Upon receipt of such certificate, the Financing Party or other entity holding the Maintenance Account shall disburse the amount set forth in (a) above to SELLER. 8.4 Adjustments ----------- All of the dollar values noted in Sections 8.1A, 8.1B and 8.3 will be adjusted each Contract Year in accordance with "Attachment I." ARTICLE IX - HELCO'S INSPECTION OF FACILITY OPERATION AND USE OF FACILITY SITE; OPTION FOR SITE REPRESENTATIVE 9.1 Inspection of Facility Operation -------------------------------- SELLER shall permit HELCO, its employees and agents (including but not limited to affiliates and contractors and their employees) to enter upon and inspect the Facility and SELLER's construction, operation and maintenance thereof from time to time, upon reasonable prior notice, provided that such -------- ---- inspections shall not interfere with SELLER's operation of the Facility and do not occur more than four (4) times per year; provided further that to the extent -------- ------- ---- 71 there exists a major operating problem with the Facility, HELCO shall be permitted to enter upon and inspect the Facility without regard to the four (4) times per year limitation. HELCO shall also be entitled to conduct non-intrusive site visits to the Facility personnel at the Site; provided that such visits ------------- shall not occur more than once a month. If HELCO observes a condition during such inspections which it has reasonable cause to believe may have an adverse impact on SELLER's ability to fulfill its obligations under this Agreement, HELCO may make a written request for and SELLER shall provide a written report on such condition within thirty (30) days. HELCO's inspection of SELLER's equipment or operation shall not be construed as endorsing the design thereof nor as any warranty of the safety or reliability of said equipment or operation nor as a waiver of any right by HELCO. 9.2 Entry for Work On Site ---------------------- SELLER shall permit HELCO, its employees and agents (including but not limited to affiliates and contractors and their employees) to enter upon the Site, with such prior notice as is reasonable under the circumstances, to take such action as may be necessary in the reasonable opinion of HELCO to: (A) maintain, inspect, read and test meters and other HELCO equipment pursuant to Section 3.2E, (B) to interconnect, interrupt, monitor or measure electrical generation produced at the Facility in accordance with the terms of this Agreement, and (C) to exercise any other rights HELCO may have under this Agreement. 9.3 Provision of Site Space ----------------------- SELLER shall provide without charge suitable space on the Site for all HELCO equipment to be placed on the Site under this Agreement. Suitable space as used herein means space appropriate for the intended use with adequate electric power, air conditioning, telecommunication wiring, security, and other necessary building services. In addition, SELLER shall provide a means for reasonable access by HELCO to the Site, also without charge to HELCO. If HELCO exercises its rights to have a Site Rep under Section 9.5, SELLER will provide suitable office space at the Site for such Site Rep. 9.4 No Ownership Interest --------------------- Neither SELLER nor any Financing Party shall acquire any ownership interest or security interest in or lien or mortgage on any equipment installed, owned, and maintained at the Site by HELCO pursuant to this Agreement, and HELCO shall have a reasonable time after termination of this Agreement in which to remove such equipment. 9.5 HELCO Site Representative Option -------------------------------- If HELCO reasonably believes, based on its review of the Facility's operating records and the Facility's actual failure to perform in accordance with the terms of this Agreement over a six (6) month period, that the Facility is not being operated in accordance with this Agreement, HELCO may, following ten (10) days' written notice to SELLER thereof, have a Site 72 Representative ("Site Rep") observe Facility operations continuously for a period of up to thirty (30) days. During this period, the Site Rep shall have access at all reasonable times to any and all operational areas of the Facility. SELLER shall comply with any reasonable request of the Site Rep for information concerning the operation (including fueling) and maintenance of the Facility. The Site Rep shall not adversely impact SELLER's operations and shall comply with SELLER's safety and related standards and conditions. HELCO shall be liable for any negligent actions or willful misconduct of the Site Rep that results in any injury or damage to any person (including the Site Rep), real property or personal property at or immediately adjacent to the Site, or adversely impacts SELLER's ability to operate the Facility. ARTICLE X - AUDIT RIGHTS 10.1 Rights of HELCO --------------- HELCO shall have the right 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 SELLER to the limited extent necessary to verify the basis for any claim by SELLER for payments from HELCO. HELCO shall not have the right to audit other financial records of SELLER. SELLER shall make such records available at its offices in Hawaii during normal business hours. HELCO shall pay SELLER's reasonable costs for such audits, including allocated overhead. 10.2 Rights of SELLER ---------------- SELLER shall have the right 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 HELCO to the limited extent necessary to verify the basis for charges invoiced by HELCO to SELLER under this Agreement. SELLER shall not have the right to audit other financial records of HELCO. HELCO shall make such information available during normal business hours at its offices in Hawaii. SELLER shall pay HELCO's reasonable costs for such audits, including allocated overhead. ARTICLE XI - INDEMNIFICATION 11.1 Indemnification of HELCO ------------------------ A. SELLER shall indemnify, defend, and hold harmless HELCO, its successors, permitted assigns, affiliates, controlling persons, directors, officers, employees, servants and agents, including but not limited to contractors and their employees (collectively referred to as an "Indemnified HELCO Party"), from and against any and all third party claims, demands, obligations, liabilities (including, without limitation, liabilities arising out of the doctrine of strict liability), losses, damages, penalties, fines, actions, suits, judgments, costs, expenses and disbursements (including without limitation, reasonable attorneys' fees and expenses) and 73 proceedings of any nature whatsoever for personal injury or death or damage to property, whether or not well founded, meritorious or unmeritorious, demanded, asserted or claimed against, imposed on, or incurred by an Indemnified HELCO Party in any way relating to or arising out of the performance by SELLER or its agents or subcontractors of this Agreement, except to the extent that any of the foregoing is attributable to the negligence or intentional action of an Indemnified HELCO Party or a failure of HELCO to comply with Section 3.1B. B. Any fines or other penalties incurred by an Indemnified SELLER Party (as defined in Section 11.2A) for noncompliance by SELLER or an Indemnified SELLER Party with laws, rules, regulations, orders or other governmental actions referred to in Section 3.2I shall not be reimbursed by HELCO but shall be the sole responsibility of SELLER. SELLER shall indemnify, defend and hold harmless each Indemnified HELCO Party from and against any and all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses, disbursements (including attorney's fees) and proceedings of any nature whatsoever suffered or incurred because of the failure of SELLER to comply with any of the laws, rules, regulations, orders or other governmental actions referred to in Section 3.2I. C. If SELLER shall obtain knowledge of any claim indemnified against under Section 11.1A or otherwise under this Agreement, SELLER shall give prompt notice thereof to HELCO, and if HELCO shall obtain any such knowledge, HELCO shall give prompt notice thereof to SELLER. D. In case any action, suit or proceeding shall be brought against an Indemnified HELCO Party, HELCO shall notify SELLER of the commencement thereof and, provided that it has acknowledged in writing to HELCO its obligation to an Indemnified HELCO Party under this Article XI, SELLER shall be entitled, at its own expense, acting through counsel acceptable to HELCO, to participate in and, to the extent that SELLER desires, to assume and control the defense thereof; provided, however, that SELLER shall not be entitled to assume and control the - -------- ------- defense of any such action, suit or proceeding if and to the extent that, in the opinion of HELCO, such action, suit or proceeding involves the potential imposition of criminal liability on an Indemnified HELCO Party or a conflict of interest between an Indemnified HELCO Party and SELLER. HELCO shall be entitled, at its own expense, acting through counsel acceptable to SELLER to participate in any action, suit or proceeding, the defense of which has been assumed by SELLER. HELCO shall supply SELLER with such information and documents requested by SELLER as are necessary or advisable for SELLER to possess in connection with its participation in any action, suit or proceeding to the extent permitted by this Section 11.1D. An Indemnified HELCO Party shall not enter into any settlement or other compromise with respect to any claim without the prior written consent of SELLER, which consent shall not be unreasonably withheld or delayed. E. Upon payment of any claim by SELLER pursuant to Section 11.1D or other similar indemnity provisions contained herein to or on behalf of HELCO, SELLER, without any further action, shall be subrogated to any and all claims that an Indemnified HELCO Party may have relating thereto, and HELCO shall cooperate with SELLER and give such further assurances as are necessary or advisable to enable SELLER vigorously to pursue such claims. 74 11.2 Indemnification of SELLER ------------------------- A. HELCO shall indemnify, defend, and hold harmless SELLER, its successors, permitted assigns, affiliates, controlling persons, directors, officers, employees, servants and agents, including but not limited to contractors and their employees (collectively referred to as an "Indemnified SELLER Party"), from and against any and all third party claims, demands, obligations, liabilities (including, without limitation, liabilities arising out of the doctrine of strict liability), losses, damages, penalties, fines, actions, suits, judgments, costs, expenses and disbursements (including reasonable attorney's fees and expenses) and proceedings of any nature whatsoever for personal injury or death or damage to property, whether or not well founded, meritorious or unmeritorious, demanded, asserted or claimed against, imposed upon, or incurred by an Indemnified SELLER Party in any way relating to or arising out of the performance by HELCO of its obligations under this Agreement, except to the extent that any of the foregoing is attributable to the negligence or intentional action of an Indemnified SELLER Party or a failure of SELLER to comply with Section 3.1B. B. If HELCO shall obtain knowledge of any claim indemnified against under Section 11.2A or otherwise under this Agreement, HELCO shall give prompt notice thereof to SELLER, and if SELLER shall obtain any such knowledge, SELLER shall give prompt notice thereof to HELCO. C. In case any action, suit or proceeding shall be brought against an Indemnified SELLER Party, SELLER shall notify HELCO of the commencement thereof and, provided that it has acknowledged in writing to SELLER its obligation to an Indemnified SELLER Party under this Article XI, HELCO shall be entitled, at its own expense, acting through counsel acceptable to SELLER, to participate in and, to the extent that HELCO desires, to assume and control the defense thereof; provided, however, that HELCO shall not be entitled to assume and control the - -------- ------- defense of any such action, suit or proceeding if and to the extent that, in the opinion of SELLER, such action, suit or proceeding involves the potential imposition of criminal liability on an Indemnified SELLER Party or a conflict of interest between an Indemnified SELLER Party and HELCO. SELLER shall be entitled, at its own expense, acting through counsel acceptable to HELCO, to participate in any action, suit or proceeding the defense of which has been assumed by HELCO. An Indemnified SELLER Party shall supply HELCO with such information and documents requested by HELCO as are necessary or advisable for HELCO to possess in connection with its participation in any action, suit or proceeding, to the extent permitted by this Section 11.2C. An Indemnified SELLER Party shall not enter into any settlement or other compromise with respect to any claim without the prior written consent of HELCO, which consent shall not be unreasonably withheld or delayed. D. Upon payment of any claim by HELCO pursuant to Section 11.2C or other similar indemnity provisions contained herein to or on behalf of SELLER, HELCO, without any further action, shall be subrogated to any and all claims that an Indemnified SELLER Party may have relating thereto, and SELLER shall cooperate with HELCO and give such further assurances as are necessary or advisable to enable HELCO vigorously to pursue such claims. 75 ARTICLE XII - CONSEQUENTIAL DAMAGES Neither SELLER nor HELCO shall be liable to the other party for any indirect, consequential, incidental, punitive or exemplary damages. ARTICLE XIII - INSURANCE 13.1 Required Coverage ----------------- SELLER shall, at its own expense, acquire and maintain, or cause to be maintained, commencing with the start of construction, as applicable, and continuing throughout the Term, as applicable, the minimum insurance coverage set forth in "Attachment J," which SELLER and/or the Financing Parties reasonably determine, after consultation with HELCO, to be necessary during construction and operation of the Facility, as long as such coverage is available to SELLER on commercially reasonable terms. 13.2 Additional Insureds ------------------- The insurance policies specified in Sections (b), (c), (d), (e) and (g) (if applicable) of "Attachment J" shall include HELCO as an additional insured, as its interest may appear, with respect to any and all third party bodily injury and/or property damage claims arising from SELLER's performance of this Agreement and, to the extent permitted by such insurers after reasonable efforts of SELLER to obtain such notice, shall require at least thirty (30) days written notice to HELCO prior to cancellation of, or material modification to such policy and ten (10) days written notice to HELCO of cancellation due to failure by SELLER to pay such premium. HELCO acknowledges that Financing Parties shall be entitled to receive and distribute any and all loss proceeds as stipulated by any Financing Documents related to any policy described in this Article XIII and Attachment J. 13.3 Evidence of Policies Provided to HELCO -------------------------------------- Evidence of insurance for the coverage specified in this Article XIII shall be provided to HELCO within thirty (30) days after SELLER has obtained a copy of the related policies or by the date specified in Section 2.3A, whichever is later. During the Term, SELLER, upon HELCO's reasonable request, shall make available to HELCO for its inspection at SELLER's designated location, certified copies of the insurance policies described in this Article XIII. 13.4 Deductibles ----------- HELCO acknowledges that any policy required herein may contain reasonable deductibles or self-insured retentions, the amounts of which are solely within the discretion of SELLER and/or the Financing Parties. 76 ARTICLE XIV - DISPUTE RESOLUTION 14.1 Good Faith Negotiations ----------------------- Before any dispute under this Agreement is subjected to the provisions of Section 14.2 or any litigation, the presidents, vice presidents, or authorized delegates from both SELLER and HELCO, each having full authority to settle the dispute, shall personally meet in Hawaii and attempt in good faith to resolve the dispute. 14.2 Dispute Resolution Procedures ----------------------------- If the parties are unable to resolve any dispute under this Agreement under the procedures of Section 14.1, such dispute shall be resolved in Hawaii by binding arbitration in accordance with the requirements of this Section 14.2; provided that, this agreement to arbitrate shall be specifically enforceable and - ------------- this Article XIV shall not preclude either party from pursuing its equitable remedies, including without limitation, seeking injunctive relief. A. Initiation of Arbitration ------------------------- Subject to Section 14.1, either party shall give to the other written notice in sufficient detail of the existence and nature of any dispute proposed to be arbitrated under this Section 14.2 and the remedy sought as well as a detailed statement of its contentions of law and fact. Such notice shall be made within a reasonable time after the dispute in question arose, and in no event shall such notice be made after the date when institution of legal or equitable proceedings based on such dispute would be barred by the applicable statute of limitations but for this Article XIV. Such notice will be signed by the president of the party issuing the notice and be delivered to the president of the other party. The other party shall file an answering statement within twenty (20) days of receipt of the notice. After the answering statement is filed, the parties shall diligently negotiate in good faith for a period of sixty (60) days. B. Appointment of Arbitrator ------------------------- If the dispute is not resolved through the negotiations required by Section 14.2A, the parties shall attempt to agree on a person with special knowledge and expertise with respect to the design, construction and operation of electric generating facilities to serve as an arbitrator panel of one. If the parties cannot agree on an arbitrator within twenty (20) days after the negotiation period required by Section 14.2A, each party shall within five (5) days, appoint one person to serve as an arbitrator and the two arbitrators thus appointed shall select a third arbitrator to serve as chairman of the panel of arbitrators; and such three arbitrators shall determine all matters by majority vote; provided, however, if the two arbitrators appointed by the parties are -------- ------- unable to agree upon the appointment of the third arbitrator within twenty (20) days after their appointment, both shall give written notice of such failure to agree to the parties and, if the parties fail to agree upon the selection of such third arbitrator within twenty (20) days 77 thereafter, then either of the parties upon written notice to the other may require such appointment from and pursuant to the rules for commercial arbitration of the American Arbitration Association. In selecting arbitrators under this Section 14.2B, the parties shall give preference to qualified Hawaiian domiciliaries. Each arbitrator appointed pursuant to this Section 14.2B shall swear to conduct such arbitration in accordance with the terms of this Section 14.2, the laws of the State of Hawaii, and the Code of Ethics of the American Arbitration Association. Each arbitrator who would be disqualified for any reason that would disqualify a judge under the Code of Judicial Conduct shall immediately resign or be withdrawn as an arbitrator. The arbitration panel may choose legal counsel to advise it on the remedies it may grant, procedures and such other legal issues as the panel deems appropriate. Copies of the notice, the statement of contentions of law and fact, the answering statement and this Agreement shall promptly be furnished by the initiating party to the arbitrator(s) selected. C. Arbitration Procedures ---------------------- (1) The parties shall have one hundred and twenty (120) days from the date of the formation of the arbitration panel to perform discovery and present evidence and argument to the arbitrators. During this period, the arbitrators shall be available to receive and consider all such evidence as is relevant, within reasonable limits due to the restricted time period, and to hear as much argument as is feasible, giving a fair allocation of time to each party to the arbitration. This period may be extended for sufficient cause by the arbitration panel or by agreement of the parties. The arbitration panel shall have the general powers of a court and may proceed in accordance with established rules of evidence and procedure, liberally construed to promote justice and expeditious resolution of the dispute. The arbitration panel shall have complete discretion over the mode and order of discovery, presentment of evidence, and the conduct of the hearing. The arbitrators shall not consider any evidence or argument not presented during such period. To the extent not in conflict with the procedures set forth in Section 14.2, such arbitration shall be held in accordance with Hawaii Revised Statutes, Chapter 658, and the prevailing rules of the American Arbitration Association for commercial arbitration. (2) The arbitrators shall use all reasonable means to expedite discovery and to sanction non-compliance with reasonable discovery requests or any discovery order. SELLER and HELCO, as the case may be, shall require and warrant that each of their officers, directors, agents, employees, representatives, contractors, partners, general partners, limited partners, and all entities that are the direct or indirect parents or subsidiaries of or an entity affiliated or related by ownership, in whole or part, with or to SELLER or HELCO, as the case may be, its partners, general partners, or limited partners, submit to the jurisdiction of any arbitration panel appointed pursuant to Article XIV and shall respond to all reasonable discovery requests without challenging or objecting to the jurisdiction of such arbitration panel, the location of the arbitration, or other grounds related in any way to separateness of entities, a lack of privity with HELCO, or their lack of status as a party to this Agreement or such arbitration. All documents 78 and deponents made available in response to reasonable discovery requests shall be made available in Hilo, Hawaii. (3) At the conclusion of such one hundred and twenty (120) day period, as extended pursuant to Section 14.2C(1), the arbitrators shall have thirty (30) days to reach a determination and to give a written decision to the parties, stating their findings of fact, conclusions of law and final order. (4) Pending resolution of disputes pursuant to this Article XIV, which disputes relate to or impact SELLER's construction schedule for the Facility, all applicable deadlines and cure periods under this Agreement shall be extended on a day-for-day basis. D. Arbitrator Limitations ---------------------- The arbitrators shall have authority to interpret and apply the terms and conditions of this Agreement and to order any remedy allowed by this Agreement, but may not change any term or condition of this Agreement, deprive either party of a remedy expressly provided hereunder, or provide any right or remedy that has been excluded hereunder. E. Decision Binding on the Parties ------------------------------- The decision of the arbitrators shall be binding on the parties at such time as the decision is confirmed by order of a court of competent jurisdiction pursuant to Chapter 658, Hawaii Revised Statutes. F. Cost of Arbitration ------------------- The arbitrators in rendering their decision shall also state which party prevailed over the other party, or that neither party prevailed over the other. The costs of arbitration (including the attorney fees and costs of the parties and legal counsel appointed pursuant to Section 14.2B) will be borne by the party which is not the prevailing party. In the event neither party prevails, the parties shall each pay fifty percent (50%) of the cost of the arbitration, arbitrator/chair of the panel, and any legal counsel appointed pursuant to Section 14.2B. Also, in the event neither party prevails, the parties each shall bear their own costs, including attorney fees, and those of the arbitrator they appointed to the panel of three arbitrators. ARTICLE XV - FORCE MAJEURE 15.1 Definition ---------- Force Majeure shall mean any storm, hail, flood, lightning, earthquake, tsunami, volcanic eruption, or other natural disaster, fire and/or explosion, civil disturbance, labor disputes or strikes, act of a public enemy, sabotage, war, national emergency or riot, action, inaction, or restraint by any court or public authority (including denial or failure to grant required permits, 79 licenses, or other authorizations despite timely efforts to obtain same), inability to obtain required fuel or water for the Facility on reasonable terms despite reasonable efforts to do so, and changes in applicable United States, Hawaii, or local environmental, permitting, zoning, land use, or labor laws, regulations, or ordinances from those in effect on the Execution Date, Catastrophic Equipment Failure, mechanical or equipment breakdown caused by any of the foregoing Force Majeure events, or any other cause beyond the reasonable control of the party relying on such cause to excuse its performance hereunder to the extent to which such party cannot remedy the problem by exercise of due diligence, including, but not limited to, the expenditure of all reasonable sums of money. For purposes of this Section 15.1, Force Majeure shall include delays in the issuance of SELLER's permits, including without limitation, the PSD Permit, beyond the issuance date set forth on Attachment Q, except to the extent such delay beyond the expected issuance date is the result of SELLER's fault or negligence. Notwithstanding the foregoing, however, Force Majeure does not include any labor dispute or strike involving operating personnel in excess of seventy-two (72) hours after the Phase 2 In-Service Date (except that if such labor dispute or strike continues for more than fourteen (14) days thereafter, such labor dispute or strike shall constitute a Force Majeure event). 15.2 Notice of Force Majeure ----------------------- A party which desires to claim an event of Force Majeure has occurred which excuses its obligations under this Agreement shall promptly, upon learning of such event and ascertaining that it will affect its performance hereunder, give written notice to the other party, stating the nature of the event, its anticipated duration and any action being taken to avoid or minimize its effect. The burden of proof shall be on the party claiming Force Majeure pursuant to this Article XV. 15.3 Excuse of Obligation; Extension of Milestone Dates and In-Service Date ---------------------------------------------------------------------- Deadlines - --------- Any obligation of either party under this Agreement shall be excused only to the extent and for the period that such party's inability to perform is caused by one (1) or more Force Majeure events. The party so excused shall make all reasonable efforts, including all reasonable expenditures of necessary funds, to cure, mitigate or remedy such Force Majeure event. Any payments due as compensation for the obligation so excused shall also be excused for so long as the obligation is not performed due to Force Majeure. During the occurrence of one (1) or more Force Majeure events, each Milestone Date, In-Service Date Deadline and related dates or other applicable deadline in this Agreement shall be extended on a day-for-day basis until the end of such Force Majeure event; provided, however, in no event shall Force -------- ------- Majeure extend any Milestone Date or In-Service Date Deadline for more than nine (9) months in the case of a single Force Majeure event, or twelve (12) months in the case of more than one (1) Force Majeure event. 80 15.4 Right to Terminate Due to Force Majeure or Catastrophic Equipment Failure ------------------------------------------------------------------------- Notwithstanding any other provision of this Agreement, if a party is prevented from substantially performing its obligations under this Agreement by natural disaster, other Force Majeure or Catastrophic Equipment Failure for a period of twenty-four (24) consecutive months, the other party may terminate the Agreement without further liability of either party to the other hereunder. Such termination shall be effective upon ninety (90) days written notice to the other party and the Financing Parties prior to the resumption of substantial performance; provided, however, that if substantial performance is resumed -------- ------- during such ninety (90) day period, such termination shall not be effective. 15.5 Obligations Remaining After Event of Force Majeure -------------------------------------------------- No monetary obligations of either party which arose before the occurrence of an event of Force Majeure causing the suspension of performance shall be excused as a result of such occurrence. The obligation to pay in a timely manner any payments owed pursuant to Article V, and any other money for obligations and liabilities which matured prior to the occurrence of an event of Force Majeure is absolute and shall not be subject to the Force Majeure provisions. In the event of a SELLER Force Majeure which reduces or limits the Facility's capability to deliver capacity and/or energy, HELCO shall be obligated to pay for capacity and/or energy only to the extent such capacity and/or energy is made available by SELLER. In the event of a HELCO Force Majeure which reduces or limits HELCO's capability to purchase energy, HELCO shall pay for such reduced energy as it may accept, but shall remain obligated to pay for capacity made available by SELLER in accordance with this Agreement. 15.6 Extension of Term ----------------- If a Force Majeure event occurs after the Phase 2 In-Service Date, the Term shall be extended on a day-for-day basis for the duration of such Force Majeure event. ARTICLE XVI - ELECTRIC SERVICE SUPPLIED BY HELCO This Agreement does not provide for any electric services by HELCO to SELLER. If SELLER requires any electric services from HELCO, HELCO shall provide such service on a non-discriminatory basis in accordance with HELCO's Schedule "J" tariff, a copy of which is attached as Attachment S, or successors thereof. ARTICLE XVII - ASSIGNMENT 17.1 Assignment by SELLER -------------------- This Agreement shall not be assignable by SELLER without the prior written consent of HELCO (which consent shall not be unreasonably withheld); provided -------- that SELLER may, - ---- 81 without the consent of HELCO, assign this Agreement (A) as required by the Financing Parties or otherwise in connection with Financing Documents or (B) to an affiliate, a wholly-owned subsidiary or a successor of SELLER. 17.2 Assignment by HELCO ------------------- This Agreement shall not be assignable by HELCO without the prior written consent of SELLER (which consent shall not be unreasonably withheld); provided -------- that HELCO shall have the right, without the consent of SELLER, to assign its - ---- interest in this Agreement to the Trustee under its First Mortgage Bond Indenture dated December 1, 1938 as it may be amended from time to time including the amendment of June 20, 1963, and to any affiliated company owned in whole or in part by Hawaiian Electric Industries, Inc., provided further that --------------------- such assignment does not impair the ability of SELLER to continue to receive the payments it is entitled to under this Agreement and, further provided that HELCO ------- -------- ---- will remain directly responsible for any obligations under this Agreement that only HELCO, as the public utility serving the Island of Hawaii, can carry out. 17.3 Binding on Assigns ------------------ This Agreement and all of its covenants, terms and provisions shall be binding upon and shall inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. ARTICLE XVIII - CHANGE IN COMMITTED CAPACITY OF FACILITY After the Phase 2 In-Service Date, SELLER shall not increase the Committed Capacity of the Facility to more than sixty thousand kilowatts (60,000EkW) (net) without the prior written approval of HELCO; provided, however, that in no event -------- ------- shall HELCO be obligated to approve a change in Committed Capacity. Unless waived by HELCO, any change in Committed Capacity will require that the Facility undergo the Capacity Test procedure referred to in Section 3.2C(22). ARTICLE XIX - SALE OF FACILITY BY SELLER 19.1 HELCO's Right of First Refusal ------------------------------ Should SELLER ever desire to dispose of its right, title, or interest in the Facility, in whole or in part, other than the sale and leaseback of the Facility or other assignment or disposition of part or all of its ownership interests in the Facility to provide financing for the Facility, it shall first offer to sell such interest to HELCO. SELLER shall not solicit any offers for the sale of the Facility with any other entity without first negotiating with HELCO in good faith for at least ninety (90) days concerning a purchase by HELCO unless, during that period, HELCO gives written notice that such negotiations are terminated. Notwithstanding the above, in the event SELLER ceases negotiations with HELCO and, within one (1) year offers to sell the 82 Facility to a third party for less than the final amount HELCO had offered to purchase the Facility, HELCO shall have the right to purchase the Facility for such lower amount on similar terms and conditions; provided that HELCO shall -------- ---- have thirty (30) days in which to accept such terms and conditions. This Section 19.1 shall not apply to unsolicited offers received by SELLER or the sale or transfer of interests in SELLER (except the sale or transfer of 100% of the interest in SELLER) or a sale or transfer initiated by Financing Parties. 19.2 No Exercise of Right by HELCO ----------------------------- In the event that HELCO does not exercise its right to purchase such interest in the Facility under Section 19.1, SELLER shall have the right to transfer or sell such interest to any person or entity which proposes to acquire the Facility with the intent to continue the operation of the Facility in accordance with the provisions of this Agreement pursuant to an assignment of this Agreement, subject to the written approval of HELCO, which approval shall not be unreasonably withheld. HELCO will grant assignment of this Agreement to the purchaser upon being reasonably satisfied that the assignee (i) has the qualifications or has contracted with an entity having the qualifications to operate the Facility in a manner consistent with the terms and conditions of this Agreement and (ii) has provided HELCO with adequate assurances of its creditworthiness and ability to perform its financial obligations hereunder in a manner consistent with the terms and conditions of this Agreement. ARTICLE XX - ESCROW ACCOUNT To the extent permitted by the Financing Parties, SELLER shall grant to HELCO a security interest in any escrow or reserve accounts established in connection with financing for the Facility, securing all of SELLER's payment obligations hereunder. Such security granted by SELLER shall be subordinate to the rights of the Financing Parties in such accounts to the extent provided for under Section 3.1E, and shall permit recourse against such accounts by HELCO only if the Financing Parties having superior rights in such accounts have fully exercised such rights, received full satisfaction of the obligations secured by such rights, or provided HELCO with a written waiver or release of such rights. SELLER shall execute such documents as HELCO shall reasonably request to grant, establish, perfect and maintain such security interest. HELCO shall execute such documents as SELLER or Financing Parties shall reasonably request to subordinate HELCO's interests to that of the Financing Parties. ARTICLE XXI - GUARANTEE 21.1 Guarantee(s) ------------ Guarantor(s) shall be financially responsible for all of SELLER's payment obligations under this Agreement up to the Guaranteed Amount, including but not limited to, any penalties, Liquidated Damages, payments due from SELLER to HELCO under the Interconnection Agreement, and reimbursement of certain HELCO administrative costs under Article XXII. 83 SELLER shall, at its option, either (i) cause the Guarantor(s) to maintain the Guarantee(s) pursuant to Section 21.2 in full force and effect throughout the Term, or (ii) substitute therefor either: A. an unconditional irrevocable direct pay or standby letter of credit in an amount determined pursuant to Section 21.2 issued by a bank in Hawaii acceptable to HELCO, in form and substance acceptable to HELCO; or B. a payment bond or performance bond in an amount determined pursuant to Section 21.2 issued by a company acceptable to HELCO for payment to HELCO in the event of a breach of this Agreement by SELLER, in form and substance reasonably acceptable to HELCO. HELCO shall not be obligated to release the Guarantor(s) from the Guarantee(s) unless the substitute proposed by SELLER under this Section 21.1 is fully acceptable to HELCO. HELCO's release of the Guarantee(s) shall be terminated and the Guarantee(s) shall be reinstated at such time as any letter of credit or bond provided hereunder terminates. In addition, if a letter of credit or bond supplied hereunder is for less than the entire amount required under Section 21.2, then the Guarantee(s) shall be released only by an amount equal to the amount of payments covered by such letter of credit or bond. Any letter of credit or bond proposed by SELLER as a substitute for the Guarantee(s) shall provide for payments to HELCO up to the Guaranteed Amount. 21.2 Guaranteed Amount ----------------- The Guaranteed Amount (or substitution therefor) shall be according to the following schedule: From the PUC Approval Date $ 200,000 through the Closing Date From the Closing Date $1,000,000 through the Phase 2 In-Service Date From the Phase 2 In-Service Date $3,000,000 through the end of the Term ARTICLE XXII - REIMBURSEMENT OF CERTAIN HELCO ADMINISTRATIVE COSTS SELLER shall reimburse HELCO for its documented, reasonable out-of-pocket legal, consulting and administrative costs incurred by HELCO in the course of securing PUC approval 84 of this Agreement up to fifty thousand dollars ($50,000). For the purpose of this Article XXII, HELCO's costs shall commence from the Execution Date and these costs shall be paid at the Closing Date, to the extent then accrued, with any additional costs to be paid on or before the Phase 2 In-Service Date. Payment shall be by wire transfer to HELCO's designated account at the Bank of Hawaii in Hilo, Hawaii, unless otherwise directed by HELCO. In the event such costs remain unpaid in whole or in part, HELCO shall have the right to offset such unpaid amounts against the initial Capacity Charge payment under this Agreement and any subsequent Capacity Charge payments until such costs have been reimbursed in full. ARTICLE XXIII - MISCELLANEOUS 23.1 Recovery of Payments -------------------- No change may be made in the terms and conditions of this Agreement except by agreement of the parties hereto. The parties to this Agreement believe, and have entered this Agreement relying on the belief that, under and pursuant to PURPA and 18 C.F.R., Part 292, including, without limitation, 18 C.F.R. 292.304(b)(5) and (d)(2), after the PUC Order has become final and non- appealable: (i) no adjustment in the payments to be paid to SELLER under the provisions of this Agreement is either appropriate or lawful; and (ii) that, also in light of the foregoing, it is neither appropriate nor lawful for the PUC or any successor entity to deny HELCO the recovery of any or all amounts paid to SELLER pursuant to the terms of this Agreement. Both parties will extend their reasonable best efforts to resist and appeal any PUC actions, decisions, or orders denying or having the effect of denying or otherwise preventing HELCO from recovering any or all amounts paid to SELLER pursuant to the terms of the Agreement; provided that HELCO shall reimburse SELLER for any and all reasonable ------------- out-of-pocket expenses incurred in assisting HELCO in accordance with this Section 23.1. Except as specifically provided in Section 2.2 hereof, the PUC's denial of HELCO's recovery of any amounts paid to SELLER pursuant to the terms of this Agreement shall have no effect on HELCO's obligations under this Agreement. 23.2 Notices ------- Except as otherwise specified in this Agreement, any notice, demand or request required or authorized by this Agreement to be given in writing to a party shall be either personally delivered or mailed by registered or certified mail (return receipt requested) postage prepaid to such party at the following address: If to SELLER: Encogen Hawaii, L.P. c/o Enserch Development Corporation 1817 Wood Street, Suite #550 - West Dallas, TX 75201 Attention: Vice President - Administration (214) 670-2712 (telephone) 85 (214) 670-2974 (fax) If to HELCO: Hawaii Electric Light Company, Inc. P. 0. Box 1027 Hilo, Hawaii 96720-1027 Attention: Manager, Production The designation of such person and/or address may be changed at any time by either party upon written notice given pursuant to the requirements of this Section 23.2. A notice served by mail shall be effective upon receipt. 23.3 Entire Agreement ---------------- This Agreement, including all attachments, constitutes the entire understanding between the parties, supersedes any and all previous understandings between the parties, and binds and inures to the benefit of the parties, their successors and assigns. The parties have entered into this Agreement in reliance upon the representations and mutual undertakings contained herein and not in reliance upon any oral or written representation or information provided to one party by any representative of the other party. 23.4 Further Assurances ------------------ If either party determines in its reasonable discretion that any further instruments, assurances or other things are necessary or desirable to carry out the terms of this Agreement, the other party will execute and deliver all such instruments and assurances and do all things reasonably necessary or desirable to carry out the terms of this Agreement. 23.5 Severability ------------ After the requirements of Section 23.14 have been satisfied, if any term or provision of this Agreement or the application thereof to any person, entity or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons, entities or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 23.6 No Waiver --------- The failure of either party to enforce at any time any of the provisions of this Agreement, or to require at any time performance by the other party of any of the provisions hereof, shall in no way be construed to be a waiver of such provisions, nor in any way to affect the validity of this Agreement or any part hereof or the right of such party thereafter to enforce every such provision. 86 23.7 Modification or Amendment ------------------------- No modification, amendment or waiver of all or any part of this Agreement shall be valid unless it is reduced to writing and signed by both parties. 23.8 Governing Law and Interpretation -------------------------------- Interpretation and performance of this Agreement shall be in accordance with, and shall be controlled by, the laws of the State of Hawaii, other than the laws thereof that would require reference to the laws of any other jurisdiction. 23.9 Counterparts ------------ This Agreement may be executed in several counterparts and all so executed counterparts shall constitute one Agreement, binding on both parties thereto, notwithstanding that both parties may not be signatories to the original or the same counterpart. 23.10 Computation of Time ------------------- In computing any period of time prescribed or allowed under this Agreement, the day of the act, event or default from which the designated period of time begins to run shall not be included. If the last day of the period so computed is a Saturday, a Sunday, or a legal holiday in Hawaii, then the period shall run until the end of the next day which is not a Saturday, a Sunday, or a legal holiday in Hawaii. When the period of time prescribed or allowed is less than seven (7) days, intermediate Saturdays, Sundays, and legal holidays shall be excluded in the computation. 23.11 Thermal Energy Sales Contract ----------------------------- In the event SELLER intends to qualify as a QF by selling thermal energy, SELLER shall, subject to compliance with applicable confidentiality agreements, provide HELCO with a copy of the Thermal Energy Sales Contract(s) (redacted to delete any confidential or proprietary information), or a certificate to the effect that such contract(s) will provide for, at a minimum, useful thermal energy sales under normal operating conditions that are adequate to maintain the Facility as a Qualifying Facility under PURPA and, in no event shall thermal energy sales limit or restrict in any way the capability of the Facility or any portion thereof to operate under HELCO Dispatch in full compliance with the terms and conditions of this Agreement. Thereafter, SELLER shall not modify the Thermal Energy Sales Contract in a manner that would materially adversely impact its ability to perform its obligations hereunder. 23.12 Review of Financing Documents; Project Financing ------------------------------------------------ The parties acknowledge that SELLER intends to obtain construction and term project financing for the Facility and that Financing Parties providing such financing will require the financing to be secured by liens upon the Facility and other assets of SELLER, including a 87 collateral assignment of this Agreement, the Interconnection Agreement and other Project Documents and all rights and obligations of SELLER hereunder and thereunder. HELCO shall execute and deliver on or before the Closing Date a consent to assignment of this Agreement and other related agreements ("Consent to Assignment"), and any other documents necessary to create a valid collateral assignment hereof to the Financing Parties, and shall cooperate with reasonable requests of the Financing Parties in connection with the documentation of any financing or refinancing with respect to the Facility, including execution and delivery of other customary certificates, instruments and opinions. The Consent to Assignment shall include, among other things, provisions giving the Financing Parties reasonably acceptable notice of and opportunity and right to cure any breach or event of default under this Agreement or the Interconnection Agreement, and shall contain terms and conditions (including notice and cure rights) generally required by lenders of long-term, non-recourse project loans, which terms and conditions shall be reasonably satisfactory to Financing Parties and HELCO. To the extent permitted by the Financing Parties, SELLER shall provide HELCO with summaries of the key terms of the Financing Documents, amendments or modifications thereto, and any documents providing for a refinancing which would materially impact HELCO. 23.13 Confidential and Proprietary Information ---------------------------------------- If and to the extent any information or documents furnished by one party to the other under this Agreement are confidential or proprietary to the furnishing party, the receiving party shall treat the same as such and shall take reasonable steps to protect against the unauthorized use of disclosure of the same; provided, however, that such information and documents are conspicuously -------- ------- marked or otherwise clearly identified as confidential or proprietary when furnished; and provided further that this sentence shall not apply to (i) any -------- ------- information or documents which are in the public domain, known to the receiving party prior to receipt from the other party, or acquired from a third party without a requirement for protection or (ii) any use or disclosure required by any law, rule, regulation, order or other requirement of any governmental authority having jurisdiction. All other information and documents furnished under this Agreement shall be furnished on a non-confidential basis. 23.14 PUC Approval ------------ The parties acknowledge and agree that this Agreement, and any amendments, supplements or related instruments thereto, is subject to approval by the PUC and the parties' respective obligations hereunder are conditioned upon receipt of such approval, except as specifically provided otherwise herein. Upon execution of this Agreement, the parties shall use their best efforts to obtain, on an expedited basis, an order from the PUC (the "PUC Order") that does not contain terms and conditions deemed to be unacceptable to the parties, and in a form deemed to be reasonable by the parties ordering that: (1) this Agreement is approved; (2) the Interconnection Agreement is approved; 88 (3) the purchased power costs to be incurred by HELCO as a result of this Agreement are reasonable; (4) the buyout and deferral clauses, Sections 3.3B and 3.3C of this Agreement respectively, are reasonable; (5) HELCO's purchased power arrangements under this Agreement, pursuant to which HELCO will purchase energy and Firm Capacity from SELLER, are prudent and in the public interest; (6) increases and decreases in the purchased energy costs to be incurred by HELCO pursuant to this Agreement may be included in HELCO's Energy Cost Adjustment Clause during the Term of the Agreement; (7) HELCO may include the power purchase costs incurred by HELCO pursuant to this Agreement, including Capacity Charge payments and Energy Charge payments in HELCO's revenue requirements for ratemaking purposes and for the purposes of determining the reasonableness of HELCO's rates during the Term of this Agreement; and (8) in accordance with the request made by the parties pursuant to Section 3.2C(27)(viii), SELLER will not be considered a "public utility" subject to regulation by the PUC in the event the Facility loses its QF status due to Simple Cycle operation requested by HELCO. 23.15 Change in Standard System or Organization ----------------------------------------- A. Consistent With Original Intent ------------------------------- If, during the Term of this Agreement, any standard, system or organization referenced in this Agreement should be modified or replaced in the normal course of events, such modification or replacement shall from that point in time be used in this Agreement in place of the original standard, system or organization, but only to the extent such modification or replacement is generally consistent with the original spirit and intent of this Agreement. B. Eliminated or Inconsistent With Original Intent ----------------------------------------------- If, during the Term of this Agreement, any standard, system or organization referenced in this Agreement should be eliminated or cease to exist, or is modified or replaced and such modification or replacement is inconsistent with the original spirit and intent of this Agreement, then in such event the parties will negotiate in good faith to amend this Agreement to a standard, system or organization that would be consistent with the original spirit and intent of this Agreement. 89 23.16 No Party Deemed Drafter ----------------------- No party shall be deemed the drafter of this Agreement. If this Agreement is ever construed by a court of law, such court shall not construe this Agreement or any provision hereof against any party as the drafter. 23.17 Headings -------- The Table of Contents and paragraph headings of the various sections have been inserted in this Agreement as a matter of convenience for reference only and shall not modify, define or limit any of the terms or provisions hereof and shall not be used in the interpretation of any term or provision of this Agreement. (Signatures on the Following Page) 90 IN WITNESS WHEREOF, HELCO and SELLER have caused this Agreement to be executed by their respective duly authorized officers as of the date first above written. HELCO: HAWAII ELECTRIC LIGHT COMPANY, INC. By: /s/ T. Michael May ------------------------------ Its: Chairman of the Board ------------------------------ By: /s/ Warren H. W. Lee ------------------------------ Its: President ------------------------------ SELLER: ENCOGEN HAWAII, L.P. By: ENSERCH DEVELOPMENT CORPORATION HAWAII, INC. Managing General Partner By: /s/ Allan V. Smith ------------------------------ Name: Allan V. Smith Title: Senior Vice President 91 ATTACHMENT A DIAGRAM OF INTERCONNECTION (See definitions of Metering Point and Point of Interconnection) [Provided as Exhibit 1 to Schedule 1 of Interconnection Agreement] A-1 Attachment A (drawing): - ----------------------- ENCOGEN/HELCO Interconnection Agreement: one line diagram of interconnection facilities and the new transmission line ATTACHMENT B MILESTONE EVENTS (See Sections 2.4A(1), 2.4A(2), 3.2A(2))
EVENT MONTHS AFTER ----- PUC APPROVAL DATE ----------------- - - Application for all Construction 3 months Permits Filed - - Construction start (pouring of foundation for the first CT) 6 months
EVENT MONTHS AFTER ----- PUC ORDER DATE -------------- - - Receipt of final (appeals exhausted) 4 months PSD/Covered Source Permit
B-1 ATTACHMENT D FACILITY FUNCTIONAL DESCRIPTION (See Section 2.1B) The Facility is located on the Site near Haina, Hawaii. The Facility employs two (2) combustion turbines, two (2) heat recovery steam generators, and a steam turbine in combined cycle mode. Output from each generator will be produced at 13.8kV and transformed to 69kV for sale to HELCO. The Facility will utilize four (4) mechanical forced draft cooling towers. The Facility will utilize low sulfur fuel to mitigate SO\\x\\emissions, and water injection and selective catalytic reduction to mitigate NO\\x\\ emissions. Fuel will be delivered by tank trucks to aboveground storage tank(s) with an approximate capacity of seventy-seven thousand (77,000) barrels. The annual consumption is expected to be approximately seven hundred thousand (700,000) barrels. The Facility will be designed to meet the requirements for starting times, ramp rates, and quick load pickup specified in Section 3.2C. It is expected that thermal energy in the form of steam and/or heated water will be produced and sold to other customer(s) pursuant to one (1) or more Thermal Energy Purchase Agreement(s). D-1 ATTACHMENT F FACILITY LOCATION AND LAYOUT (See Section 2.1C) F-1 Attachment F (drawing): - ----------------------- Facility location and layout dated July 10, 1997. ATTACHMENT G SUMMARY OF MAINTENANCE AND INSPECTION PERFORMED IN PRIOR CALENDAR YEAR (See Section 3.2B(5))
DATE WORK ORDER SUBMITTED: 06/28/96 WO#: 11451 EQUIPMENT #: 1CCF-TNK-1 EQUIPMENT DESCRIPTION: AMMONIA STORAGE TANK 1 PROBLEM DESCRIPTION: PURCHASE EMERGENCY ADAPTER FITTINGS FOR UNLOADING GASPRO TANKS TO STORAGE TANK WORK PERFORMED: PURCHASED THE NEW ADAPTERS AND VERIFIED THEIR OPERATION. COMPLETION DATE: 06/28/96 WORK ORDER COMPLETED BY: AA ----------------END OF CURRENT WORK ORDER---------------- DATE WORK ORDER SUBMITTED: 05/19/96 WO#: 11136 EQUIPMENT #: 1WSA-BV-12 EQUIPMENT DESCRIPTION: MAKE-UP PI ISOLATION PROBLEM DESCRIPTION: 'D' MAKE-UP PUMP PI ISOLATION FITTING LEAKING ON SPOOL SIDE WORK PERFORMED: REMOVED AND REPLACED FITTINGS AND FLANGES WITH STAINLESS STEEL. THIS WORK WAS DONE DURING PUMP OVERHAUL ON WO 1374. JH COMPLETION DATE: 06/28/96 WORK ORDER COMPLETED BY: BB
----------------END OF CURRENT WORK ORDER---------------- G-1 ATTACHMENT H QUALIFIED INDEPENDENT ENGINEERS LIST (See Section 3.3D) Black & Veatch R. W. Beck 8400 Ward Parkway 2101 Fourth Avenue P. O. Box 8405 Suite 600 Kansas City, Missouri 64114 Seattle, WA 98121-2375 Phone: (913) 339-2530 Phone: (206) 441-7500 FAX: (913) 339-2934 Fax: (206) 441-4962 Burns & McDonnell 4800 East 63rd Street Kansas City, Missouri 64130 Phone: (816) 822-3091 FAX: 816-333-3690 Parsons Brinckerhoff Energy Services, Inc. 303 Second Street, Suite 850 San Francisco, CA 94107-1368 Phone: (415) 281-8700 FAX: (415) 281-8707 Raytheon 3000 W. MacArthur Boulevard Santa Ana, CA 92701 Phone: (714) 662-4000 FAX: (714) 662-4048 Sargent & Lundy 55 East Monroe Street Chicago, Illinois 60603-5780 Phone: (312) 269-2246 FAX: (312) 269-3146 Stone & Webster Engineering Corporation 7677 East Berry Avenue Englewood, Colorado 80111-2137 Phone: (303) 741-7103 FAX: (303) 741-7670 H-1 ATTACHMENT I ADJUSTMENT OF CHARGES (See Sections 3.2C(23), 3.2J, 5.1, 8.4) Charges subject to adjustment based on GDPIPD will be adjusted by the following formula: New Charge = Base Charge x GDPIPD\\CURRENT\\ ----------------- GDPIPD\\BASE\\ where
New Charge = adjusted charge Base Charge = charge (in dollars) calculated per this Agreement GDPIPD\\CURRENT\\ = GDPIPD, as adjusted, in effect at the time the energy is delivered GDPIPD\\BASE\\ = The "Final" GDPIPD for the Third Quarter of the year prior to the Reference Year.
An adjustment shall be made on each January 1 equal to one hundred percent (100%) of the percentage change between the "Final" Third Quarter Reference Year GDPIPD ("GDPIPD\\BASE\\") and the previous year's Third Quarter "Final" GDPIPD value. When adjusting the charges subject to adjustment based on GDPIPD, the adjustment shall first apply to the energy delivered by SELLER to HELCO in the month of the adjustment date (January 1) and then invoiced for payment in the following month. For purposes of this Attachment, the term "Reference Year" refers to the base year specifically referred to within the Agreement as the starting point for escalation. I-1 ATTACHMENT J REQUIRED INSURANCE (See Article XIII) (a) Worker's Compensation and Employers' Liability. This coverage shall ---------------------------------------------- include worker's compensation, temporary disability and other similar insurance required by applicable Hawaii state or U.S. federal laws. If exposure exists, coverage required by the Longshore and Harbor Worker's Compensation Act (33 U.S.C. (S) 688) shall be included. Additionally, coverage under this subsection shall include a Voluntary Compensation and Employers' Liability endorsement for employees not subject to the Workers' Compensation laws. Employers' Liability coverage limits shall be no less than: Bodily Injury by Accident - $1,000,000 each Accident Bodily Injury by Disease - $1,000,000 each Employee Bodily Injury by Disease - $1,000,000 policy limit (b) General Liability Insurance. This coverage shall include either --------------------------- Comprehensive General Liability, Commercial General Liability Insurance or the reasonable equivalent thereof, covering all operations by or on behalf of SELLER. Such coverage shall provide insurance for bodily injury and property damage liability for the limits of liability indicated below and shall include coverage for: (1) Premises, operations, and mobile equipment, (2) Products and completed operations, (3) Owners and contractors protective liability, (4) Contractual liability, (5) Broad form property damage (including completed operations), (6) Explosion, collapse and underground hazard, and (7) Personal injury liability. Limits of liability for such coverage, which may be provided with umbrella and/or excess insurance coverage, shall be:
Bodily Injury & Property Damage $20,000,000 per occurrence and $20,000,000 aggregate annually
(c) Automobile Liability Insurance. This insurance shall include coverage ------------------------------ for owned, leased and non-owned automobiles. The limits of liability shall be a combined single limit for J-1 bodily injury and property damage of Two Million Dollars ($2,000,000) for each occurrence and in the aggregate annually. If general liability insurance is provided by a commercial general liability policy, then such general liability policy shall include coverage for automobile contractual liability as required under this item (c). (d) Builders All Risk Insurance. This insurance shall include coverage for --------------------------- earthquake and flood perils including transit (excluding ocean transit), testing, incidental storage, structures, buildings, improvements and temporary structures used in construction, or part of the permanent Facility from the start of construction through the earlier of the End of Phase 2 Start-Up or the effective date of the policy coverage set forth in paragraph (e). The amount of coverage shall be purchased on a full replacement cost basis, and the sublimits for earthquake and flood perils shall be 40% of replacement cost at such time up to Twenty Million Dollars ($20,000,000), if such insurance amounts are available on commercially reasonable terms. The coverage shall be written on a standard "ISO" "All Risks" completed value form or equivalent and may allow for reasonable other sublimits including, but not limited to, One Million Dollars ($1,000,000) for transit and Five Million Dollars ($5,000,000) for incidental offsite storage. Coverage shall be extended to include testing. (e) All Risk Property/Comprehensive Boiler and Machinery Insurance (Upon -------------------------------------------------------------------- Completion of Construction). This insurance shall provide All Risk Property - -------------------------- Coverage (including the perils of earthquake and flood) and Comprehensive Boiler and Machinery Coverage against damage to the Facility. The amount of coverage shall be purchased on a full replacement cost basis and the sublimits for earthquake and flood perils shall be no less than Twenty Million Dollars ($20,000,000), if such insurance amounts are available on commercially reasonable terms. Such coverage may allow for other reasonable sublimits. Such policies shall be endorsed to require that the coverage afforded shall not be canceled (except for nonpayment of premiums) or reduced without at least thirty (30) days prior written notice to SELLER and HELCO, provided, however, that such -------- ------- endorsement shall provide (i) that the insurer may not cancel the coverage for non-payment of premium without giving SELLER and HELCO five (5) days notice that SELLER has failed to make timely payment thereof, and (ii) that, subject to the consent of the Financing Parties, SELLER or HELCO shall thereupon have the right to pay such premium directly to the insurer. (f) Business Interruption Insurance (Upon Completion of Construction). ----------------------------------------------------------------- This insurance shall provide coverage for all of SELLER's costs to the extent that they would not be eliminated or reduced by the failure of the Facility to operate for a period of at least twelve (12) months following a covered physical damage loss deductible period or reasonable dollar deductible. (g) Project Liability Errors and Omissions. SELLER shall be adequately -------------------------------------- protected against project liability errors and omissions on account of negligent actions or inactions of architects, engineers, contractors and subcontractors involved in the construction of the Facility. This protection may be provided through any one or more of the following mechanisms: (i) construction contract(s) with the above parties who have sufficient financial creditworthiness J-2 to cover project liability errors and omissions; (ii) other agreement(s) with the above parties; or (iii) reserve account(s) which may be used to correct material deficiencies associated with the Facility as a result of negligent actions or inactions of the above parties. (h) Ocean Transit. SELLER shall take reasonable action to ensure that the ------------- risk of loss or damage to any material items of equipment which are subject to ocean transit is adequately protected against by the terms of delivery from contractors or suppliers of such equipment or SELLER's own insurance coverage. J-3 ATTACHMENT K CALCULATION OF RAMP DERATING PENALTY (See Section 8.1C)
Example: Capacity Charge Rate $0.01981/kWh Unit capacity 25 MW Unit capacity during ramp derating period 21.5 MW Ramp derating 3.5 MW Duration of ramp derating period 48 hours
Penalty = $0.01981/kWh x 3,500 x 48 = $0.01981 x 3,500 x 48 = $3,328.08 K-1 ATTACHMENT L CAPACITY TESTING PROCEDURES (See Section 3.2C(22)) I. Initial Acceptance Tests ------------------------ A. When Phase 1 and Phase 2 of the Facility are ready for their respective Initial Acceptance Test, SELLER shall notify HELCO at least seven (7) days prior to such test and shall coordinate with HELCO. SELLER shall perform and HELCO shall monitor such test no earlier than seven (7) days of HELCO's receipt of such notice. B. The Initial Acceptance Test shall be performed for each of Phase 1 and Phase 2 as follows: (1) The test shall last for forty-eight (48) hours and shall be scheduled on the start-up plan provided by SELLER to HELCO in accordance with Section 5.1. (2) During the test period, the Facility shall operate in accordance with the Dispatch instructions of HELCO's System Operator, subject in all cases to Good Engineering and Operating Practices and the safety and design limits of the Facility as specified by the applicable equipment manufacturers. (3) If SELLER and HELCO are satisfied with the Initial Acceptance Test, Firm Capacity shall be designated by SELLER up to the minimum average capacity level that the Facility is able to sustain over a fifteen (15) minute interval in which the Facility is being dispatched at maximum capacity; provided -------- that SELLER may not without HELCO's consent, set the Firm Capacity at a level in - ---- excess of the Committed Capacity. (4) If either SELLER or HELCO reasonably believes that an abnormal condition occurred which may have adversely impacted the Initial Acceptance Test, such party may request a re-test at such party's expense. (5) If, following two re-tests, the parties cannot agree that such Initial Acceptance Test produced accurate and reliable results, the parties shall hire a Qualified Independent Engineer, from the list set forth in Attachment H, to observe a third test and declare the Firm Capacity. The cost of such Qualified Independent Engineer shall be shared equally by the parties. (6) The parties shall not hire a Qualified Independent Engineer if following two or more re-tests both parties agree that such Initial Acceptance Test produced inaccurate or unreliable results; provided that the provisions ------------- regarding the hiring of a Qualified Independent Engineer shall apply if the parties fail to agree to the results of any subsequent test. L-1 (7) If SELLER is unable to complete the Initial Acceptance Test or a subsequent test for any reason, it shall be permitted to re-conduct such test. C. If SELLER's acceptance test under its construction contract includes the requirements set forth for the Initial Acceptance Tests provided hereby, and HELCO has an adequate opportunity to monitor such test, the Facility shall, upon passing such acceptance test, be deemed to have passed the Initial Acceptance Test provided herein, without the need to conduct a separate test. II. Subsequent Capacity Tests. ------------------------- The procedures set forth for Initial Acceptance Tests shall apply to any subsequent Capacity Test, except that (1) such test shall last twenty-four (24) hours; (2) such test shall be observed by appropriate qualified HELCO personnel; and (3) during such test, HELCO shall also, if appropriate, test the ramp rates of the Facility, all in accordance with Section 3.2 of this Agreement and Good Engineering and Operating Practices. L-2 ATTACHMENT M UNIT INCIDENT REPORT (See Section 3.2B(4)) Unit: _________________ Date: __________ No. _________________
Plant CT 1 CT 2 ST ------------------------------------------------------- [ ] Unit Trip Start [ ] Test - ----------------------------------------------------------------------- [ ] Forced Outage End [ ] Fail To Start - ----------------------------------------------------------------------- [ ] Risk Condition Duration [ ] Force Majeure - ----------------------------------------------------------------------- [ ] Other Derating [ ] Derating - -----------------------------------------------------------------------
The on-duty Control Room Operator is responsible for the completion of this report each time a unit experiences an unplanned Shutdown, Start Failure or Derating. Attach Trip Log and Sequence of Events Log to this report for unit trips or when appropriate. Before resetting alarms and relays, verify that all alarms and protective relay actions are listed on the printout. If not listed, record them and attach to report. Unit Status Prior to Incident: [ ] Start-Up Load: _________ [ ] On-Line Voltage: _________ Load: [ ] Constant Type of Fuel: [ ] Diesel [ ] Increasing [ ] Other [ ] Decreasing [ ] Cause of Incident: [ ] HRSG Trip___________________________ [ ] Turbine Trip ____________________________ [ ] Generator Trip ___________________________
Derating: CT1 _____ Derated MW output __________ Hours __________ MW hours(MW*Hrs) CT2 _____ Derated MW output __________ Hours __________ MW hours(MW*Hrs) ST ______ Derated MW output __________ Hours __________ MW hours(MW*Hrs)
Brief Explanation of Incident: ______________________________________________________________________________ ______________________________________________________________________________ M-1 ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Control Room Operator: __________________ Date/Time: _________________ Lead Technician On Duty: __________________ Area Leader: _________________ M-2 UNIT INCIDENT REPORT (PAGE 2) Corrective Action Taken: ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ _____________________________________________ ____________________________ (Plant Manager) M-3 ATTACHMENT N [INTENTIONALLY OMITTED] N-1 ATTACHMENT O DESIGN MATERIALS . Site Plan . General Arrangement Layout . Plant Description . Preliminary Equipment List . Preliminary Design and Specifications for Following Major Equipment Components . Combustion Turbine/Generators . Heat Recovery Steam Generators . Steam Turbine/Generator . Main Step-Up Transformers . Cooling Tower . Black Start Generator . Boiler Feedwater Pumps . Water Treatment System O-1 ATTACHMENT P SAMPLE ENERGY PAYMENT CALCULATION After Phase 2 In-Service Date Assumptions: 1. During May 1997, the Facility generated electricity during six 15-minute periods (total 1.5 hours). 2. The final 3rd quarter 1995 GDPIPD (GDPIPD\\BASE\\) is 107.8 (see United States Department of Commerce News report BEA 96-05, Gross Domestic Product: Third Quarter 1995 (Final), Table 4). 3. The final 3rd quarter 1996 GDPIPD (GDPIPD\\CURRENT\\) is 109.9 (see United States Department of Commerce News report BEA 96-40, Gross Domestic Product: Third Quarter 1996 (Final), Table 4). 4. The Facility\\PRICE\\ (HELCO's total cost of delivered No. 2 fuel oil at Keahole) is 599.84 cents/mmBtu (see HELCO's Energy Cost Adjustment (ECA) Filing effective May 1, 1997, copy attached as P-3 and P-4). 5. Calculations regarding operation of the Facility are for illustrative purposes only; simple cycle operation of 2 CTs is not expected in normal operations. A. Calculation of Fuel Component\\BASE\\ and Fuel Component
Fuel Component\\BASE\\ rate ($/kWh) 15-min. Facility Dispatch Integrated (Applicable Equation) period CT1 or CT2 Load (L) kWh (rounded to 6 decimal Fuel Component\\BASE\\($) ending (Applicable Equation) (kW) Purchased places) (rounded to 6 decimal places) - ---------- ---------------------- --------------- ------------- --------------------------- ----------------------------- 0015 1 CT CC 11,000 2,750 0.050358 138.484500 CT1 (Equation 3) (Equation 3) 0345 1 CT SC 5,000 1,250 0.083555 104.443750 CT1 (Equation 5) (Equation 5) 0500 2 CT SC 13,000 3,250 251.995500 CT1 7,000 1,750 0.075810 132.667500 CT2 6,000 1,500 0.079552 119.328000 (Equation 6) (Equations 5) 1600 2 CT CC 56,000 14,000 531.490250 CT1 + ST 29,000 7,250 0.038074 276.036500 CT2 + ST 27,000 6,750 0.037845 255.453750 (Unequal dispatch (Equations 3) requested; Equation 7) 1830 2 CT CC 60,000 15,000 0.034918 523.770000 (Equation 1) (Equation 1) 2315 2 CT CC 23,000 5,750 0.043774 251.700500 (Dispatch between (Equation 2) 16 and 24 MW; Equation 2)
P-1 Total kWh purchased from facility = 42,000 kWh Total Fuel Component\\BASE\\ = $1,801.884500 Fuel Component = Fuel Component\\BASE\\ x Facility\\PRICE\\ / Fuel\\BASE\\ = $1,801.884500 x 5.9984 / 4.35324 = $2,482.85 B. Calculation of Variable O&M Component\\BASE\\ and Variable O&M Component (i) Calculation of Variable Component Variable Component = $0.00092/kWh x 42,000 kWh = $38.640000 (1995 $) (ii) Calculation of Overhaul Component Total CT1 operating hours (from Part A) = 1.5 hours Total CT2 operating hours (from Part A) = 1.0 hour CT1 Overhaul Component = $103.43/hour x 1.5 hours = $155.145000 (1995 $) CT2 Overhaul Component = $103.43/hour x 1.0 hour = $103.430000 (1995 $) Total Overhaul Component = $258.575000 (1995 $) Variable O&M Component\\BASE\\ = Variable Component + Overhaul Component = $297.215000 (1995 $) Variable O&M Component = Variable O&M Component\\BASE\\ x GDPIPD\\CURRENT\\ / GDPIPD\\BASE\\ = $297.215000 x 109.9 / 107.8 = $303.00 C. Calculation of Energy Charge Energy Charge = (Fuel Component + Variable O&M Component) x (.98) = (2,482.85 + 303.00) x (.98) = $2,730.13 P-2 97055.xls ATTACHMENT 2 ECA HAWAII ELECTRIC LIGHT COMPANY, INC. ENERGY COST ADJUSTMENT (ECA) FILING
Line Line PURCHASED ENERGY COMPONENT ---- ---- -------------------------- 1 Effective Date May 1, 1997 PURCHASED ENERGY PRICE, cents/kwh Supercedes Factors of April 21, 1997 27 HCPC (Contract)-Off Peak 5.150 28 -On Peak 6.210 29 Not Used 0.000 30 PGV - Off Peak 5.470 31 - On Peak 6.610 HELCO GENERATION COMPONENT 32 PGV - Off Peak Addl Contract 3.829 -------------------------- 33 - On Peak Addl Contract 4.829 FUEL PRICES, cents/mmbtu 34 Wailuku Hydro - Off Peak 5.970 2 Hilo Industrial 309.94 35 - On Peak 7.240 3 Puna Industrial 322.20 36 Other (greater than 100KW) - Off Peak 5.987 4 Keahole Diesel 599.84 37 - On Peak 7.247 5 Waimea Diesel 591.19 38 Other (less than 100 KW) 5.950 6 Hilo Diesel 575.80 7 Puna Diesel 576.84 PURCHASED ENERGY KWH MIX, % 8 Wind 0.00 39 HCPC (Contract)-Off Peak 11.96 9 Hydro 0.00 40 -On Peak 16.77 41 Not Used 0.00 BTU MIX, % 42 PGV - Off Peak 21.84 10 Hilo Industrial 44.36 43 - On Peak 30.59 11 Puna Industrial 17.61 44 PGV - Off Peak Addl Contract 0.00 12 Keahole Diesel 6.13 45 - On Peak Addl Contract 6.44 13 Waimea Diesel 0.31 46 Wailuku Hydro - Off Peak 3.56 14 Hilo Diesel 1.68 47 - On Peak 4.98 15 Puna Diesel 26.09 48 Other (greater than 100KW) - Off Peak 1.25 16 Wind 0.73 49 - On Peak 2.58 17 Hydro 3.09 50 Other (less than 100 KW) 0.03 ------------ ----------- 100.00 100.00 ------------ ----------- 18 COMPOSITE COST OF GENERATION, 51 COMPOSITE COST OF PURCHASED cents/mmbtu 393.00 ENERGY, cents/kwh 6.022 19 % input to System kwh Mix 58.03 52 % Input to System kwh Mix 41.97 20 Efficiency Factor, mmbtu/kwh 0.014909 53 WEIGHTED COMP. PURCH. ENERGY 21 WEIGHTED COMPOSITE GEN COST, COST cents/kwh (lines (51x52)) 2.52743 cents/kwh (lines (16x17x18)) 3.40012 54 BASE PURCHASED ENERGY 22 BASE GEN. COST, cents/mmbtu 376.37 COMPOSITE COST, cents/kwh 5.940 23 Base % Input to Sys kwh Mix 61.55 55 Base % Input to Sys kwh Mix 38.45 24 Efficiency Factor, mmbtu/kwh 0.014909 56 WEIGHTED BASE PURCH ENERGY 25 WEIGHTED BASE GEN COST, COST, cents/kwh (lines (54x55)) 2.28393 cents/kwh (lines (20x21x22)) 3.45376 57 COST LESS BASE (line (53-56)) 0.24350 26 COST LESS BASE (line (19-23)) (0.05364) 58 Loss Factor 1.091 27 Multiplier to Include 59 Multiplier to Include Revenue Tax Requirement 1.0975 Revenue Tax Requirement 1.0975 28 GENERATION FACTOR, cents/kwh (0.05887) 60 PURCHASED ENERGY FCTR, cents/kwh 0.29156 (line (24x25)) (lines (57x58x59))
LINE SYSTEM COMPOSITE ---- ---------------- 61 FUEL AND PURCHASED ENERGY 0.23269 FACTOR, cents/kwh (lines (26+60)) 62 HCPC Amendment #3, cents/kwh 0.000 63 Not Used 0.000 64 ECA Reconciliation Adjustment 0.185 65 ECA FACTOR, cents/kwh 0.418 (line (61+62+63+64))
P-3 9705FF.xls ATTACHMENT 3 Prices with PGV Addl SHEET 1 OF 8 HELCO Fuel Oil Inventory Prices For May-97
INDUSTRIAL FUEL COSTS: HILO PUNA ------- ------- Average Industrial Fuel Cost - $/BBL 19.5261 19.5261 Land Transportation Cost - $/BBL -- 0.7722 -------- -------- Industrial Costs For Filing - $/BBL 19.5261 20.2983 Conversion Factors - mmbtu/BBL 6.30 6.30 -------- -------- Industrial Costs for Filing - cents/mmbtu 309.94 322.20 ======== ========
DIESEL FUEL COSTS: KEAHOLE WAIMEA HILO PUNA CT-3 ------- ------- ------- --------- Average Diesel Fuel Cost - $/BBL 33.0388 33.0388 33.0388 33.0388 Land Transportation Cost - $/BBL 2.1121 1.6047 0.7031 0.7638 -------- -------- -------- -------- Diesel Costs For Filing - $/BBL 33.1509 34.6435 33.7419 33.8026 Conversion Factors - mmbtu/BBL 5.86 5.86 5.86 5.86 -------- -------- -------- -------- Diesel Costs For Filing - cents/mmbtu 599.84 591.19 575.80 576.84 ======== ======== ======== ========
PURCHASED POWER: HCPC (Contract Energy) rate for 2nd Qtr: HCPC Floor: ---------- ----------- - off peak 5.150 cents/kwh 4.510 cents/kwh - on peak 6.210 cents/kwh 5.410 cents/kwh 2nd Qtr: PGV Floor: ---------- -------------- PGV - off peak 5.470 cents/kwh 5.430 cents/kwh - on peak 6.610 cents/kwh 6.560 cents/kwh PGV Additional Contract eff. 5/1/97 - off peak 3.829 cents/kwh 3.325 cents/kwh - on peak 4.829 cents/kwh 4.325 cents/kwh 2nd Qtr: Wailuku Floor: ---------- -------------- WAILUKU HYDRO - off peak 5.970 cents/kwh 5.970 cents/kwh - on peak 7.240 cents/kwh 7.240 cents/kwh Other: (less than 100 KW) 5.950 cents/kwh
P-4 ATTACHMENT Q SELLER'S PERMITS
Permit Agency Expected Issuance Date - ------ ------ ---------------------- PSD/Covered Source DoH/EPA February 1, 1998 NPDES, Water Discharge DoH February 1, 1998 Well Permit DLNR/DWR June 30, 1997 Special Use Permit County of Hawaii June 30, 1997
Q-1 ATTACHMENT R INTENTIONALLY OMITTED R-1 ATTACHMENT S HELCO's SCHEDULE "J" TARIFF S-1 Superseding Revised Sheet No. 52B REVISED SHEET NO. 52B Effective January 1, 1995 Effective February 21, 1995 SCHEDULE "J" General Service Demand Availability: Applicable to general light and/or power loads which exceed 5000 kilowatthours per month or 25 kilowatts three times within a twelve-month period, and supplied through a single meter. Service will be delivered at secondary voltages as specified by the Company, except where the nature or location of the customer's load makes delivery at secondary voltage impractical, the Company may, at its option, deliver the service at a nominal primary voltage as specified by the Company. Service supplied at primary voltage shall be subject to the special terms and conditions set forth below. Rate: CUSTOMER CHARGE: Single phase service - per month ........................$31.00 Three phase service - per month ........................$53.00 DEMAND CHARGE: (To be added to Customer Charge) All Kw of billing demand - per Kw ........................$5.60 ENERGY CHARGE: (To be added to Customer and Demand Charges) First 200 Kwhr/month/Kw of billing demand - per Kwhr .........13.7791 Next 200 Kwhr/month/Kw of billing demand - per Kwhr .........11.5621 Over 400 Kwhr/month/Kw of billing demand - per Kwhr .........10.5611 Energy Cost Adjustment Clause: The energy cost adjustment provided in the Energy Cost Adjustment Clause shall be added to the Customer, Demand, and Energy Charges. Integrated Resource Planning Cost Recovery Surcharge: The Integrated Resource Planning Cost Recovery Surcharge shall be added to the Customer, Demand, and Energy Charges, and energy cost adjustment. Minimum Charge: The monthly minimum charge shall be the sum of the Customer and HAWAII ELECTRIC LIGHT COMPANY, INC. Docket No. 7764 Decision and Order Nos. 13762 and 13773 S-1 Superseding Revised Sheet No. 52C REVISED SHEET NO. 52C Effective October 9, 1992 Effective February 21, 1995 Schedule "J (Continued) the Demand Charges. The Demand Charge shall be computed with the above demand charge applied to the kilowatts of billing demand, but not less than $140.00 per month. The kilowatts of billing demand for the minimum charge calculation each month shall be the highest of the maximum demand for such month, the greatest maximum demand for the preceding eleven months, or 25 kw. Determination of Demand: The maximum demand for each month shall be the maximum average load in kilowatts during any fifteen-minute period as indicated by a demand meter. The kilowatts of billing demand for each month shall be the highest of the maximum demand for such month, but not less than 75% of the greatest maximum demand for the preceding eleven months, nor less than 25 kilowatts. Power Factor: For customers with maximum measured demands in excess of 200 kilowatts per month for any one time within a twelve-month period, the following power factor adjustment will apply to the above energy and demand charges. The above energy and demand charges are based upon an average monthly power factor of 85%. For each 1% the average power factor is above or below 85%, the energy and demand charges as computed under the above rates will be decreased or increased, respectively, by 0.10%. The average monthly power factor will be determined from the readings of a Kwhr meter and kvarh meter, and will be computed to the nearest whole percent and not exceeding 100% for the purpose of computing the adjustment. The kvarh meter shall be ratcheted to prevent reversal in the event the power factor is leading at any time. Primary Supply Voltage Service: Where, at the option of the Company, service is delivered and metered at the primary supply line voltage of 2400 volts or more, the energy and demand charges as computed under the above rates will be decreased by 5.0%. When customers' transformers are adjacent to the delivery point, the Company may permit the customer to be HAWAII ELECTRIC LIGHT COMPANY, INC. Docket No. 7764 Decision and Order Nos. 13762 and 13773 S-2 SHEET NO. 52D Effective February 21, 1995 Schedule "J" (Continued) metered at a single point on the secondary side of his transformers where such point is approved by the Company. When the energy is metered on the secondary side of the customers' transformers, the above energy and demand charges will be decreased by 4%. Rules and Regulations: Service supplied under this rate shall be subject to the Rules and Regulations of the Company. HAWAII ELECTRIC LIGHT COMPANY, INC. Docket No. 7764 Decision and Order Nos. 13762 and 13773 S-3 ATTACHMENT T FORM OF GUARANTEE T-1 GUARANTEE AGREEMENT between ENSERCH CORPORATION and HAWAII ELECTRIC LIGHT. COMPANY, INC. THIS GUARANTEE AGREEMENT ("Guarantee) is made this _________ day of _____________________, 1997 by and between HAWAII ELECTRIC LIGHT COMPANY, INC. ("HELCO"), a Hawaii corporation with principal offices in Hilo, Hawaii, and ENSERCH CORPORATION ("Guarantor"), a Texas corporation, with principal offices in Dallas, Texas. WITNESSETH ---------- WHEREAS, HELCO is a regulated public utility engaged in the business of generation, transmission and distribution of electric power to customers on the island of Hawaii, Hawaii; and WHEREAS, Encogen Hawaii, L.P., a Delaware limited partnership, with principal offices in Dallas, Texas doing business in Hawaii ("SELLER"), is an affiliate of Guarantor; and WHEREAS, concurrently herewith, SELLER and HELCO have entered into a Power Purchase Agreement, dated as of ____________________, 1997 (the "Agreement"), whereby SELLER will construct, operate and maintain a 60 MW (net) cogeneration facility ("the Facility") at Haina, Hawaii and HELCO will purchase the electric output from the Facility over a period of thirty (30) years; and WHEREAS, HELCO is willing to enter into the Agreement only if the Guarantor enters into this Agreement with HELCO; and WHEREAS, to induce HELCO to enter into the Agreement, Guarantor is willing to enter in this Guarantee with HELCO. NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby represents, warrants, covenants and agrees with HELCO as follows: 1. Definitions. All capitalized terms used herein and not defined herein, ----------- and which are defined in, or by reference in, the Agreement, as the Agreement may be amended from time to time in accordance with its terms, shall have the meanings specified in the Agreement 2. Guarantee. --------- a. Subject to the limitations contained in Section 3, Guarantor hereby guarantees to HELCO the due and punctual payment, as and when due, of fifty percent (50%)(the "Proportionate Share") of all sums payable by SELLER to HELCO as the result of the non-performance of obligations under the Agreement or other events or circumstances during the term of the Agreement. This Guarantee is one of two identical Guarantees being provided by Guarantor and J.A. Jones, Inc. in accordance with Section 2.1 of the Agreement, each of which constitutes a several, not joint, obligation of Guarantor and J.A. Jones, respectively, with respect to any sums payable by SELLER to HELCO under the Agreement. In no event shall HELCO have recourse against Guarantor in excess of the lesser of its Proportionate Share of SELLER's payment obligations or the limits set forth in Section 3 below. b. This Guarantee is a primary and original obligation of Guarantor and is an absolute, unconditional, continuing and irrevocable guarantee and is in no way conditioned or contingent upon any attempt to collect payment from or proceed against SELLER except as stated otherwise herein. This Guarantee shall remain in full force and effect until the earlier to occur of the following events: (i) all of SELLER's obligations under the Agreement including, without limitation, any obligations for breach thereof, have been fulfilled; (ii) this Guarantee has been substituted for in accordance with Section 21.1 of the Agreement; or (iii) the termination of the Agreement; provided that obligations arising prior to such termination date shall survive such termination. Any notice required to be given by HELCO to SELLER under the Agreement shall also be given by HELCO to Guarantor at: Enserch Corporation 1817 Wood Street, Suite #550-West Dallas, Texas 75201 (214) 670-2712 (telephone) (214) 670-2974 (facsimile) (or such other address as Guarantor may designate in writing to HELCO). Guarantor shall have the same opportunity to cure defaults by SELLER under the Agreement as SELLER shall have; provided, however, that no time period provided in the Agreement for cure shall be extended or start anew by virtue of this sentence. In the event that the Agreement shall be terminated as a result of the rejection or disaffirmance thereof by any trustee, receiver or liquidating agency of SELLER or any of its properties, in any assignment for the benefit of creditors or any bankruptcy, insolvency, reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar 2 proceeding, Guarantor's obligations hereunder shall continue to the same extent as if such Agreement had not been so rejected or disaffirmed. Guarantor shall, and does hereby waive all rights and benefits which might relieve, in whole or in part, Guarantor from the performance of its duties and obligations hereunder by reason of any such proceeding, and Guarantor agrees that it shall be liable for all sums and obligations guaranteed by this Guarantee without regard to any modification, limitation or discharge of the liability of SELLER that may result from any such proceeding. 3. Guarantee Limits. Guarantor's obligations under Section 2(a) hereof in ---------------- the aggregate shall be limited to the amounts shown below with respect to sums as payable by SELLER to HELCO pursuant to the Agreement as the result of events or circumstances during the period shown opposite such amounts:
Period Amount * ------ ------ Until PUC Approval $ -0- From PUC Approval through Closing Date $100,000 From Closing Date through the Phase 2 $500,000 In-Service Date From Phase 2 In-Service Date to end of Term $1,500,000
*Guarantor's obligations in any given period shall be reduced by any amounts paid by Guarantor with respect to such obligations in all preceding periods. As used above "PUC Approval" shall mean the date that the PUC order referred to in Section 23.14 of the Agreement becomes final and non-appealable. 4. Generally. Guarantor shall not be liable under Section 2 of this --------- Guarantee to any extent greater than if it had been the contracting party (in place of SELLER) under the Agreement, and all the representations and warranties made by Guarantor in Section 5 hereof in respect of this Guarantee were true in respect of the Agreement as well as the Guarantee and notwithstanding any bankruptcy or insolvency of SELLER. In addition, Guarantor shall have no obligation under Section 2(a) of this Guarantee for any claim for payment, performance or otherwise attributable to events or circumstances during the period prior to the Phase 2 In-Service Date, not asserted by HELCO in writing within one hundred eighty (180) days after the Phase 2 In-Service date. 5. Representations and Warranties. Guarantor represents and warrants as ------------------------------ follows: a. Guarantor has full power, authority and legal right to execute and deliver and perform its obligations under this Guarantee. This Guarantee has been duly executed and delivered by Guarantor and constitutes a legal, valid and binding obligation of Guarantor, enforceable in accordance with its terms, except to the extent that such enforcement may be 3 limited by any bankruptcy, reorganization, insolvency, moratorium or similar laws affecting generally the enforcement of creditors' rights from time to time in effect and general principles of equity. b. No consent, authorization or approval of, or filing with, any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or has been required in respect of Guarantor in connection with the execution, delivery or performance by Guarantor of this Guarantee, or the compliance by Guarantor with any of the remedies and provisions thereof. c. The execution and delivery of, and performance by Guarantor of its obligations under this Guarantee will not result in a violation of, or be in conflict with, any provision of the articles of incorporation or bylaws of Guarantor, or result in a violation of, or be in conflict with, or constitute a default or any event which would, with notice or lapse of time, or both, become a default under, any mortgage, indenture, contract, agreement or other instrument to which Guarantor is a party or by which it or its property is bound, or result in a violation of, or be in conflict with, or result in a breach of, any term or provision of any judgment, order, decree or award of any court, arbitrator or governmental of public instrumentality binding upon Guarantor or its property, which individually or in the aggregate would materially adversely affect Guarantor's ability to perform its obligations under this Guarantee. d. Guarantor is not in default, and no conditions exists which, with notice of lapse of time, or both, would constitute a default by Guarantor under any mortgage, loan agreement, deed or trust, indenture or other agreement with respect thereto, evidence of indebtedness or other instrument of a material nature, to which it is party or by which it is bound, or in violation of, or in default under, any rule, regulation, order, writ, judgment, injunction or decree of any court, arbitrator or federal, state, municipal or other governmental authority, commission, board, bureau, agency, or instrumentality, domestic or foreign, which individually or in the aggregate would materially adversely affect Guarantor's ability to perform its obligations under this Guarantee. e. There is no action, suit, proceeding, inquiry or investigation, at law or in equity, or before or by any court, public board or body, pending against Guarantor, or of which Guarantor has otherwise received official notice, of which to the knowledge of Guarantor is threatened against Guarantor, wherein an adverse decision, ruling or finding would have a material adverse effect on the Guarantor's financial position or its ability to perform its obligations under this Guarantee. f. All agreements, representations and warranties contained herein or made in writing by or on behalf of Guarantor in connection with the transaction contemplated hereby shall survive the execution and delivery of this Guarantee. 4 6. Notice. Guarantor shall give written notice to HELCO and SELLER within ------ ten (10) days after (i) the occurrence of any event or circumstance that results in any of the representations and warranties made by Guarantor in Section 5 ceasing to be accurate, or (ii) the occurrence, with respect to Guarantor, of any of the events specified in paragraphs (10) or (11) of Section 7.1A of the Agreement as constituting an Event of Default upon the occurrence thereof with respect to SELLER. Such notice shall describe, with reasonable particularity, the event or circumstance that has caused such result and shall specify the effect thereof on all representations and warranties of Guarantor that are affected thereby. 7. Miscellaneous. ------------- a. Severability. If any term or provision of this Guarantee or the ------------ application thereof to any person, entity or circumstance shall to any extent be invalid or unenforceable, the remainder of this guarantee, or the application of such term or provision to persons, entities or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term and provision of this Guarantee shall be valid and enforceable to the fullest extent permitted by law. b. No Waiver. Except as specifically provided otherwise herein, the --------- failure of either party to enforce at any time any of the provisions of this Guarantee, or to require at any time performance by the other party of any of the provisions thereof, shall in no way be construed to be a waiver of such provision, nor in any way to affect the validity of this Guarantee or any part thereof, or the right of such party thereafter to enforce every such provision. c. Modification. No modification or waiver of all or any part of this ------------ Guarantee shall be valid unless it is reduced to writing and signed by both parties. d. Governing Law and Interpretation. Interpretation and performance of -------------------------------- this Guarantee shall be in accordance with, and shall be controlled by, the laws of the State of Hawaii, other than the laws thereof that would require reference to the laws of any other jurisdiction. e. Counterparts. This Guarantee may be executed in several ------------ counterparts and all such executed counterparts shall constitute one agreement, binding on both parties thereto, notwithstanding that both parties may not be signatories to the original or the same counterpart. f. Successors and Assigns. This Guarantee shall be binding upon ---------------------- Guarantor and its successors and assigns and all persons claiming under or through Guarantor or any such successor or assigns, and shall inure to the benefit of, and be enforceable by, HELCO. 5 g. Consolidation. In the event that HELCO brings an action to enforce ------------- this Guarantee during the pendency of any proceeding (arbitration or otherwise) between HELCO and SELLER, Guarantor shall have the option to join such enforcement action with any such pending proceeding. Moreover, Guarantor shall have the option to join any such proceeding first brought against Guarantor with any subsequent proceeding brought against SELLER. In each of the cases described above, such joinder option shall extend until such time as final judgment is rendered in the relevant proceeding. IN WITNESS WHEREOF, HELCO and Guarantor have caused this Guarantee to be executed by their respective duly authorized officers as of the date first above written. HELCO: HAWAII ELECTRIC LIGHT COMPANY, INC. By ------------------------------------ Its -------------------------------- By ------------------------------------ Its -------------------------------- Guarantor: ENSERCH CORPORATION By ------------------------------------ Its Vice President and Treasurer ------------------------------ By ------------------------------------ Its President -------------------------------- 6 EX-10.7(A) 8 INTERCONNECTION AGREEMENT BETWEEN ENCOGEN & HELCO HECO Exhibit 10.7(a) -------------------- INTERCONNECTION AGREEMENT between ENCOGEN HAWAII, L.P. and HAWAII ELECTRIC LIGHT COMPANY, INC.
TABLE OF CONTENTS ----------------- RECITALS................................................................. 1 AGREEMENT................................................................ 1 1. DEFINITIONS......................................................... 1 2. DESIGN, ENGINEERING AND CONSTRUCTION OF INTERCONNECTION FACILITIES.. 2 3. GOVERNMENTAL APPROVALS.............................................. 3 4. EASEMENTS AND RIGHTS-OF-WAY, ETC.................................... 3 5. OPERATION AND MAINTENANCE........................................... 4 6. PAYMENT FOR THE INTERCONNECTION FACILITIES.......................... 4 7. TRANSFER OF OWNERSHIP/TITLE......................................... 5 8. RELOCATION OF INTERCONNECTION FACILITIES............................ 6 9. NEW TRANSMISSION LINE............................................... 6 10. DETERMINATION OF RECONDUCTORING COSTS............................... 7 11. INDEMNIFICATION..................................................... 8 12. PUC APPROVAL........................................................ 8 13. ASSIGNMENT.......................................................... 8 14. DISPUTE RESOLUTION.................................................. 8 15. COUNTERPARTS........................................................ 8 16. TERMINATION; SURVIVAL............................................... 8
TABLE OF CONTENTS (CONT'D)
17. GOVERNING LAW AND INTERPRETATION.................................. 8 18. MODIFICATION OR AMENDMENT......................................... 9 19. NOTICES........................................................... 9 20. NO PARTY DEEMED DRAFTER........................................... 9 21. HEADINGS.......................................................... 9 22. NO WAIVER......................................................... 9 23. SEVERABILITY...................................................... 9 24. ENTIRE AGREEMENT.................................................. 10
2 INTERCONNECTION AGREEMENT ------------------------- This INTERCONNECTION AGREEMENT (this "Agreement"), is made as of this 22nd day of October, 1997, between ENCOGEN HAWAII, L.P., a Delaware limited partnership with its principal offices in Dallas, Texas ("SELLER"), and HAWAII ELECTRIC LIGHT COMPANY, INC., a Hawaii corporation with its principal offices in Hilo, Hawaii ("HELCO"). RECITALS: --------- A. SELLER and HELCO have entered into a certain Power Purchase Agreement dated as of October 22, 1997 (the "Power Purchase Agreement" or "PPA"), pursuant to which SELLER will sell to HELCO electric output from an approximately 60-megawatt diesel oil-fired power production facility (the "Facility") to be constructed in Haina, Hawaii. B. In order to permit a flow of electricity between the Facility and HELCO's existing electric system, certain interconnection facilities need to be constructed, all as more particularly described on Schedule 1 attached to this ---------- Agreement (collectively, the "Interconnection Facilities"). C. Pursuant to Decision and Order No. 15053 ("D&O No. 15053") issued by the Hawaii Public Utilities Commission ("PUC"), HELCO is required to design, procure and construct a new sixty-nine (69) kilovolt (kV) transmission line from Keamuku to the New Switching Station, all as more particularly described on Schedule 2 attached to this Agreement (the "New Transmission Line") and SELLER - ---------- is required to make certain payments to HELCO in connection with the New Transmission Line. D. SELLER and HELCO desire to set forth their respective responsibilities for the design, engineering, construction, ownership, operation and maintenance of the Interconnection Facilities, and certain costs and obligations associated therewith, and their respective responsibilities concerning the New Transmission Line pursuant to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the foregoing recitals, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of SELLER and HELCO agrees as follows: A G R E E M E N T - - - - - - - - - 1. Definitions. Unless otherwise defined herein, all capitalized ----------- terms used in this Agreement shall have the meanings assigned to such terms in the Power Purchase Agreement. 1 (a) "Baseline Interconnection Configuration" shall have the meaning set forth in Section 6(b). (b) "Contractors" shall have the meaning set forth in Section 2(b). (c) "Independent Engineer" shall have the meaning set forth in Section 10(a). (d) "New Switching Station" shall mean the new switching station to be designed and constructed by SELLER and transferred to HELCO as depicted in Exhibit 1 to Schedule 1 attached to this Agreement. ---------- (e) "Plans" shall have the meaning set forth in Section 2(c). (f) "Point of Interconnection" shall mean the point at the New Switching Station side of the high side step up transformer isolating switch, as depicted on the interconnection diagram attached as Exhibit 1 to Schedule 1 to ---------- this Agreement. (g) "Reconductoring Costs" shall have the meaning set forth in Section 10. (h) "Residual Payment Amount" shall have the meaning set forth in Section 7(b). (i) "Scope of Work" shall have the meaning set forth in Section 10(b). (j) "Specifications" shall have the meaning set forth in Section 10(b). (k) "Standards" shall have the meaning set forth in Section 2(c). (l) "Transfer Date" shall have the meaning set forth in Section 7(a). 2. Design, Engineering and Construction of Interconnection Facilities. ------------------------------------------------------------------ (a) SELLER shall be responsible for the design, engineering and construction of the Interconnection Facilities. (b) SELLER may, at its option, engage third party consultants or contractors (the "Contractors") to perform its obligations hereunder; provided -------- that SELLER's selection of any Contractor shall be subject to HELCO's prior - ---- approval, which approval shall not be unreasonably withheld. (c) The design and engineering plans (the "Plans") of SELLER regarding the Interconnection Facilities shall comply with (i) all applicable laws; (ii) HELCO's 2 design specifications and construction standards listed on Schedule 3 and (iii) ---------- Good Engineering and Operating Practices (collectively, the "Standards"). Unless otherwise agreed to by the parties, HELCO shall have twenty (20) days following receipt of SELLER's Plans for its review, comment and verification that the Plans comply with the Standards, which verification shall not be unreasonably withheld. HELCO shall be deemed to have waived its right to review and comment under this Section 2(c) and to have given its verification with respect to such Plans if it fails to exercise its rights within such twenty (20) day period. If HELCO reasonably determines that SELLER's Plans are not in accordance with the Standards, then it may request in writing a response from SELLER to its comments and SELLER shall respond in writing within twenty (20) days of such request by providing (i) its justification for why its Plans conform to the standards or (ii) changes in the Plans responsive to HELCO's comments and in accordance with the Standards. (d) SELLER shall permit HELCO to inspect the construction of its Interconnection Facilities at all reasonable times during normal business hours and upon prior notice to its designated contact, which if oral shall be promptly documented in writing. SELLER shall also provide HELCO with monthly progress reports on the status of the construction. At HELCO's reasonable request, SELLER shall provide HELCO an opportunity to meet with appropriate personnel and any contractors to discuss and assess any such progress report. (e) Construction of the Interconnection Facilities shall be completed and the Interconnection Facilities shall be demonstrated to be commercially operable by the Phase 1 In-Service Date Deadline, as extended for Force Majeure. In the event that SELLER fails to complete the Interconnection Facilities by such date, and the components not completed are necessary to SELLER's eligibility to receive Capacity Charge payments under Article V of the Power Purchase Agreement, HELCO shall have no obligation to make such Capacity Charge payments until such work is completed and the conditions of Article V of the Power Purchase Agreement are satisfied. (f) HELCO and SELLER shall cooperate in good faith to coordinate tie- in of the Interconnection Facilities to HELCO's electrical system. 3. Governmental Approvals. SELLER shall obtain all required permits, ---------------------- licenses, approvals and other governmental authorizations (the "Governmental Approvals") required to construct, own and operate the Interconnection Facilities prior to the Transfer Date. HELCO shall obtain all other Governmental Approvals required, if any, to maintain and operate the Interconnection Facilities on and after the Transfer Date. On or before the Transfer Date, SELLER shall provide HELCO with copies of all such permits and approvals obtained by SELLER regarding the construction, ownership or operation of the Interconnection Facilities. 4. Easements and Rights-of-Way, Etc. SELLER shall obtain all easements --------------------------------- and rights-of-way on the Site and on any other affected property which are required to construct, maintain and operate the Interconnection Facilities. At HELCO's request, SELLER shall use reasonable efforts to obtain perpetual easements; provided, that, HELCO shall pay or reimburse SELLER for any -------- ---- incremental costs incurred by SELLER in connection therewith. Such 3 easements and rights of way shall not contain terms and conditions which are not commercially reasonable and shall be provided in advance to HELCO for its review. Furthermore, to the extent the existing easement or right of way relating to SELLER's two one-mile lines are not adequate to also accommodate the corresponding segment of HELCO's New Transmission Line, SELLER shall use reasonable efforts to obtain the additional necessary easement; provided that ------------- HELCO shall pay or reimburse SELLER for any incremental costs incurred by SELLER in connection therewith. 5. Operation and Maintenance. SELLER shall operate and maintain, at its ------------------------- cost, the Interconnection Facilities prior to the Transfer Date. On and after the Transfer Date, HELCO shall own, operate and maintain the Interconnection Facilities. So long as the Interconnection Facilities are dedicated exclusively to SELLER, SELLER shall reimburse HELCO for all reasonable and routine operation and maintenance expenses of such facilities, subject to review and approval by SELLER, which approval shall not be unreasonably withheld. In the event HELCO taps off the lines or New Switching Station included in the Interconnection Facilities, for its benefit or the benefit of other parties (including, without limitation, other nonutility generators), HELCO or such other party shall share proportionately in the operation and maintenance expenses for that specific portion of the Interconnection Facilities. HELCO shall operate and maintain, at its cost, the remainder of the HELCO transmission system, including without limitation, the New Transmission Line. 6. Payment for the Interconnection Facilities. ------------------------------------------ (a) SELLER shall bear the cost of design, engineering and construction of the Interconnection Facilities. SELLER shall reimburse HELCO for the reasonable out-of-pocket costs for any work which may be done on such Interconnection Facilities by HELCO or its Contractors pursuant to this Agreement or at SELLER's request. (b) HELCO shall, at SELLER'S option, reimburse SELLER or pay for any and all reasonable incremental costs which SELLER incurs or would incur relating to the Interconnection Facilities which are incurred to tie-in the New Transmission Line or which are necessary to accommodate the New Transmission Line, including without limitation the costs of any additional breakers, additional easements or rights of way, or the incremental costs of additional poles or the use of steel poles in lieu of wood poles, and any costs associated therewith. For purposes of this Agreement, such "incremental costs" shall include, without limitation, all procurement and construction costs above and beyond those that would normally be incurred in accordance with custom in the power generation industry in connection with a four-line (element) breaker and one half configuration, based on six breakers and two transformers (the "Baseline Interconnection Configuration"). SELLER shall bear any additional design costs associated with modification of the Baseline Interconnection Configuration to accommodate the New Transmission Line. 4 7. Transfer of Ownership/Title. --------------------------- (a) Following completion of the construction of the Interconnection Facilities (but prior to the Phase 1 In-Service Date Deadline, as extended for Force Majeure), SELLER shall transfer (such transfer date, the "Transfer Date") to HELCO all of SELLER's right, title and interest in and to the Interconnection Facilities to the extent that such facilities were constructed and owned by SELLER. In connection with the transfer of the Interconnection Facilities, SELLER shall transfer and assign to HELCO all applicable manufacturer's or Contractor's warranties which are assignable. The Interconnection Facilities shall be transferred by SELLER to HELCO "as is, where is" and SELLER shall not provide any warranty whatsoever regarding the Interconnection Facilities, other than the assignment of such manufacturer's or Contractor's warranties. (b) HELCO's title and ownership of the Interconnection Facilities shall be free and clear of subcontractor liens and encumbrances, subject to the following restrictions: (1) SELLER shall reserve and shall at all times have the right to use the Interconnection Facilities (as the same may be replaced, expanded, or modified) for so long as the Facility (as the same may be replaced, expanded, or modified) continues operations at the Site; provided, that, SELLER -------- ---- shall have no right to use the Interconnection Facilities subsequent to the termination of the PPA or to receive the Residual Payment Amount (as defined herein) if such termination is the result of an event of default by SELLER pursuant to Sections 7.1A(4), (7), (8), (9), (12), (13), (18) or (19) of the PPA; and provided, further, that in the event the SELLER notifies HELCO that the -------- ------- Facility has ceased operations, HELCO shall, within thirty (30) days, pay SELLER an amount (the "Residual Payment Amount") to be determined by the parties in good faith based upon depreciated book value or salvage value of the Interconnection Facilities, whichever is greater (or by appraisal if the parties cannot agree within thirty (30) days) based upon the residual value of the Interconnection Facilities at the time the Facility ceases to operate and such right of access terminates; and (2) until such time as the Residual Payment Amount is paid and except as specifically provided otherwise in Section 8, HELCO shall not relocate the Interconnection Facilities or sell, lease or otherwise encumber such facilities without SELLER'S prior written consent. SELLER's continuing right to use the Interconnection Facilities after the term of the PPA as provided herein shall not, in and of itself, create any right of access to HELCO's electrical system for purposes of wheeling to other purchasers of energy and/or capacity and shall not preclude HELCO from charging for such wheeling services to the extent permitted by law and applicable regulations. (c) In connection with the transfer of the Interconnection Facilities to HELCO, SELLER shall, at its option, grant or transfer to HELCO such easements, rights of way, or licenses as the case may be necessary to operate and maintain the Interconnection Facilities on and after the Transfer Date. (d) In connection with SELLER's transfer of the Interconnection Facilities, HELCO shall be responsible for and shall pay any and all expenses, costs and taxes in connection with the transfer of the Interconnection Facilities and shall indemnify and make SELLER whole for any such taxes, expenses or costs. On and after the Transfer Date, HELCO 5 shall be responsible for all property and other taxes associated with the ownership and operation of the Interconnection Facilities. (e) During the term of the PPA, the Interconnection Facilities shall be dedicated primarily to accommodate the delivery of electricity by SELLER to HELCO under the PPA (or, if applicable, by HELCO to SELLER), and SELLER shall not use the Interconnection Facilities in a manner that conflicts or interferes with the performance of its obligations under the PPA. 8. Relocation of Interconnection Facilities. Should HELCO be required ---------------------------------------- after the Transfer Date, pursuant to (i) terms of an applicable easement relating to such Interconnection Facilities or (ii) a request by the State of Hawaii or a county thereof in the event such Interconnection Facilities fall within Hawaii's or such county's right of way, to relocate any part of the Interconnection Facilities, SELLER shall pay or reimburse HELCO for its reasonable, out-of-pocket cost and expenses in connection with such relocation and the reconnection of the Facility with HELCO's electrical system; provided, -------- that, HELCO shall use reasonable efforts to effect such relocation in a prompt - ---- and cost effective manner and shall, during any related disconnection of the Facility, continue to make Capacity Charge payments under the Power Purchase Agreement. 9. New Transmission Line. --------------------- (a) HELCO shall provide SELLER with monthly progress reports (or such other reports as filed by HELCO with the PUC) documenting HELCO's progress in constructing the New Transmission Line; provided, that, HELCO's obligations to -------- ---- purchase energy and capacity under the Power Purchase Agreement shall not be affected in any way by HELCO's failure to complete or delays in completing the New Transmission Line. HELCO shall have full responsibility for and shall bear any and all costs of such actions or equipment as may be necessary for HELCO to accept the full electrical output of the Facility. In the event that HELCO is unable to accept the full electrical output of the Facility due to its failure to take such actions, HELCO shall be obligated to pay SELLER the Capacity Charge payments to which it would have been entitled under the PPA if HELCO had taken such necessary actions. (b) In connection with the New Transmission Line, SELLER agrees to pay HELCO an amount equal to the Reconductoring Costs (as determined pursuant to Section 10) in three (3) installments as follows: Upon the issuance of final, non-appealable PUC Order approving the PPA: 30% Upon HELCO's receipt of final Environmental Impact Statement regarding the New Transmission Line: 30% Upon energizing and placing of the New 6 Transmission Line in service: 40% Such amounts shall be due and payable by SELLER to HELCO within thirty (30) days after SELLER's receipt of: (i) a certificate signed by a duly authorized officer of HELCO, certifying that such milestone event has occurred; and (ii) such other supporting evidence and documentation as SELLER shall reasonably request. Except as provided in this Section 9(b), SELLER shall not be responsible for any other costs related to the New Transmission Line. (c) Upon completion of the New Transmission Line, HELCO and SELLER shall cooperate to coordinate the tie-in of the New Transmission Line with Interconnection Facilities in a manner that minimizes the interruption of the Facility operation; provided that during such interruption HELCO shall remain ------------- obligated to make Capacity Charge payments to SELLER as provided in the PPA. 10. Determination of Reconductoring Costs. -------------------------------------- (a) The parties shall hire an independent engineer (the "Independent Engineer") from the list of qualified independent engineers set forth on Schedule 4 attached hereto to determine the cost of reconductoring HELCO's - ---------- sixty-nine (69) kV transmission line from its Waimea Substation to its Honokaa substation (such cost, the "Reconductoring Costs"). (b) The scope of work to be performed by the Independent Engineer (the "Scope of Work") and the reconductoring specifications (the "Specifications") shall be mutually determined by the parties within forty-five (45) days following the PUC Submittal Date and shall be attached as Schedule 5 to this ---------- Agreement. (c) The cost of the work to be performed by the Independent Engineer as provided in Section 10(b) shall be borne by SELLER. (d) The Reconductoring Costs shall include only the cost of replacing the existing conductors (as of the date of this Agreement) on the Honokaa-Waimea 69 kV transmission line, including, but not limited to, normal AFUDC (as determined in accordance with custom in the power generation industry), switching costs, traffic control costs and other costs normally incurred by HELCO in such reconductoring projects, but shall exclude the costs of pole replacement, unless such pole must be replaced by a larger pole to accommodate a higher rated conductor. Replacement of deteriorated poles shall not be included in determining Reconductoring Costs unless the pole would have been replaced under the foregoing sentence regardless of its condition. (e) The Independent Engineer's determination of the Reconductoring Costs in accordance with the Scope of Work and the Specifications shall be accepted by the parties for purposes of calculating the payment pursuant to Section 9(b), unless either party can demonstrate the existence of a material error or omission by the Independent Engineer in making such determination. In the event of a dispute regarding such determination which is not resolved within thirty (30) days, the parties shall appoint a new Independent Engineer from the list on 7 Schedule 4, who shall review the work performed by the first Independent - ---------- Engineer and issue a determination which shall be binding on the parties. The cost of the new Independent Engineer shall be borne by both parties equally. 11. Indemnification. In connection with the performance of this --------------- Agreement, each party agrees to indemnify and hold harmless the other party from and against any and all liabilities, claims, losses, damages, or expenses, including reasonable counsel fees, whether arising before or after completion of the work hereunder, which may be incurred or sustained by the indemnified party by reason of the negligence, willful act or omission of the other party. 12. PUC Approval. The parties' respective obligations hereunder shall ------------ be contingent on HELCO's receipt of the PUC Order as defined in the PPA. 13. Assignment. The parties shall have the right to assign this ---------- Agreement to the same extent the PPA may be assigned pursuant to Article XVII thereof. 14. Dispute Resolution. Except as provided in Section 10(e), any ------------------ dispute arising under this Agreement shall be resolved, if possible, by HELCO's President and SELLER's project manager, or their respective designees, and any remaining disputes shall be resolved pursuant to arbitration in accordance with the procedures set forth in Article XIV of the PPA, or in the case of a dispute under Section 2(c) hereof, under Section 2.4C of the PPA. 15. Counterparts. This Agreement may be executed in several ------------ counterparts and all so executed counterparts shall constitute one Agreement, binding on both parties thereto, notwithstanding that both parties may not be signatories to the original or the same counterpart. 16. Termination; Survival. This Agreement shall be effective upon --------------------- execution and shall be co-terminous with the Power Purchase Agreement, except for Sections 7(b) and 11 which shall survive termination. 17. Governing Law and Interpretation. Interpretation and performance -------------------------------- of this Agreement shall be in accordance with, and shall be controlled by, the laws of the State of Hawaii, other than the laws thereof that would require reference to the laws of any other jurisdiction. 18. Modification or Amendment. No modification, amendment or waiver ------------------------- of all or any part of this Agreement shall be valid unless it is reduced to writing and signed by both parties. 19. Notices. Except as otherwise specified in this Agreement, any ------- notice, demand or request required or authorized by this Agreement to be given in writing to a party shall be either personally delivered or mailed by registered or certified mail (return receipt requested) postage prepaid to such party at the following address: If to SELLER: Encogen Hawaii, L.P. 8 c/o Enserch Development Corporation 1817 Wood Street, Suite #550 - West Dallas, TX 75201 Attention: Vice President - Administration (214) 670-2712 (telephone) (214) 670-2974 (fax) If to HELCO: Hawaii Electric Light Company, Inc. P.O. Box 1027 Hilo, Hawaii 96720-1027 Attention: Manager, Production (or such other person who may be designated in writing by HELCO) The designation of such person and/or address may be changed at any time by either party upon written notice given pursuant to the requirements of this Section 19. A notice served by mail shall be effective upon receipt. 20. No Party Deemed Drafter. No party shall be deemed the drafter of ----------------------- this Agreement. If this Agreement is ever construed by a court of law, such court shall not construe this Agreement or any provision hereof against any party as the drafter. 21. Headings. The paragraph headings of the various sections have -------- been inserted in this Agreement as a matter of convenience for reference only and shall not modify, define or limit any of the terms or provisions hereof and shall not be used in the interpretation of any term or provision of this Agreement. 22. No Waiver. The failure of either party to enforce at any time --------- any of the provisions of this Agreement, or to require at any time performance by the other party of any of the provisions hereof, shall in no way be construed to be a waiver of such provisions, nor in any way to affect the validity of this Agreement or any part hereof or the right of such party thereafter to enforce every such provision. 23. Severability. If any term or provision of this Agreement or the ------------ application thereof to any person, entity or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons, entities or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 24. Entire Agreement. Except to the extent covered under the PPA, ---------------- this Agreement shall constitute the entire agreement between the parties with respect to interconnection of the Facility with HELCO's electrical system, and shall supersede all prior contracts, proposals, negotiations, and discussions, whether written or oral. This Agreement shall govern in the event of a conflict as to interconnection matters between this Agreement and the PPA. 9 IN WITNESS WHEREOF, HELCO and SELLER have caused this Agreement to be executed by their respective duly authorized officers as of the date first above written. HELCO: HAWAII ELECTRIC LIGHT COMPANY, INC. By: /s/ T. Michael May ----------------------------------- Its: Chairman of the Board By: /s/ Warren H. W. Lee ------------------------------------ Its: President SELLER: ENCOGEN HAWAII, L.P. By: ENSERCH DEVELOPMENT CORPORATION HAWAII, INC. Managing General Partner By: /s/ Allan V. Smith ------------------------------ Name: Allan V. Smith Title: Senior Vice President 10 LIST OF SCHEDULES ----------------- Schedule 1 Interconnection Facilities - ---------- Schedule 2 New Transmission Line - ---------- Schedule 3 List of HELCO Design Specifications and Construction Standards - ---------- Schedule 4 List of Independent Engineers - ---------- Schedule 5 Scope of Work; Specifications - ---------- SCHEDULE 1 ---------- Interconnection Facilities -------------------------- The Interconnection Facilities set forth in this Schedule 1 shall be installed to form a connection between the Facility and HELCO's electrical system. For the purposes of this Interconnection Agreement, HELCO's electrical system begins at the edge of the Honokaa - Puukapu 69-kV transmission line right-of-way (the "HELCO ROW") and adjacent to the Honokaa substation where the two, new 69-kV transmission lines from the New Switching Station shall connect (by means of a flying tap) to the existing Honokaa - Puukapu 69-kV transmission line - forming a Hamakua - Honokaa 69-kV transmission line and a Hamakua - Puukapu 69-kV transmission line. The two, new 69-kV transmission lines will be terminated onto an anchor pole (if applicable) installed by HELCO at EDC's cost within the HELCO ROW. The Interconnection Facilities shall be comprised of all power system equipment installed by SELLER and other related equipment as necessary for the interconnection in conformance with the Specifications and Standards listed on Schedule 3, between the high-side switches of the Facility's 13.8/69-kV step-up transformers and HELCO's electrical system, including the following elements, as depicted in Exhibit 1: 1. The 69-kV New Switching Station, including site preparation, fencing, gates, trenching for cable placement, structures, and buswork configured initially to operate with six (6) breakers arranged in a breaker-and-a-half scheme./1/ 2. One (1) 69-kV transmission line from the New Switching Station to the HELCO ROW system, approximately one (1) mile in length, referred to as the Hamakua - Honokaa 69-kV transmission line./2/ 3. One (1) 69-kV transmission line from the New Switching Station to the HELCO ROW system, approximately one (1) mile in length, referred to as the Hamakua - Puukapu 69-kV transmission line. 4. Six (6) 69-kV circuit breakers, and associated switches, relays, protection, and controls for the New Switching Station connection of: 4.a. the Facility's two (2) 13.8/69-kV generator step-up transformers, each rated adequately to handle the entire output of the Facility; 4.b. the Hamakua - Honokaa 69-kV transmission line; and - ------------------------ /1/ The New Switching Station site preparation, fencing, and gates will be designed to accommodate a maximum of nine (9) 69-kV circuit breakers arranged in a breaker-and-a-half scheme. /2/ The new Hamakua-Honokaa 69-kV transmission line and the new Hamakua-Puukapu 69-kV transmission line may be supported on two, separate, wood pole lines, or on a single, steel, double-circuit tower line. Schedule 1 4.c. the Hamakua - Puukapu 69-kV transmission line. 5. In the event HELCO reasonably requests a change in the configuration from that depicted on Schedule 1, SELLER shall in good faith consider measures to accommodate HELCO's request; provided, that, HELCO shall reimburse and -------- ---- make SELLER whole with respect to all direct or indirect costs or loss of revenues resulting from accommodating HELCO's request. Exhibit 1 to Schedule 1 (drawing): - ---------------------------------- ENCOGEN/HELCO Interconnection Agreement: one line diagram of interconnection facilities and the new transmission line SCHEDULE 2 ---------- New Transmission Line --------------------- The New Transmission Line facilities shall be installed by HELCO in conformance with the Specifications and Standards listed on Schedule 3, and shall include the following elements as depicted on Exhibit 1: 1. One (1) 69-kV transmission line from the New Switching Station to HELCO's existing Keamuku substation, approximately twenty-nine (29) miles in length, referred to as the Hamakua - Keamuku 69-kV transmission line. 2. Four (4) 69-kV circuit breakers two (2) at the New Switching Station and two (2) at the Keamuku Substation, and associated switches, relays, protection, and controls for the breaker-and-a-half New Switching Station connection of the Hamakua - Keamuku 69-kV transmission line. 3. Modifications to HELCO's Keamuku substation associated with the breaker- and-a-half connection of the Hamakua - Keamuku 69-kV transmission line. 4. Reconductoring and/or rebuilding the 69-kV transmission line segments from: 4.a. Keamuku substation to Puuhuluhulu substation; 4.b. Puuhuluhulu substation to Puuwaawaa substation; 4.c. Puuwaawaa substation to Huehue; and 4.d. Huehue substation to Keahole substation. 5. Addition of twelve (12) megavars of 69-kV shunt capacitors in West Hawaii. Schedule 2 SCHEDULE 3 ---------- HELCO Design Specifications and Construction Standards ------------------------------------------------------ Hawaii Electric Light Co. Inc.'s Overhead Transmission Line Design and Construction Specifications (a copy of which is on file at the offices of HELCO and Enserch), as transmitted by HELCO to Enserch on or about October 10, 1995. Schedule 3 SCHEDULE 4 ---------- List of Independent Engineers ----------------------------- 1. Mr. Mark Shaw C. H. Guernsey & Company 5555 N. Grand Blvd. Oklahoma City, OK 73112 405-947-5515 405-947-5542 (fax) 2. Mr. M. L. Norton Miner & Miner Consulting Engineers, Inc. 910 27th Avenue Greeley, CO 80631 970-352-3706 970-352-3716 (fax) 3. Sylva Engineer Corp. 1303-B Sherwood Forest Houston, TX 77043 713-973-7329 713-973-7359 (fax) 4. R. W. Beck 2101 Fourth Avenue Suite 600 Seattle, WA 98121-2375 206-441-7500 206-441-4962 (fax) Schedule 4 SCHEDULE 5 ---------- Scope of Work for Independent Engineering Services -------------------------------------------------- To Estimate the Cost of Reconductoring the Honokaa-Waimea 69-kV Line -------------------------------------------------------------------- 1. SCOPE. The Independent Engineer shall provide a cost estimate for the reconductoring of the existing 69-kV line between Hawaii Electric Light Company's (HELCO) Honokaa and Waimea Substations. The cost estimate shall include the labor and equipment cost of all removal of conductor, insulators and miscellaneous hardware net of material salvage value shown in HELCO's accounting property records. The cost estimate shall include labor, equipment and material cost of new poles, conductors, insulators, guys, anchors and other miscellaneous hardware required to make the facilities complete and operational. The cost estimate shall include the cost of required pole relocations and the transfer of existing distribution facilities to new and relocated poles. The reconductoring cost estimate shall not include any cost of ordinary replacement of deteriorated facilities. The Independent Engineer shall be a currently licensed Professional Engineer in the State of Hawaii. The Independent Engineer shall utilize as the primary basis for the cost estimate at least four similar projects commenced or completed within the last 24 months. At least two such projects shall have been in the State of Hawaii, and if possible, publicly bid. The remaining two projects shall have been publicly bid. The Independent Engineer shall provide to both parties a copy of all documents and data relied upon in producing the cost estimate. 2. REFERENCES. The independent engineer shall utilize the Standards referenced in Section 2(c) of this agreement. 3. MATERIALS. The facilities shall be designed using HELCO's material standards. HELCO will provide a list of acceptable materials in use prior to commencement of work The new conductor shall be 556.5 kcmil AAC (Dahlia). The shield wire shall be 195.7 kcmil (Amherst). 4. INFORMATION TO BE PROVIDED TO THE INDEPENDENT ENGINEER. HELCO shall provide "as built" drawings of the existing facilities including distribution underbuild. 5. INFORMATION TO BE PROVIDED BY THE INDEPENDENT ENGINEER. The Independent Engineer shall provide a labor and material cost estimate for the project along with a discussion of the development of the cost estimates including adjustments made. The cost estimate shall be broken down by construction units with all distribution shown as separate construction units. Prior to commencing work on the cost estimate the Independent Engineer shall also provide plan and pole framing elevation drawings for approval of both Enserch and HELCO. A bill of materials retired and a bill of materials installed shall also be provided for approval prior to commencing work on the cost estimate. Schedule 5 EX-10.8 9 OIL SUPPLY CONTRACT BTWN CHEVRON AND HECO HECO Exhibit 10.8 ----------------- LOW SULFUR FUEL OIL SUPPLY CONTRACT by and between CHEVRON PRODUCTS COMPANY, A DIVISION OF CHEVRON U.S.A. INC and HAWAIIAN ELECTRIC COMPANY, INC. * * * * * * * * TABLE OF CONTENTS
ARTICLE PAGE ARTICLE 1: Definitions 1 ARTICLE 2: Term of Contract 3 ARTICLE 3: Purchase Volumes and Delivery Rates 3 Section 3.1: Purchase Volumes 3 Section 3.2: Delivery Rates 4 ARTICLE 4: Quality 5 ARTICLE 5: Price 6 Section 5.1: Price Per Physical Barrel 6 Section 5.2: Flexibility in Supply Source 8 Section 5.3: Fees, Taxes, Assessments, Levies, etc. 8 Section 5.4: Rounding of Index Averages 9 Section 5.5: Successor Publications 9 ARTICLE 6: Indemnity 9 ARTICLE 7: Pipeline Delivery 9 Section 7.1: LSFO Delivery 9 Section 7.2: Determination of Quality 9 Section 7.3: Measurement of Quantity 10 Section 7.4: Disputes of Quality 10 Section 7.5: Independent Inspection 11 ARTICLE 8: Marine Delivery 11 Section 8.1 Notification of Marine Delivery 11 Section 8.2: Notification of Chevron Use of HECO's BPTF 12 Section 8.3: Delivery of Marine Cargo 12 Section 8.4: Title and Risk of Loss for a Marine Delivery 12 Section 8.5: Determination of Quantity and Quality 12 Section 8.6: Disputes of Quality 13 ARTICLE 9: Line Displacement Stock and Blend Stock 13 Section 9.1: Line Displacement Stock 13 Section 9.2: Blend Stock 13 ARTICLE 10: Invoicing and Payment 13 Section 10.1: Invoices 13 Section 10.2: Ratable Invoicing 14 Section 10.3: Payments 14 Section 10.4: Method of Payment 14 ARTICLE 11: Contingencies 15 Section 11.1: Definition of Contingency 15 Section 11.2: Obligations to Sell 15 Section 11.3: Obligations to Purchase 15 Section 11.4: Price Effectiveness 16 Section 11.5: Combustion Specifications 16 Section 11.6: Effective Date 16 Section 11.7: [---] 16 ARTICLE 12: Effect of Suspension or Reduction 17 Section 12.1: Notice of Suspension or Reduction 17 Section 12.2: Option to Terminate 17 Section 12.3: Prompt Notices 17 Section 12.4: United States Currency 17 Section 12.5: Substitute Suppliers 17 ARTICLE 13: Waiver and Non-Assignability 17 Section 13.1: Waiver 17
ii Section 13.2: Non-Assignability 17 Section 13.3: Definitions 18 ARTICLE 14: Default 18 ARTICLE 15: Conflicts of Interest 18 ARTICLE 16: Applicable Law 18 ARTICLE 17: Public Utility Commission Approval 19 Section 17.1: Filing Requirements; HECO's Energy Cost Adjustment Clause 19 Section 17.2: Use as a Public Utility 19 ARTICLE 18: Miscellaneous 19 Section 18.1: Headings 19 Section 18.2: Entire Agreement 19 Section 18.3: Contract is Not an Asset 19 Section 18.4: Notices 19 Section 18.5: Unenforceable Terms 20 Section 18.6: Successors and Assigns 20 Section 18.7: Termination of Prior Agreement 20 ADDENDUM No. 1: Illustrative Schedule of Prices 22 ADDENDUM No. 2: Quality Adjustments 33 ADDENDUM No. 3: Recovery of Worldscale Fixed Differential For Oil Pollution Liability Insurance 35 ADDENDUM No. 4: Inter Facility Points of Title/Risk of Loss 37
iii LOW SULFUR FUEL OIL SUPPLY CONTRACT ----------------------------------- THIS CONTRACT dated as of Nov. 14, 1997, by and between CHEVRON PRODUCTS ------------- COMPANY, A DIVISION OF CHEVRON U.S.A. INC. , a Pennsylvania corporation, ("Chevron") and HAWAIIAN ELECTRIC COMPANY, INC., a Hawaii corporation, ("HECO"), with the purpose for the sale and purchase of LSFO and other petroleum products. WHEREAS, Chevron is a supplier of petroleum fuels with terminal and Refinery facilities in Hawaii. WHEREAS, HECO is a utility engaged in the generation and sale of electricity, with terminal facilities, in Hawaii. NOW THEREFORE, the parties agree as follows: ARTICLE 1: Definitions Except where otherwise indicated, the following definitions shall apply throughout this Contract: 1. "API" or "API Gravity" means the American Petroleum Institute's standard measurement of gravity for petroleum products, including fuel. 2. "ASTM" means the American Society for Testing and Materials whose standards are utilized in this Contract with respect to fuel specifications, quantitative measurements, sampling and testing. 3. "barrel" means 42 American bulk gallons at 60 degrees Fahrenheit. 4. "BPH" means barrels per hour, a unit of measure of the rate of the physical transfer or movement of fuel. 5. "BPTF" means HECO's Barbers Point Tank Farm, a fuel receiving, storage and distribution facility located in Barbers Point area of Oahu, in Campbell Estate Industrial Park, Kapolei, Hawaii. 6. "BTU" and "BTU content" means British Thermal Unit and refers to the standard assessment of fuel's gross heating value or gross heat content. 7. "Black Oil Pipeline" means Chevron's 8 inch pipeline running from Barbers Point to Honolulu which is used for transporting LSFO to the HECO fuel receiving and storage facilities at Waiau and Iwilei in addition to the transportation of Chevron's other black petroleum products. 8. "Certificate of Quality" or "Quality Certificate" means the formal document recording the Chevron laboratory determinations of the quality and BTU content of a particular sample which represents a specific Delivery, said laboratory determinations having been performed in accordance with the standard test methods described in Article 4. 9. "Contingency" means as per the provisions of Section 11.1 10. "Contract" means this Low Sulfur Fuel Oil Supply Contract, between Chevron and HECO, the term of which commences January 1, 1998. 11. "Day" or "Days" means a calendar day of 24 hours. 1 12. "Deliver," "Delivery," "Deliveries" or "Delivered" refers to the transfer of title or physical movement of LSFO sold by Chevron and purchased by HECO. 13. "Delivery Status Against Ratable" means the calculated figure equal to cumulative Deliveries of LSFO as of a specific Day in a Month where said Deliveries for the Month which includes the specified Day less the cumulative Nominations on a Contract-to-date basis as of that same specific Day in a Month. 14. "Effective Date" means, for the purposes of this Contract, January 1, 1998. 15. "Extension" means successive 12-Month periods in the term of this Contract in addition to and after the initial term of this Contract which is through December 31, 2004, each Extension beginning January 1. 16. "Facilities And Operating Contract" means that certain separate agreement by and between Chevron and HECO of even date with this LSFO Supply Contract by and between the same parties. 17. "G.S.V." means gross standard volume in U.S. barrels at 60 degrees Fahrenheit. 18. "Independent Inspector" means a qualified third-party petroleum inspection contractor acceptable to both parties providing petroleum sampling, measurement and other services before, during and after a Delivery. 19. "Invoiced Deliveries" means Deliveries which have been invoiced in accordance with Article 10. 20. "Invoice Date" means the billing or invoice issue date as shown on the invoice which is after completion of the Delivery in question. 21. "Kahe Pipeline" means HECO's 10 inch pipeline running from Barbers Point to the Kahe Power Plant which is used for transporting LSFO to the fuel receiving and storage facilities at HECO's Kahe Power Plant. 22. "Line Displacement Stock " means, collectively for this purpose, Chevron Diesel Fuel No. 2, Chevron Industrial Fuel Oil No. 6 or Chevron Industrial Fuel Oil No. 5 reasonably required for Chevron to complete the Deliveries of LSFO into HECO's tankage at Kahe, Waiau and Iwilei. 23. "LSFO" means Low Sulfur Fuel Oil of the quality specified in Article 4. 24. "LSWR" means Low Sulfur Waxy Resid, mixed/cracked quality, a common grade of low sulfur fuel oil typically sold in Singapore, Indonesia and elsewhere in the Far East. 25. "Marine Delivery" or "Marine Deliveries" means a Delivery of LSFO and/or the components thereof, including blend stock, all or part of which are Delivered by Chevron from a marine vessel to HECO's receiving and storage tanks. 26. "MM" means million when used in conjunction with a unit of measure such as BTU, i.e. MM BTU means million BTU. 27. "Month" means a calendar month. 28. "Nominated" or "Nomination" means the amount of LSFO specified by HECO to be sold and Delivered by Chevron and purchased and received by HECO for a specified Month. 2 29. "Pipeline Delivery" or "Pipeline Deliveries" means a Delivery of LSFO from Chevron's Hawaii Refinery to HECO's petroleum receiving and storage tanks at BPTF via Chevron's Refinery pipelines, or to HECO's fuel storage at Kahe, Waiau, or Iwilei via HECO's Kahe pipeline or Chevron's Black Oil Pipeline, respectively. 30. "Refinery" means Chevron's oil refining and related facilities located in the Barbers Point area of Oahu, in Campbell Estate Industrial Park, Kapolei Hawaii 31. "Year" means a calendar Year. ARTICLE 2: Term of Contract The term of this Contract shall be from January 1, 1998 through December 31, 2004, and shall continue thereafter for Extensions beginning each successive January 1, unless HECO or Chevron gives written notice of termination at least 120 Days before the beginning of an Extension. ARTICLE 3: Purchase Volumes and Delivery Rates Section 3.1: Purchase Volumes During each Year that this Contract is in effect, Chevron shall sell and Deliver to HECO and HECO shall purchase and receive from Chevron, LSFO at a reasonably uniform rate during each Month. This Monthly volume shall equate to an average daily rate in physical barrels per Day which is no less than the [---] nor more than [---] as set out below: Annual Average Daily Rate in Physical Barrels Per Day
[---] [---] [---] [---] Year Minimum Maximum Minimum Maximum ---- ------- ------- ------- ------- 1998-1999 [---] [---] [---] [---] 2000-2004 [---] [---] [---] [---]
The minimum and maximum annual volume of LSFO to be Delivered and sold by Chevron and to be Nominated, purchased and received by HECO during each of the Years are as follows: Annual Volume In Thousands Of Barrels
Year Minimum Maximum ---- ------- ------- 1998 [---] [---] 1999 [---] [---] 2000 [---] [---] 2001 [---] [---] 2002 [---] [---] 2003 [---] [---] 2004 [---] [---]
Pursuant to Section 5.1, the [---] Maximum Annual Average Daily Rate in physical barrels per Day, when multiplied by the number of Days in each Month, designates the maximum purchase volume during that Month which shall occur at [---] 3 The minimum and maximum annual volumes to be sold by Chevron and purchased by HECO during each Year of any extension shall be determined by multiplying the Days of that Year by the average daily minimum and maximum rates indicated for Year 2004, unless mutually agreed otherwise. Subject to availability, Chevron will sell and Deliver and HECO shall purchase and receive such additional volumes as are mutually agreed. Section 3.2: Delivery Rates (a) HECO shall advise Chevron of its Nominated rate of Delivery for each Month [---] prior to the beginning of that Month. HECO shall provide Chevron written notice of the amount of LSFO to be sold and Delivered. No later than 10 Days prior to the beginning of each Month, Chevron will provide HECO a proposed schedule of Pipeline Deliveries and Marine Deliveries ("Delivery Schedule") to be made for the following three Months. The proposed Delivery Schedule shall specify the type of Delivery, Pipeline Delivery or Marine Delivery, approximate quantity and the approximate date. The Deliveries are to be made at reasonably regular intervals. HECO shall notify Chevron of its acceptance or rejection of the proposed Delivery Schedule within three (3) business days of receipt. Should HECO fail to provide notice to Chevron of its acceptance, conditional acceptance or rejection of the Delivery Schedule prior to the end of said three (3)-business-day period, HECO shall be deemed to have accepted the Delivery Schedule. If HECO rejects the proposed Delivery Schedule because the date or volume of an individual Delivery is unacceptable, HECO shall advise Chevron as soon as possible thereafter of a satisfactory alternate Delivery date or alternate Delivery quantity. Chevron shall notify HECO of any change in the accepted Delivery Schedule due to any of the following causes with respect to each individual Delivery as soon as practicable after it shall become known to Chevron: 1. A change in the volume of an individual Pipeline Delivery, if such change is in excess of 10,000 barrels of the previously advised Delivery volume or a change in the volume of an individual Marine Delivery, if such change is in excess of 25,000 barrels of the previously advised Delivery volume; or 2. A change in the date of an individual Delivery, if such change is greater than 2 Days from the previously advised date. (b) HECO shall not be required to take Delivery of more than [---] of a Month's Nominated volume in any [---] Day consecutive period; and Chevron shall not be required to make Delivery of more than [---] of a Month's Nominated volume in any [---] Day consecutive period. Chevron will make reasonable good faith efforts to plan its Pipeline Deliveries and Marine Deliveries such that it shall have a Delivery Status Against Ratable of approximately zero at Month-end for the third Month of the accepted Delivery Schedule. Scheduled Marine Deliveries can be made plus or minus [---] Days from the date shown on the accepted Delivery Schedule. (c) Chevron and HECO shall make best efforts to coordinate their separate marine and pipeline shipments into and out of HECO's BPTF to minimize operational difficulties and costs, including but not limited to tankage availability and vessel demurrage. (d) Unless waived by HECO and subject to tank availability, the physical volume of Chevron's Marine Deliveries of LSFO shall be limited to [---] barrels, during any [---] Day period and any Month, except during Months when Chevron's LSFO production facilities at Barbers Point 4 are not operating or when HECO's Nominated rate of Delivery for the Month of the Marine Delivery is in excess of the [---] Maximum quantity specified in Section 3.1. (e) If due to reasons other than a Contingency as defined in Article 11, Chevron's anticipated Pipeline Deliveries and Marine Deliveries of LSFO shall reasonably indicate that the cumulative quantity of its Deliveries to HECO during a period of this Contract will result in a Delivery Status Against Ratable in excess of [---] barrels for a period in excess of [---] consecutive Days, Chevron shall be deemed to be in a "Supply Deficit Position" and shall give prompt notice of same to HECO. In the event that Chevron gives notice that it is in a Supply Deficit Position, Chevron and HECO shall thereafter immediately confer in good faith on the steps to be taken to minimize the impact of any Supply Deficit Position on HECO. Within three (3) business days of its tendering notice of Supply Deficit Position to HECO, Chevron shall propose a detailed plan ("Supply Plan") whereby it may make Deliveries of LSFO to HECO to address the Supply Deficit Position. In the event Chevron has other term contract buyers for LSFO in Hawaii, Chevron shall ratably allocate its sale of LSFO to all such buyers on the basis of actual sales to each such buyer over the prior Year. (f) If due to reasons other than a Contingency as defined in Article 11, HECO's anticipated demand for LSFO should reasonably indicate that its Monthly Delivery requirements from Chevron during a period of this Contract are less than the minimum Monthly or annual volume of LSFO to be purchased and received by HECO as set forth in Section 3.1, HECO shall be deemed to be in a "Purchase Deficit Position" and shall give prompt written notice to Chevron. In the event that HECO gives notice that it is in a Purchase Deficit Position, Chevron and HECO shall thereafter immediately confer in good faith on the steps to be taken to minimize the impact of any Purchase Deficit Position on Chevron. [---] In such circumstances, purchases of LSFO shall be ratably allocated among all sellers including Chevron on the basis of actual sales from each seller over the prior Year. ARTICLE 4: Quality The LSFO Delivered thereunder shall comply with the following specification limits:
LSFO ASTM Test Specification Specification Method Units Limits - ------------- ------ ----- ------ API Gravity D4052 Deg 12 min 24 max Sulfur D4292 Wt % 0.50 max Flash Point D93 Deg F 150 min Pour Point D97 Deg F 125 max
5 Viscosity D445 SSU at l00 min 210 Deg F 450 max Ash D482 Wt % 0.05 max BTU content D240 MM BTU/Bbl 6.000 min Nitrogen D4629 Wt % 0.50 max Water & Sediment D1796 Wt % 0.50 max
CHEVRON MAKES NO WARRANTY, EXPRESSED OR IMPLIED IN FACT OR BY LAW, AS TO THE MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE CONCERNING THE LSFO OTHER THAN IT SHALL COMPLY WITH THE QUALITY HEREIN SPECIFIED, AND THAT IT SHALL BE SUITABLE FOR USE AS A BOILER FUEL. ARTICLE 5: Price Section 5.1: Price Per Physical Barrel For the Monthly cumulative volume which is at or below the [---] maximum limit of Section 3.1 multiplied by the number of Days in the Month, the price of LSFO Delivered to meet the Nominated commitment of a Month shall be determined as follows: [---] For the Monthly cumulative volume which exceeds the Tier 1 maximum limit of Section 3.1 multiplied by the number of Days in the Month, the price of LSFO Delivered to meet the Nominated commitment of a Month shall be determined as follows: [---] where: P1 = Billing price per physical barrel of LSFO Delivered to meet that portion of the Nominated commitment of a Month that is equal to or below the [---] maximum regardless of the actual Month Delivered, in U. S. dollars. P2 = Billing price per physical barrel of LSFO Delivered to meet that portion of the Nominated commitment of a Month that exceeds the [---] maximum, regardless of the actual Month Delivered , in U.S. dollars. LSWR INDEX = A market index for low sulfur fuel oil, defined as the average of [---], defined as follows: [---], a variable market price component which is a discount or premium to the [---] which shall be calculated by a simple averaging of the daily high and low or bid and ask of the "Premia to the Pertamina Formula" price for Singapore or Singapore/Indonesia cracked, mixed/cracked or equivalent LSWR as assessed and published in [---] in the date range specified below for [---]. 6 [---] (a) [---] for LSWR Mixed/Cracked sold in Singapore, during the period beginning the 21st of the second Month immediately preceding the Nominated Month of Delivery and ending the 20th Day of the Month immediately preceding the Nominated Month of Delivery. (b) [---] --- Similarly, the average of the high and low prices per barrel published by [---] for every date of publication within the date range of [---] above. (c) [---] ---- Similarly, the average of the bid and asked prices per barrel published by [---] for every date of publication within the date range of [---] above. (d) [---] ---- Similarly, the average of the prices per barrel published by [---] for every date of publication within the date range of [---] above. FREIGHT = a market index for freight, defined for each calendar quarter as the multiplication product of (a) and (b) below, plus the fixed rate differential described in (c) below: (a) The simple average of the Average Freight Rate Assessment ("AFRA") Worldscale Points for the average of Large Range 1 vessels, as published Monthly by London Tanker Brokers Panel Limited for the three Monthly publications in the calendar quarter immediately preceding the calendar quarter of the Nominated Month of Delivery. Monthly publications show rates of vessel voyages which occurred during the last half of the second Month immediately preceding that publication and the first half of the Month immediately preceding that publication, and (b) The Worldscale 100 rate for voyages between Singapore and Barbers Point, Hawaii, applicable to the Year of the quarter defined in (a) above; expressed in New Worldscale rates, as published by Worldscale Associates (London Limited) in its New Worldwide Nominal Freight Scale (Worldscale); plus, (c) There shall be added to the multiplication product of (a) and (b) above, a fixed rate differential for segregated ballast tank configured oil tankers, "SBT Tankers," if and as provided by Worldscale, with respect to the Additional Insurance Premiums for Basic ($500 Million) and Excess ($200 Million) coverage of Oil Pollution Liability Insurance on vessels carrying persistent oils to and from the U.S.A., consistent with a typical vessel as derived in Addendum No. 3 attached to this Contract. The FREIGHT rate will be expressed in U.S. dollars per barrel, using a conversion factor of 6.75 barrels per metric ton. LA BUNKER = A market index for industrial fuel oil, defined as the simple average of the high and low prices for Los Angeles Bunker C fuel as reported by the Platt's Oilgram Bunkerwire ("Platt's Bunkerwire") for all dates of publication during the period beginning the 21st of the second Month immediately preceding the Nominated Month of Delivery and ending the 20th Day of the Month immediately preceding the Nominated Month of Delivery. The LA Bunker market index will be expressed in U.S. dollars per barrel, using a conversion factor of 6.368 barrels per metric ton. 7 [---] volumes sold and purchased in each Year of the indicated period as follows: 1998-1999: [---] per barrel 2000-2004/Extension: [---] per barrel [---] volumes sold and purchased in each Year of the indicated period as follows: 1998-1999: [---] per barrel 2000-2004/Extension: [---] per barrel The per barrel premium applicable for 2004 shall also apply to sales and purchases of LSFO during each Year of any Extension, unless otherwise mutually agreed. BTU = The actual BTU content of each LSFO Delivery, pursuant to Section 7.2, expressed in MM BTU's per barrel and rounded to three decimal places. T = the [---], the Hawaii General Excise Tax, the Hawaii Environmental Response Tax, [---] and any other tax properly imposed on the sale of LSFO pursuant to Section 5.3 herein. The price for LSFO Delivered shall be based on the price for the Month Delivered to meet the Nominated commitment of a Month regardless of the actual Month during which physical Delivery occurs. Addendum No. 1 hereto contains an illustrative schedule of prices calculated pursuant to this Section 5.1, including a copy of the Monthly London Tanker Brokers Panel Limited publication. Section 5.2: Flexibility in Supply Source To provide the flexibility needed by Chevron to meet its obligations to HECO, the source and type of crude oil and other raw material, the place of manufacture, and the manufacturer of LSFO for Delivery to HECO hereunder shall be determined solely by Chevron. The price of all LSFO Delivered by Chevron to HECO hereunder shall be determined in accordance with the terms of this Contract regardless of where, how and by whom such LSFO is manufactured and regardless of the type or source of crude oil or other raw materials used in its manufacture. Section 5.3: Fees, Taxes, Assessments, Levies, etc. In addition to all other amounts payable by HECO under this Contract, HECO shall reimburse Chevron for all taxes, assessments, levies and imposts of whatsoever kind or nature imposed on Chevron by any governmental or quasi-governmental body, as adjusted, modified or revised from time to time, including without limitation the Hawaii General Excise Tax, the [---], the Hawaii Environmental Response Tax and [---]s with respect to the [---] sale of LSFO and its components under this Contract or the receipt by Chevron of payments hereunder. Notwithstanding the foregoing and any illustrative schedule of prices herein, HECO shall not be required to reimburse Chevron under this Section 5.3 for any tax measured by or based on the net income of Chevron or for real property taxes or to duplicate any item of expense of Chevron which is recovered by Chevron under the billing price under Section 5.1 or for any item expressly mentioned by [---] or Platt's Bunkerwire, or confirmed by [---] or Platt's Bunkerwire in writing upon inquiry by either Chevron or HECO, as being included in a price used to compute the billing price under Section 5.1. [---] 8 [---] As of the effective date of this Contract, the governmental fees, etc. which are currently in effect are the [---], the Hawaii General Excise Tax (4.166%) the [---] and the Hawaii Environmental Response Tax ($0.05 per barrel). The Hawaii General Excise Tax and the Hawaii Environmental Response Tax will be added to the invoiced price. The Hawaii Environmental Response Tax is not subject to Hawaii General Excise Tax. Section 5.4: Rounding of Index Averages All prices, index averages, adjustments thereto and other sums payable hereunder shall be stated in the nearest thousandth of a dollar. Section 5.5: Successor Publications [---] and Platt's Bunkerwire shall include any successor publication(s) and, in the event of either the discontinuance of any of these publications, the publications referenced in the derivation of the market index for freight or of assessments of Singapore/Indonesia mixed/cracked or equivalent quality LSWR, [---] or Los Angeles Bunker C Fuel Oil, respectively, the parties shall agree upon an alternate price reporting services and publications or market price assessments and any modification of the per barrel premiums for LSWR, price formula components A1 and A2, as applicable, as may be reasonable under the circumstances. ARTICLE 6: Indemnity Each party agrees to defend, indemnify and hold harmless the other party in accordance with the provisions of Article 17 of the Facilities And Operating Contract the terms and conditions of which are hereby incorporated herein and made a part of this Contract by reference hereto. The provisions of this Article 6 shall survive the termination of the Contract. ARTICLE 7: Pipeline Delivery Section 7.1: LSFO Delivery Pipeline Delivery of LSFO from Chevron's Hawaii Refinery shall be made by one of the following methods: (a) Chevron may Deliver LSFO by pipeline from the Refinery into HECO's BPTF. Title and risk of loss of LSFO so Delivered shall pass to HECO where Refinery pipelines interconnect with HECO's BPTF pipelines at the point where the pipelines intersect the boundary line between the Refinery property and HECO's BPTF property at either point A, depending on whether Chevron Delivers LSFO through the "Front Door Line" or "Back Door Line" as shown in Addendum No. 4. (b) Pursuant to the Facilities and Operating Agreement between Chevron and HECO, Chevron may Deliver LSFO by pipeline from the Refinery into HECO's receiving and storage tanks at Kahe, Waiau and Iwilei. With respect to such Deliveries to HECO's receiving and storage tanks at Kahe, title and risk of loss of LSFO Delivered from the Refinery shall pass to HECO where the 9 Refinery pipelines interconnect with HECO's Kahe Pipeline at either point B shown in Addendum No. 4. With respect to such Deliveries to HECO's receiving and storage tanks at Waiau and Iwilei, title and risk of loss of LSFO Delivered from the Refinery shall pass to HECO where the Refinery pipelines interconnect with Chevron's Black Oil Pipeline at either point C as shown in Addendum No. 4. The use of facilities for Delivery of LSFO pursuant to Section 7.1.(b) of this Contract, including but not limited to HECO's obligation to pay a per barrel pipeline pumping fee for the LSFO Delivered under Section 7.1 (b), the measurement of the pumped quantities and the terms of sale and Delivery by Chevron and purchase and receipt by HECO of Line Displacement Stock related to the Delivery of LSFO, other than the specific provisions set forth in Article 9 herein, shall be governed by the Facilities And Operating Contract. Section 7.2: Determination of Quality The quality and BTU content of the LSFO Delivered by Pipeline Delivery to HECO shall be determined on the basis of a volumetric weighted average composite of samples drawn from Chevron's issuing tank(s) at the Refinery in such a manner as to be representative of each individual Pipeline Delivery ("Tank Final Sample"). The Tank Final Sample shall be divided into a minimum of three (3) parts as follows: (1) One part shall be provided to Chevron's Refinery laboratory for analysis to determine BTU content per barrel and quality determination. (2) One part shall be provided to HECO's laboratory for analysis to determine BTU content per barrel and for the purpose of verifying Chevron's determinations. (3) At least one part shall be sealed and retained by the Independent Inspector for a period of not less than three (3) Months. Chevron agrees to provide HECO and the Independent Inspector with a copy of Chevron's Certificate of Quality representing the Tank Final Sample and will make best efforts to provide such quality documentation no later than [---] of the Pipeline Delivery. If the completed Certificate of Quality is not available the Day of the completion of the Pipeline Delivery, Chevron will advise HECO and the Independent Inspector, by the Day of the completion of the Pipeline Delivery, the final determination of API gravity, flash point, sulfur content and sediment and water representing the Tank Final Sample. The official BTU content determination shall be based upon an average of Chevron's and HECO's laboratory analyses, provided that such analyses fall within the ASTM reproducibility standard (currently 0.4 MJ/kg which the parties shall deem to be equivalent to a fixed standard of 60,000 BTU per barrel) for Test D-240. Chevron and HECO will make best efforts to evaluate the BTU content of the Tank Final Sample and exchange results within [---] Days. In the event the difference between HECO's and Chevron's laboratory determination of BTU content falls outside said reproducibility standard, the sealed part of the Tank Final Sample in the possession of the Independent Inspector shall be provided to an independent testing laboratory for an official determination, which shall be final. In cases of disagreement or excessive delays in HECO's determination of BTU content, Chevron shall have the right to invoice the sale using a provisional BTU content of 6.2 MM BTU per barrel, with any required adjustments made after final determination is made. Chevron and HECO shall share equally the cost of independent tests and determinations. Section 7.3: Measurement of Quantity Quantities of LSFO and Line Displacement Stock Delivered by Pipeline Delivery hereunder shall be determined at the time of the Pipeline Delivery by gauging Chevron's tanks before and after pumping under the supervision of the Independent Inspector. Quantities sold and Delivered by Chevron and purchased and received by HECO hereunder shall be calculated in accordance with the current measurement standards adopted by industry, ASTM, 10 API and other recognized standard-setting bodies as are applicable in the opinion of the Independent Inspector and shall be expressed in G.S.V., U.S. barrels @ 60 degrees F. Both HECO and Chevron agree that if measurement of Chevron's tanks is, in the opinion of the Independent Inspector, considered to have been rendered inaccurate for any reason including, but not limited to operational constraints, physical loss of LSFO or Line Displacement Stock or inadvertent transfer of LSFO or Line Displacement Stock within Chevron's facilities, then the quantity of LSFO or Line Displacement Stock may be determined by gauging HECO's tanks before and after pumping under the supervision of the Independent Inspector. Section 7.4: Disputes of Quality If Chevron or HECO has reason to believe that the quality of LSFO or Line Displacement Stock stated for a particular Pipeline Delivery or Marine Delivery per Article 7 or Article 8 is incorrect, that party shall within sixty (60) Days after the issuance date of the complete Certificate of Quality, present the other party with documents supporting such dispute and the parties will confer, in good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quality, if justified, for the Pipeline Delivery or Marine Delivery in question. In the event of an unresolvable difference between Chevron and HECO, the sealed part of the relevant sample in the possession of the Independent Inspector shall be provided to an independent testing laboratory for an official determination, which shall be final. Chevron and HECO shall share equally the cost for such independent laboratory determination. If the quality of the LSFO received by HECO from Chevron fails to conform to specifications in Article 4 of this Contract, both Chevron and HECO shall minimize, if possible, the impact of any quality problem on HECO by specification waiver if the use of the LSFO will not cause harm to HECO, or by Chevron delivering higher quality LSFO in a timely manner to produce a specification quality blend in HECO's receiving and storage tank(s) containing the non-specification LSFO. If all such, and similar, efforts fail to resolve the quality problem, then HECO may return non-specification LSFO to Chevron, in which case Chevron shall replace the non-specification LSFO in a timely manner. All costs and expenses, including HECO's handling costs incurred in returning and replacing non-specification LSFO, shall be paid by Chevron. Section 7.5: Independent Inspection Chevron and HECO will make best efforts to ensure that all measurements taken and determinations made with respect to the provisions of this Contract shall be under the supervision of an Independent Inspector, and the costs thereof, shall be shared equally by Chevron and HECO. If, due to a need for timeliness, Chevron personnel rather than the Independent Inspector take measurements, such measuring shall be performed in accordance with accepted industry standards approved by an Independent Inspector. ARTICLE 8: Marine Delivery Section 8.1: Notification of Marine Delivery Chevron shall provide HECO with updates on the anticipated arrival date of its vessel and expected date for commencing the Marine Delivery and otherwise comply with the notice provisions of Section 3.2(a) herein.. Section 8.2: Notification of Chevron Use of HECO's BPTF Chevron shall provide HECO at least [---] Days advanced notice of its planned use of a specified volume of more than [---] barrels, and no more than [---] barrels, of HECO's petroleum storage capacity at BPTF for Chevron's use in making a Marine Delivery to HECO. [---] 11 [---] Section 8.3: Delivery of Marine Cargo Chevron may Deliver LSFO or LSFO blend stock from Chevron's vessel into BPTF. The volume of Chevron's Marine Delivery shall conform to the provisions of Section 3.2(a) herein unless it has received prior written approval from HECO. Section 8.4: Title and Risk of Loss for a Marine Delivery Title to the LSFO and the risk of loss of the LSFO and components Delivered from Chevron's vessel or from the Refinery in conjunction with a Marine Delivery shall pass from Chevron to HECO at the BPTF as soon as the [---] Section 8.5: Determination of Quantity and Quality The quantity and quality of LSFO Delivered by marine vessel shall be determined in the manner specified in Sections 7.2, 7.3 and 7.4 of this Contract, except as follows: (a) Chevron agrees to advise the Independent Inspector, prior to commencing a Marine Delivery of LSFO or any component thereof from Chevron's vessel, the API gravity and flash point in degrees F. shown the port of loading Quality Certificate representing the quality of said LSFO or component thereof. (b) In order to reduce the likelihood of Chevron's Marine Delivery resulting in quality problems occurring in HECO's receiving tank(s), Chevron agrees to test a volumetric weighted average composite of samples representative of the LSFO or component thereof to be shipped to HECO's receiving tanks ("Precautionary Sample"). The Precautionary Sample shall be drawn after the arrival of the vessel in Hawaiian waters, but prior to the commencement of the Marine Delivery, and shall be tested by Chevron's Refinery laboratory. Chevron agrees that should a pre-discharge computer blend simulation representing the quality of a volumetric weighted average mixture of the Precautionary Sample, components of the Marine Delivery in questions previously shipped to HECO's receiving tanks and other LSFO components available to be shipped from Chevron's Refinery reasonably indicate the Marine Delivery in question will not conform to the quality specified in Article 4, Chevron will instruct the vessel operator not to commence Delivery of its cargo to HECO's receiving tanks without HECO's express permission. (c) The quality and BTU content of the LSFO Delivered shall be determined on the basis of a volumetric weighted average composite of samples drawn from HECO's receiving tank(s) in such manner as to be representative of the entire Marine Delivery (also "Tank Final Sample"). The Tank Final Sample shall be divided and otherwise handled in accordance with the provisions of Section 7.2. (d) Quantity of the LSFO Delivered via a Marine Delivery shall be determined at the time of each Marine Delivery by gauging HECO's tank(s) before and after pumping. Quantities sold and Delivered pursuant to this Section 8.5 shall be calculated in accordance with the current measurement standards adopted by industry, ASTM, API and other recognized standard-setting bodies as are applicable in the opinion of the Independent Inspector and shall be expressed in G.S.V., U.S. barrels @ 60 degrees F. 12 Section 8.6: Disputes of Quality If Chevron or HECO has reason to believe that the quality of LSFO stated for an individual Marine Delivery is not in conformance with the qualities described in Article 4 , Chevron and HECO shall attempt to resolve the quality problem pursuant to the provisions of Section 7.4. ARTICLE 9: Line Displacement Stock and Blend Stock Section 9.l: Line Displacement Stock HECO shall purchase and Chevron shall supply whatever volume of Line Displacement Stock is reasonably required for Chevron to complete the Deliveries of LSFO that is received into HECO's tankage at Kahe, Waiau and Iwilei. The price of No. 2 diesel fuel or No. 6 fuel oil used as Line Displacement Stock shall be the then-current pricing for the fuel comprising the Line Displacement Stock in that certain separate agreement between Chevron and HECO and its affiliated companies of even date herewith, known as the Inter-Island Industrial Fuel Oil and Diesel Fuel Contract ("Inter-Island Supply Contract"), if such a supply contract is in effect; otherwise its price shall be the then-current Honolulu posted price for such fuel, less normally available discounts, if any, at the time of purchase. The price of No. 5 fuel oil used as Line Displacement Stock shall be the [---] in the Inter-Island Supply Contract, if such a supply contract is in effect; otherwise its price shall be the then-current Honolulu posted price for No. 5 fuel oil, less normally available discounts, if any, at the time of purchase. HECO's minimum purchase obligation and Chevron's maximum purchase obligation set forth in Article 3 shall be reduced by each physical barrel of Line Displacement Stock sold. Section 9.2: Blend Stock In the event HECO desires to adjust the quality of its LSWR in its BPTF receiving and storage tanks to meet the specifications of Article 4, Chevron shall supply the necessary blend stock pursuant to Addendum No. 2 given reasonable notice. ARTICLE 10: Invoicing and Payment Section 10.1: Invoices Invoices, which will show the price per physical barrel of LSFO, blend stock and Line Displacement Stock sold will be prepared and dated following Delivery shall be rendered from time to time each Month. Original invoices shall include full documentation, as approved by both parties including Certificate of Quality, report of the Independent Inspector, and price calculation; such documentation may, however, be provided by Chevron to HECO separately. The invoices shall also show as a separate item the estimated amounts of any reimbursements to which Chevron is entitled pursuant to Section 5.3. If an invoice incorporating an item other than a BTU content adjustment in error, or has been sent to HECO, then HECO shall have the option to hold said invoice without penalty until such error or dispute is resolved and HECO shall have received a corrected invoice, debit or credit. HECO shall make payment for such corrected invoice or debit in accordance with this Section 10.3. If a disputed item has not been resolved in 30 Days from the Invoice Date, HECO shall pay the undisputed amount. If Chevron's or HECO's final laboratory result for BTU content is unavailable or if Chevron's laboratory result is disputed by HECO, Chevron may issue a provisional invoice pursuant to Section 7.2. HECO shall in such case make payment for such provisional invoice in accordance with the provisions of Section 10.3. 13 Section 10.2: [---] [---] Section 10.3: Payments Payments of such invoices shall be made in U.S. dollars. Subject to Section 10.1, Section 10.2, Section 7.4 and Section 8.6 herein, the timing of payments for sales and Deliveries received shall be based upon the invoice issue date which shall be the Invoice Date or postmarked mailing date of the invoice, whichever is later, as follows: (a) Payment for a received invoice dated from the 1st through the 10th of a Month is due on the 20th of the same Month. (b) Payment for a received invoice dated from the 11th through the 20th of a Month is due by the last Day of the same Month. (c) Payment for a received invoice dated from the 21st through the last Day of the Month is due on the 10th Day of the following Month. Due dates are the dates payments are to reach Chevron. If the due date falls on a Saturday, the payment shall be received on the preceding business Day. If such date falls on a Sunday or a holiday, payment shall be received the following business Day. Section 10.4: Method of Payment Payments shall be by bank wire transfer of immediately available funds to: Chevron Products Company, a division of Chevron U.S.A. Inc. Account Number 59-51755 First National Bank of Chicago, Chicago, IL ABA Ref. No. 071000013 For identification purposes, all wires must clearly indicate that payment is being made by order of HECO and provide the invoice reference number. In addition, written documentation evidencing specific invoices being paid shall be immediately forwarded to: Utility Fuel Receivables/Room 3338 Chevron Products Company, a division of Chevron U.S.A. Inc P.O. Box 7006 San Francisco, California 94120-7006 Fax (415) 894-1195 ARTICLE 11: Contingencies Section 11.1: Definition of Contingency As used in this Article 11, the term "Contingency" means: (a) any event reasonably beyond the control of the party affected; 14 (b) compliance, voluntary or involuntary, with a direction or request of any government or person purporting to act with governmental authority; excluding, however, any such direction or request restricting or otherwise regulating combustion of the LSFO to be purchased by HECO hereunder, the effect of which restrictions or regulation upon the parties' performance shall be governed by Section 11.5 of this Contract; (c) total or partial expropriation, nationalization, confiscation, requisitioning or abrogation or breach of government contract or concession; (d) closing of, or restriction on the use of, a port or pipeline; (e) maritime peril (including but not limited to, negligence in navigation or management of vessel, collision, stranding, destruction, or loss of vessel), storm, earthquake, flood; (f) accident, fire, explosion; (g) hostilities or war (declared or undeclared), embargo, blockage, riot, civil unrest, sabotage, revolution, insurrection; (h) strike or other labor difficulty (whomever's employees are involved), even though the strike or other labor difficulty could be settled by acceding to the demands of a labor group; or (i) loss or shortage of supply, production, manufacturing, distribution, refining, transportation, Delivery facilities, receiving facilities, equipment, labor, material, power generation or power distribution caused by circumstances which the affected party is not able to overcome by the exercise of reasonable diligence or which the affected party is able to overcome only at substantial additional expense in relation to the expected revenue, benefits or rights related directly to this Contract. Section 11.2: Obligations to Sell Chevron shall not be obligated to sell or Deliver LSFO to the extent that performance of this Contract is prevented, restricted or delayed by a Contingency which significantly affects Chevron's ability to supply, manufacture or transport LSFO to HECO under this Contract from Chevron's U.S. West Coast (to the extent Chevron's U.S. West Coast refineries are producing LSFO at the time of the Contingency) and Refinery. In such circumstances, Deliveries of LSFO to HECO may be reduced on a basis as equitable to HECO as to Chevron's and its Affiliates' other customers of crude and petroleum products, and Chevron shall not be obligated to acquire additional crude or LSFO but to the extent that it does acquire additional crude or LSFO, HECO shall be entitled to an equitable share of the LSFO acquired or derived from the crude acquired, at a price to be agreed from time-to-time. Section 11.3: Obligations to Purchase HECO shall not be obligated to purchase, receive or use LSFO to the extent that performance of this Contract in the customary manner is prevented, restricted or delayed by a Contingency. In such circumstances, purchases from Chevron may be reduced on any basis as equitable to Chevron as to HECO's other suppliers of LSFO. Section 11.4: Price Effectiveness If at any time any price determined under this Contract cannot be given effect because to do so would violate a direction or request of any government or person purporting to act with governmental authority, HECO and Chevron shall attempt to agree on an alternate course of action, but failing agreement within ten (10) Days the party adversely affected may suspend performance with respect to the quantity of LSFO affected by the direction or request. 15 Section 11.5: Combustion Specifications To the extent that any governmental regulation requires combustion of LSFO meeting more stringent specifications or permits combustion of LSFO meeting less stringent specifications than those in Article 4, HECO and Chevron shall negotiate in good faith to agree on an alternative course of action that will reasonably allow HECO to comply with such regulation while fulfilling its minimum annual purchase volume commitment under Article 3, at a price and on other terms and conditions that are fair to both parties. Chevron shall have no obligation to Deliver LSFO meeting new specifications if it is not available for purchase from third parties and Chevron cannot manufacture such LSFO in existing facilities without substantial new capital investment. If HECO and Chevron do not agree on such an alternate course of action, then [---] To the extent HECO is unable to utilize fuel to be supplied by Chevron under this Contract, but [---], then purchases from Chevron may be reduced on any basis as equitable to Chevron as to HECO's other suppliers of similar fuel oil. Any adjustments in price pursuant to this Section 11.5 shall be governed by Section 11.6, except that the adjustments shall apply to all LSFO Delivered which meets the [---]. Section 11.6: Effective Date In the event of retroactive adjustments hereunder, the charge or credit to HECO shall be computed and billed to HECO as soon as practical after the adjustment is known. In the event of retroactive changes which cause adjustments hereunder after termination of this Contract, payment shall be made within fifteen (15) Days after receipt of written demand therefor by the other party. Section 11.7: [---] [---] ARTICLE 12: Effect of Suspension or Reduction Section 12.1: Notice of Suspension or Reduction In the event of any suspension or reduction of sales and Deliveries under Article 11, Chevron shall not be obligated to sell and HECO shall not be obligated to buy, after the period of suspension or reduction, the undelivered quantity of LSFO which normally would have been sold and Delivered hereunder during the period of suspension or reduction. 16 Section 12.2: Option to Terminate If sales and Deliveries are suspended under Article 11 for more than 180 Days, Chevron or HECO shall have the option while such suspension continues to terminate its obligations to the other party under this Contract on thirty (30) Days written notice to the other party. Section 12.3: Prompt Notices Any party which relies upon Article 11 shall give the other party prompt notice thereof specifying the anticipated amount and duration of any suspension or reduction of Deliveries. It shall also give prompt notice when it no longer expects to rely on Article 11 and Deliveries shall be reinstated subject to all conditions of this Contract, unless this Contract has been terminated previously under Section 12.2. Section 12.4: United States Currency Nothing in Article 11 shall relieve HECO of the obligation to pay in full in United States currency for the LSFO sold and Delivered hereunder and for other amounts due by HECO to Chevron under this Contract. Section 12.5: Substitute Suppliers While Deliveries are suspended or reduced by Chevron pursuant to Article 11, it shall not be a breach of this Contract for HECO to buy from a supplier other than Chevron the quantities of LSFO which Chevron does not Deliver. During this period of time there will be no minimum volume requirements. After any suspension or reduction has ended, minimum and maximum volume requirements of Article 3 for the annual period in which the suspension or reduction occurred will be reduced in proportion to the ratio of the number of Days within the annual period during which no suspension or reduction was in effect, to the number of Days within the annual period. ARTICLE 13: Waiver and Non-Assignability Section 13.1: Waiver Waiver by one party of the other's breach of any provision of this Contract shall not be deemed a waiver of any subsequent or continuing breach of such provisions or of the breach of any other provision or provisions hereof. Section 13.2: Non-Assignability This Contract shall not be assignable by either party without the written consent of the other, which shall not be unreasonably withheld, except that either party may assign this Contract to any Affiliate, provided that any such assignment shall not release that party from any of its obligations hereunder, and except that HECO may assign this Contract to the Trustee under its First Mortgage Bond Indentures. Chevron does not, by agreement to such an assignment, waive any right it may have to terminate this Contract for any breach hereof occurring at any time before or after any such assignment or release HECO of any obligations arising under this Contract after any such assignment. Following any such assignment, no further assignment may be made without the consent of Chevron. Section 13.3: Definitions In this Article 13 and Sections 11.2 and 11.7, "Affiliate" shall mean any corporation controlling, controlled by or under common control, with either Chevron or HECO. "Control" of a corporation shall mean ownership, directly or indirectly, or at least 50% of the voting shares of such corporation. 17 ARTICLE 14: Default If HECO or Chevron considers the other party to be in default of any obligation under this Contract, such party shall give the other party notice thereof. Such other party shall then have thirty (30) Days in which to remedy such default. If the default is not remedied, the other party may, without prejudice to any other right or remedy of such party in respect of such breach, terminate its obligations under this Contract, except for HECO's obligation to pay in full in United States currency for the LSFO sold and Delivered hereunder and for other amounts due by HECO to Chevron under this Contract, by forty-five (45) Days written notice to the party in breach. Any termination shall be without prejudice to accrued rights. All rights and remedies hereunder are independent of each other and election of one remedy shall not exclude another. In no event shall either party be liable for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise. ARTICLE 15: Conflicts of Interest Conflicts of interest related to this Contract are strictly prohibited. Except as otherwise expressly provided herein, neither party nor any director, employee or agent of a party shall give to or receive from any director, employee or agent of the other party any gift, entertainment or other favor of significant value, or any commission, fee or rebate. Likewise, neither party nor any director, employee or agent of a party shall enter into any business arrangement with any director, employee or agent of the other party (or any affiliate), unless such person is acting for and on behalf of the other party, without prior written notification thereof to the other party. In the event of any violation of this Article 15, including any violation occurring prior to the date of this Contract which resulted directly or indirectly in one party's consent to enter into this Contract with the other party, such party may, at its sole option, terminate this Contract at any time and, except for obligations to pay in full in United States currency for the outstanding payment obligations hereunder, shall be relieved of any further obligation under this Contract. Both parties agree to immediately notify the other of any known violation of this Article. ARTICLE 16: Applicable Law This Contract shall be construed in accordance with, and all disputes arising hereunder shall be determined in accordance with, the local law of the State of Hawaii, U.S.A. ARTICLE 17: Public Utility Commission Approval Section 17.1: Filing Requirements; HECO's Energy Cost Adjustment Clause This Contract is required to be filed with the Hawaii Public Utilities Commission ("PUC") for approval. If in the proceedings initiated as a result of the filing of this Contract, the PUC disapproves or fails to authorize the full recovery of the fuel costs incurred under this Contract through HECO's "Energy Cost Adjustment Clause", HECO may terminate this Contract by giving sixty (60) Days written notice to Chevron. Section 17.2: Use as a Public Utility. No use of the pipelines, facilities or equipment owned by Chevron and used in connection with this Contract shall be construed as having been dedicated by Chevron to a public use and it is hereby acknowledged by the parties that Chevron retains the exclusive right to determine who other than the parties to this Contract shall use said pipelines, facilities, and equipment. 18 ARTICLE 18: Miscellaneous Section 18.1: Headings Headings of the Articles and Sections are for convenient reference only and are not to be considered part of this Contract. Section 18.2: Entire Agreement This document contains the entire agreement between the parties covering the subject matter and cancels, as of the effective date hereof, all prior agreements of any kind between the parties covering such subject matter and any amendments thereto. There are no other agreements which constitute any part of the consideration for, or any condition to, either party's compliance with its obligations under this Contract. Section 18.3: Contract is Not an Asset This Contract shall not be deemed to be an asset in, and, at the option of a party, shall terminate in the event of any voluntary or involuntary receivership, bankruptcy or insolvency proceedings affecting the other party. Section 18.4: Notices Except as otherwise expressly provided herein, all notices shall be given in writing, by letter, facsimile or electronic mail to the following addresses, or such other address as the parties may designate by notice, and shall be deemed given upon receipt. Seller: Manager, Petroleum Coke, Heavy Fuels & Sulfur Chevron Products Company, A Division of Chevron U.S.A. Inc P.O. Box 7006 San Francisco, CA 94120-7006 Facsimile: (415) 894-1195 19 Buyer: Manager, Power Supply Services Department Hawaiian Electric Company, Inc. Box 2750 Honolulu, HI 96840-0001 Facsimile: (808) 543-4366 Section 18.5: Unenforceable Terms If any term or provision, or any part of any term or provision, of this Contract is held by any court or other competent authority to be illegal or unenforceable, the remaining terms, provisions, rights and obligations shall not be affected. Section 18.6: Successors and Assigns This Contract shall inure to the benefit of and be binding upon the parties hereto, their successors and permitted assigns. Section 18.7: Termination of Prior Agreement Effective as of the Effective Date of the Term hereunder, this Contract hereby supersedes that certain Low Sulfur Fuel Oil Supply Contract between the parties dated November 20, 1995, and all amendments thereto. 20 IN WITNESS WHEREOF, the parties hereto have executed this Low Sulfur Fuel Oil Supply Contract as of the Day and Year first herein above written. CHEVRON PRODUCTS COMPANY, HAWAIIAN ELECTRIC A DIVISION OF CHEVRON U.S.A. INC. COMPANY, INC. By /s/ Phillip H. Fisher By /s/ Edward Y. Hirata ---------------------- ----------------------- Phillip H. Fisher Edward Y. Hirata ----------------------- (Printed or Typed Name) Its Manager, Petroleum Coke Its Vice President, Regulatory Affairs Heavy Fuels & Sulfur ---------------------------------- By /s/ Marvin A. Hawthorne ------------------------ Marvin A. Hawthorne ------------------------ (Printed or Typed Name) Its Assistant Treasurer ------------------- 21 ADDENDUM NO. 1 ILLUSTRATIVE SCHEDULE OF PRICES ------------------------------- (Illustrative Product Price Calculation for September 1997) For the Monthly cumulative volume which is at or below the [---] maximum limit of Section 3.1 multiplied by the number of Days in the Month, the price of LSFO Delivered to meet the Nominated commitment of a Month shall be determined as follows: [---] Where P1 is equal to the billing price per physical barrel of LSFO Delivered to meet that portion of the Nominated commitment of a Month that is equal to or below the [---] maximum regardless of the actual Month Delivered, in U. S. dollars. I. LSWR INDEX = A market index for low sulfur fuel oil, defined as the [--], defined as follows: [---] [---] [---] (Price in USD per barrel) Date Low High Average ---- --- ---- ------- [---] [---] [---] [---] 22 [---] (Price in USD per barrel) Date Low High Average ---- --- ---- ------- [---] [---] [---] [---] [---] Average of the two assessments, [---] [---] = [---] [---] The value of the [---] shall be [---] under this Contract [---]. [---] 23 [---] (a) [---] ---- The average of [---] for all [---], during the period [---]. Date Low High Average ---- --- ---- ------- [---] [---] [---] [---] AVERAGE PRICE [---] (b) [---] --- Similarly, the average of [---] for [---]. Date Low High Average ---- --- ---- ------- [---] [---] [---] [---] 24 [---] AVERAGE PRICE [---] (c) [---] ---- Similarly, the average of the [---]. Date Low High Average ---- --- ---- ------- [---] [---] [---] [---] AVERAGE PRICE [---] (d) [---] ---- Similarly, the average of the [---] for [---]. Date Average ---- ------- [---] [---] 25 [---] AVERAGE PRICE [---] Average of the [---], [---] [---] = [---] [---] [---] = [---] II. [---] = [---]: (a) [---] 26 AFRA Worldscale Large Range 1 average New Worldscale Large Range 1 Publication Date Points April 1997 131.10 May 1997 141.30 June 1997 139.90 ------ Average 137.43 (b) The Worldscale 100 rate for voyages between Singapore and Barbers Point, Hawaii, applicable to the Year of the quarter defined in (a) above; expressed in New Worldscale rates, as published by Worldscale Associates (London Limited) in its New Worldwide Nominal Freight Scale (Worldscale); plus, New Worldscale 100 Rate between Singapore and Barbers Point effective January 1, 1997 = $10.11 PER METRIC TON (c) There shall be added to the multiplication product of (a) and (b) above, a fixed rate differential for SBT Tankers, if and as provided by Worldscale, with respect to the Additional Insurance Premiums for Basic ($500 Million) and Excess ($200 Million) coverage of Oil Pollution Liability Insurance on vessels carrying persistent oils to and from the U.S.A., consistent with a typical vessel as derived in Addendum No. 3 attached to this Contract. New Worldscale fixed rate differential for Additional Insurance Premiums for Oil Pollution Liability Insurance for SBT Tankers effective February 20, 1997 = $0.023 PER BARREL The FREIGHT rate will be expressed in U.S. dollars per barrel, using a conversion factor of 6.75 barrels ("bbls") per metric ton ("MT"). FREIGHT = {[(137.43 * $10.11/MT) / 100] / 6.75 bbls/MT} + ($0.023/bbl) = $ 2.081/BBL iii. LA BUNKER = A market index for industrial fuel oil, defined as the simple average of the high and low prices for Los Angeles Bunker C fuel as reported by the Platt's Oilgram Bunkerwire ("Platt's Bunkerwire") for all dates of publication during the period beginning the 21st of the second Month immediately preceding the Nominated Month of Delivery and ending the 20th Day of the Month immediately preceding the Nominated Month of Delivery.
Date Low High Average - ---- --- ---- ------- 07/21/97 $100.00 $104.00 $102.00 per Metric Ton 07/22/97 $ 95.00 $101.00 $98.00 per Metric Ton 07/23/97 $ 97.00 $100.00 $98.50 per Metric Ton 07/24/97 $ 97.00 $103.50 $100.25 per Metric Ton 07/25/97 $100.00 $104.00 $102.00 per Metric Ton 07/28/97 $100.00 $105.00 $102.50 per Metric Ton 07/29/97 $100.00 $105.00 $102.50 per Metric Ton 07/30/97 $101.00 $105.00 $103.00 per Metric Ton 07/31/97 $104.00 $108.00 $106.00 per Metric Ton
27 08/01/97 $103.00 $107.00 $105.00 per Metric Ton 08/04/97 $103.00 $107.00 $105.00 per Metric Ton 08/05/97 $103.00 $107.00 $105.00 per Metric Ton 08/06/97 $101.00 $104.00 $102.50 per Metric Ton 08/07/97 $101.00 $104.00 $102.50 per Metric Ton 08/08/97 $102.00 $105.00 $103.50 per Metric Ton 08/11/97 $ 97.00 $102.00 $99.50 per Metric Ton 08/12/97 $ 98.00 $102.00 $100.00 per Metric Ton 08/13/97 $ 93.00 $100.00 $96.50 per Metric Ton 08/14/97 $ 95.00 $100.00 $97.50 per Metric Ton 08/15/97 $ 97.00 $101.00 $99.00 per Metric Ton 08/18/97 $ 96.00 $ 99.00 $97.50 per Metric Ton 08/19/97 $ 93.00 $101.00 $97.00 per Metric Ton 08/20/97 $ 93.00 $ 98.00 $95.50 per Metric Ton
AVERAGE $100.902 PER METRIC TON The LA Bunker market index will be expressed in U.S. dollars per barrel, using a conversion factor of 6.368 barrels per metric ton. = ($100.902/MT)/(6.368 bbls/MT) LA BUNKER = $15.845/BBL iv. [---] = [---] v. BTU = The actual BTU content of each LSFO Delivery, pursuant to Section 7.2, expressed in MM BTU's per barrel and rounded to three decimal places. T = [---], the Hawaii General Excise Tax, the Hawaii Environmental Response Tax, [---] and any other tax properly imposed on the sale of LSFO pursuant to Section 5.3 herein. [---] [---] HGET = 4.166% of pre-HGET price Hawaii Environmental Response Tax applied after HGET and Hawaii Use Tax = $0.05 per barrel 28 A. PRODUCT PRICE COMPUTATION FOR [---] DELIVERY WITH STANDARD BTU CONTENT OF 6.2 MM BTU PER BARREL [---] = [---] = [---] = [---] = [---] where T = sum of [---] = [---] HGET = 4.166% of LSWR Index + [---] = [---] [---] = [---] Hawaii Environmental Response Tax = $0.0500/bbl ----------- [---]
[---] = [---] = [---] PER BARREL B. PRODUCT PRICE COMPUTATION FOR [---] DELIVERY WITH BTU CONTENT OTHER THAN STANDARD 6.2 MM BTU PER BARREL [---] = [---] IF BTU IS 6.275 MM BTU PER BARREL, THEN COMPUTATION IS AS FOLLOWS: = [---] = [---] = [---] = [---] where T = sum of [---] = [---] HGET = 4.166% of LSWR Index + [---] = [---] [---]) = [---] Hawaii Environmental Response Tax = $0.0500/bbl ----------- [---] 29 [---] = [---] = [---] PER BARREL For the Monthly cumulative volume which exceeds the [---] maximum limit of Section 3.1 multiplied by the number of Days in the Month, the price of LSFO Delivered to meet the Nominated commitment of a Month shall be determined as follows: [---] Where P2 equals the billing price per physical barrel of LSFO Delivered to meet that portion of the Nominated commitment of a Month that exceeds the [---] maximum, regardless of the actual Month Delivered , in U.S. dollars. iv. [---] [---] C. PRODUCT PRICE COMPUTATION FOR [---] DELIVERY WITH STANDARD BTU CONTENT OF 6.2 MM BTU PER BARREL [---] = [---] = [---] = [---] = [---] where T = sum of [---] = [---] HGET = 4.166% of LSWR Index + [---] = [---] [---] = [---] Hawaii Environmental Response Tax = $0.0500/bbl ----------- [---] [---] = [---] = [---] PER BARREL D. PRODUCT PRICE COMPUTATION FOR [---] DELIVERY WITH BTU CONTENT OTHER THAN STANDARD 6.2 MM BTU PER BARREL [---] = [---] 30 IF BTU IS 6.275 MM BTU PER BARREL, THEN COMPUTATION IS AS FOLLOWS: = [---] = [---] = [---] where T = sum of [---] = [---] HGET = 4.166% of LSWR Index +[---] = [---] [---] = [---] Hawaii Environmental Response Tax = $0.0500/bbl ----------- [---] [---] = [---] = [---] PER BARREL Note on items as they appear on invoices - ---------------------------------------- Actual invoices for sales and Deliveries of LSFO may include additional charges for pipeline throughput and pipeline displacement stock incurred under the Facilities and Operating Contract by and between the same parties and for which certain taxes, such as the HGET and [---], are consolidated with the corresponding tax charged on the sale of LSFO. Actual invoices for sales and Deliveries of LSFO may also contain comments which reference the measured BTU content of the invoiced Delivery, calculated LSFO price per unit before BTU content adjustment and per unit amount of pipeline throughput charge, if any. 31 [ LONDON TANKER BROKERS' PANEL LIMITED letterhead ] 1st June 1997 Hawaiian Electric Company Inc P.O. Box 2750 Honolulu HI 96840-0001 Hawaii Attn: Mr. J.C. Aicken Dir. Fuel Resource Dear Sirs AFRA The results of the monthly average freight rate assessments made over the period 16th April 1997/15th May 1997 are as follows: MEDIUM RANGE ( 25,000/ 44,999 (LONG) TONS) WORLDSCALE 175.8 LARGE RANGE 1 ( 45,000/ 79,999 (LONG) TONS) WORLDSCALE 139.9 LARGE RANGE 2 ( 80,000/159,999 (LONG) TONS) WORLDSCALE 100.8 VLCC (160,000/319,999 (LONG) TONS) WORLDSCALE 57.9 ULCC (320,000/549,999 (LONG) TONS) WORLDSCALE 49.4 We would remind you that, in accordance with the agreement between us, these assessments are provided to you on the condition they will not be reproduced, supplied or disclosed to any other person. Your faithfully LONDON TANKER BROKERS' PANEL LIMITED /s/ R.W. Porter R.W. Porter Managing Director 32 ADDENDUM NO. 2 QUALITY ADJUSTMENTS Section 1: Adjustments to Quality of HECO's Oil In the event HECO desires to adjust the quality of its LSWR in its BPTF tanks to meet the specifications of Article 4 and provided that the LSWR meets the qualities of Section 2(a), Chevron shall supply the necessary blend stock, quality analysis and other services necessary to complete the adjustment. HECO will provide LSWR of the quality generally available in the Singapore market. Section 2: Quality and Quantity Determination (a) HECO shall give Chevron 70 Days advance notice of the quantity and quality of any LSWR for which it desires an adjustment. The LSWR shall meet the following viscosity-sulfur relationship:
LSWR Viscosity - cst at 122F ---------------------------------------------- Maximum For Pipeline Delivery LSWR Sulfur ------------------------------------ Wt % Minimum To Waiau/Iwilei To Kahe ----------- ------- --------------- ------- [---] [---] [---] [---]
(b) The specific quality and quantity of the LSWR in HECO's tankage before adjustment shall be determined in accordance with Sections 7.2, 7.3 and 7.4, except that the samples shall be taken and gauging shall be done on HECO tanks at BPTF prior to Chevron's adjustment of quality. (c) The specific quality and quantity of the LSWR in HECO's tankage after adjustment shall be determined in accordance with Sections 7.2, 7.3 and 7.4, except that the samples shall be taken and gauging shall be done on HECO tanks at BPTF after Chevron has completed the adjustment of quality. Section 3: Compensation (a) HECO shall purchase from Chevron whatever blend stock that is required for Chevron to complete the adjustment. The price of the oil used for adjustment shall be the [---]; otherwise, [---]. (b) HECO shall [---] and each[---], provided however that [---]. 33 Section 4: Invoices Invoices for the above will be submitted by Chevron and paid by HECO in accordance with Article l0 of this Contract. Section 5: Illustrative Schedule of Prices and Fees (a) Price of Blend Stock, [---]. Basis: 1) [---] = [---] 2) [---] = [---] 3) TF = Taxes currently in effect is the Hawaii General Excise Tax of 4.166% of pre-tax price, [---], Hawaii Environmental Response Tax of $0.05 per barrel, applied after the HGET and [---]. PRICE OF BLEND STOCK = [---] = [---] = [---] where T = sum of HGET = 4.166% of [---] = 0.04166*[---] = [---] [---] = [---] Hawaii Environmental Response Tax = $0.0500/bbl ----------- [---] [---] (b) [---] Basis: 1) HECO provides 250,000 barrels of LSWR 2) Chevron provides 25,000 barrels of Blend Stock 3) [---] 4) Tax currently in effect is the Hawaii General Excise Tax of 4.166% of pre-tax price. [---] = [---] = [---] 34 = [---] where T = sum of HGET = 4.166% of Pre-HGET[---] = 0.04166*[---] = [---] [---] 35 ADDENDUM NO. 3 RECOVERY OF WORLDSCALE FIXED DIFFERENTIAL FOR OIL POLLUTION LIABILITY INSURANCE The price formula for LSFO in Section 5.1 of the Contract includes the component "FREIGHT" that refers to a Worldscale 100 rate published in the current edition of Worldscale which incorporates a Fixed Rate Differential to reflect the cost of additional premiums for Oil Spill Liability Insurance on vessels carrying Persistent Oils applicable to voyages having a destination in the U.S.A.. Chevron acknowledges that any vessel used to transport LSFO that is sold and purchased under the Contract, including its components and the crude oil from which the LSFO is derived, shall be required to possess oil spill liability insurance coverage in the amount of $700 million. The price formula component "FREIGHT" refers to an AFRA rate applicable to a vessel size classification of LR-1, or Large Range 1. This vessel classification references tanker vessels ranging in size from 45,000 Long Tons Deadweight to 79,999 Long tons Deadweight. In order to derive an approximation of the relationship between Deadweight and Gross Registered Tons for a nominal vessel consistent with the mathematical average of this vessel size classification, the average of two vessels that have transported LSFO or its components to Hawaii in the recent past that are approximately equal to the midpoint of the LR-1 range were referenced. These vessels are described as follows: Name Deadweight Tons (DWT) Gross Registered Tons (GRT) ---- --------------------- --------------------------- M/T London Spirit 62,097 36,865 M/T London Victory 62,156 36,865 ------ ------ Average 62,127 36,865 The Worldscale 100 rate that is to be included in the computation of FREIGHT is to be derived in the same manner as the following illustrative example calculations: 1. The Worldscale 100 rate in effect from February 20, 1997, shall include a Fixed Rate Differential for SBT Tankers which shall be the sum of a. and b. and shall be computed as follows: a. Fixed Rate Differential with respect to the additional insurance premiums For Basic $500 million coverage of Oil Pollution Liability Insurance on vessels carrying Persistent Oils to and from the U.S.A. Fixed Rate Differential = $0.16/GRT X 36,865 GRT ---------------------- 62,127 = $0.095 per Metric Ton For illustrative purposes, this rate may be expressed in U.S. dollars per barrel as follows: = $0.095/Metric Ton ----------------- 6.75 barrels/Metric Ton = $0.014/barrel b. Fixed Rate Differential with respect to the additional insurance premiums for Excess $200 million coverage of Oil Pollution Liability Insurance on vessels carrying Persistent Oils to and from the U.S.A. 36 Fixed Rate Differential = .875 X $0.1205/GRT X 36,865 GRT ------------------------------- 62,127 = $0.063 per Metric Ton For illustrative purposes, this rate may be expressed in U.S. dollars per barrel as follows: = $0.063/Metric Ton ----------------- 6.75 barrels/Metric Ton = $0.009/barrel The sum of which shall equal $0.158 per Metric Ton, or $0.023 expressed in U.S. dollars per barrel. 2. The AFRA Worldscale Points and their related Worldscale 100 rate applicable for each calendar quarter are based upon an average of the three Monthly AFRA publications in the calendar quarter immediately preceding the calendar quarter of the Nominated Month of Delivery. Therefore the relevant Fixed Rate Differentials computed above should be applied (to a Year of 365 Days) as follows: A. With respect to volumes of LSFO Nominated during the three (3) Months of the quarter following a change in the published rate (typically February of each Year), the relevant Fixed Rate Differential to be included in the computation of the price component "FREIGHT" shall be the sum of: 50/90 multiplied by the Fixed Rate Differential computed prior to the rate change: and 40/90 multiplied by the Fixed Rate Differential computed using the revised rate: B. With respect to volumes of LSFO Nominated for subsequent Months, and continuing for so long as the Fixed Rate Differentials as set forth in Worldscale Circular shall be applicable, the relevant Fixed Rate Differential to be included in the computation of the price component "FREIGHT" shall be as derived in part 1 above. 37 ADDENDUM NO. 4 LSFO CONTRACT Page 1 of 3 TRANSITION FROM REFINERY TO HECO BPTF LSFO TITLE TRANSFER POINT A (diagram) ADDENDUM NO. 4 LSFO CONTRACT Page 2 of 3 TRANSITION FROM REFINERY TO KAHE PIPELINE LSFO TITLE TRANSFER POINT B (diagram) ADDENDUM NO. 4 LSFO CONTRACT Page 3 of 3 TRANSITION FROM REFINERY TO BLACK OIL PIPELINE LSFO TITLE TRANSFER POINTS (diagram) EX-10.9 10 FUEL SUPPLY CONTRACT BTWN THE COMPANIES HECO Exhibit 10.9 ----------------- INTER-ISLAND INDUSTRIAL FUEL OIL AND DIESEL FUEL SUPPLY CONTRACT By and Between CHEVRON PRODUCTS COMPANY, A DIVISION OF CHEVRON U.S.A. INC and HAWAIIAN ELECTRIC COMPANY, INC.; MAUI ELECTRIC COMPANY, LTD.; HAWAII ELECTRIC LIGHT CO., INC.; HAWAIIAN TUG & BARGE CORP.; and YOUNG BROTHERS, LIMITED. * * * * * * * * * * * * * * * TABLE OF CONTENTS
ARTICLE PAGE - ------- ---- ARTICLE I: Definitions 1 ARTICLE 2: Term 4 ARTICLE 3: Quantity 4 Section 3.1: Minimum and Maximum Annual Quantities 4 Section 3.2: Forecast 5 Section 3.3: Ratability 6 Section 3.4: Effect of Purchase Power Agreements (PPA) 6 ARTICLE 4: Quality 7 Section 4.1: CIFO Specifications 7 Section 4.2: Diesel Specifications 7 Section 4.3: Jet Fuel Grade 7 Section 4.4: No Warranty of Merchantability or Fitness 8 ARTICLE 5: Price, BTU Determination 8 Section 5.1: Diesel, CIFO and Jet Prices 8 Section 5.2: Determination of Source of Raw Materials 8 Section 5.3: Reimbursement of All Taxes, Assessments and Levies 10 Section 5.4 Determination of BTU Content For Diesel 11 Section 5.5: Determination of BTU Content For CIFO 11 Section 5.6: Dispute 11 Section 5.7: Rounding of Prices 11 Section 5.8: Successor Publications 12 ARTICLE 6: Deliveries 12 Section 6.1: Delivery of Diesel and CIFO to MECO and HELCO 12 Section 6.2: Delivery of Diesel to HT&B and YB 13 Section 6.3: Delivery of Diesel to HECO 13 Section 6.4: Delivery of Jet to MECO and HELCO 13 Section 6.5: Chevron's Delivery of Diesel to Molokai, Kahului, Maui, Hilo, Hawaii and Kawaihae, Hawaii 13 Section 6.6: Title and Risk of Loss 13 Section 6.7: Notice of Delivery 14 ARTICLE 7: Determination Of Quality 14 Section 7.1: Sampling Procedures 14 Section 7.2: Quality Disputes 15 Section 7.3: Impact of Less Than Quality Product 15 ARTICLE 8: Measurement Of Quantity 16 Section 8.1: Determination of Quantity 16 Section 8.2 Determination of Quantities at HDT 16 Section 8.3 Quantity Dispute 16 ARTICLE 9: Invoicing and Payment 17 Section 9.1: Invoices 17 Section 9.2: Payment Terms 17 Section 9.3: Method of Payment 17 ARTICLE 10: Chevron's Facilities On Oahu 18 ARTICLE 11: Chevron's Facilities On Maui And Hawaii 19 Section 11.1: Use of Chevron Storage and Handling Facilities 19 Section 11.2: Barge Schedule Notification 19 Section 11.3 Loaded Samples 20 Section 11.4 Coast Guard Dock Watch Requirements 20 Section 11.5: Care, Custody and Control of Received Oil 20
ii Section 11.6: Determination of Quality of Received Oil at Unloading 21 Section 11.7 Determination of Quantity of Received Oil and Oil at Time of Custody Transfer 21 Section 11.8 Commingle Product 22 Section 11.9 Transfer Notification From Kahului and Hilo 22 Section 11.10 Custody of Returned Fuel Oil 22 Section 11.11 Custody of Returned Diesel 22 Section 11.12 Return Oil Quantities 23 Section 11.13 Transfer of Returned Oil 23 Section 11.14 Terminaling and Handling Fees 23 ARTICLE 12: Contingencies 24 Section 12.1: Definition of Contingency 24 Section 12.2: Obligation to Supply Product 25 Section 12.3: Obligation to Purchase Product 25 Section 12.4: Price Determination Prevention 25 Section 12.5: Governmental Regulation Requirements 25 Section 12.6: Chevron's Obligations Under Contract 25 ARTICLE 13: Effect Of Suspension Or Reduction 26 Section 13.1: Event of Suspension 26 Section 13.2: Suspension For More Than 180 Days 26 Section 13.3: Notification of Suspension 26 Section 13.4: Obligation to Pay In Full 26 Section 13.5 Suspension Not A Breach Of Contract 26 ARTICLE 14 Waiver And Nonassignability 26 Section 14.1: Waiver By One Party 26 Section 14.2: Assignability of Contract 27 ARTICLE 15 Conflict Of Interest 27 ARTICLE 16: Default 27 ARTICLE 17: Applicable Law 28 ARTICLE 18: Indemnity 28 Section 18.1: Buyer Held Harmless for General Indemnity when title and risk of loss is with Chevron 28 Section 18.2: Buyer Held Harmless for Releases to the Environment when title and risk of loss is with Chevron 28 Section 18.3 Chevron Held Harmless for General Indemnity when title and risk of loss is with Buyer 28 Section 18.4: Chevron Held Harmless for Releases to the Environment when title and risk of loss is with Buyer 29 ARTICLE 19: Public Utilities Commission 29 Section 19.1: Filing Requirements; Buyers Energy Cost Adjustment Clause 29 Section 19.2: Decision and Order Impairing Chevron 29 Section 19.3 Use as a Public Utility 29 ARTICLE 20: Insurance 30 Section 20.1: Requirements 30 Section 20.2: Change of Insurance Notification 30 Section 20.3: Certificate of Insurance From Subsequent Buyers and Carriers 30 Section 20.4: Obtaining Insurance Documents 31 Section 20.5: Terminaling and Handling Fees Insurance Exclusion 31 ARTICLE 21: Safety And Terminal Protection 31 Section 21.1: Operating and Safety Regulations 31 Section 21.2: Right To Refuse Acceptance 31 ARTICLE 22: Pollution Mitigation 31 Section 22.1: Responsibility To Mitigate 31 Section 22.2: Cooperation With Chevron's Measures 32
iii ARTICLE 23: Miscellaneous 32 Section 23.1: Heading of Articles and Sections 32 Section 23.2: Content of Document 32 Section 23.3: Notification 32 Section 23.4 Court Rulings 33 Section 23.5: Benefit of And Binding 33 Section 23.6: Effective Date and Supersedence 33 ADDENDUM No. 1 Illustrative Schedule of Prices 36 ADDENDUM No. 2 Quality Control Samples Summary and Schematic of Sample Locations 46 ADDENDUM No. 3 [---] 49
iv INTER-ISLAND INDUSTRIAL FUEL OIL AND DIESEL FUEL SUPPLY CONTRACT ---------------------------------------------------------------- THIS CONTRACT, dated as of Nov. 14, 1997, by and between CHEVRON PRODUCTS COMPANY, A DIVISION OF CHEVRON U.S.A. INC a Pennsylvania corporation ("Chevron"), and HAWAIIAN ELECTRIC COMPANY, INC.; MAUI ELECTRIC COMPANY, LTD.; HAWAII ELECTRIC LIGHT CO., INC.; HAWAIIAN TUG & BARGE CORP.; and YOUNG BROTHERS, LIMITED, each a Hawaii corporation (collectively referred to as "Buyers" and individually referred to as "Buyer" herein unless otherwise indicated). WHEREAS, Chevron is a supplier of petroleum fuels with terminal and Refinery facilities in Hawaii. WHEREAS, Buyers are engaged in various business activities: HECO, HELCO, and MECO are utilities engaged in the generation, purchase and sale of electricity in Hawaii; HT&B is a tug and barge company; YB is a barge company engaged in general marine transportation. NOW, therefore, the parties agree as follows: ARTICLE I DEFINITIONS ----------- Except where otherwise indicated, the following definitions shall apply throughout this Contract: 1. "API" or "API Gravity" means the American Petroleum Institutes standard measurement of gravity for petroleum products. 2. "ASTM" means the American Society for Testing and Materials whose standards are utilized in this Contract with respect to fuel specifications, quantitative measurements, sampling and testing. 3. "Affiliate", except where otherwise expressly provided, means a corporation controlling, controlled by or under common control with Chevron or Buyer, as the case may be. 4. [---] 5. "barrel" means 42 American bulk gallons at 60 degrees Fahrenheit 6. "Black Oil Pipeline" means Chevron's 8 inch black oil distribution pipeline between Chevron's Refinery and HMT with interconnections to HECO's Waiau electric generating station and HECO's Iwilei petroleum storage facility. 7. "BPH" means barrels per hour, a unit of measure of the rate of the physical transfer or movement of petroleum products. 8. "BTU" and "BTU content" means British Thermal Unit and refers to the standard assessment of a fuel's gross heating value or gross heat content. 9. "Buyer's Barbers Point Storage Facilities" means Buyer's bulk petroleum receiving, storage and distribution facilities located in the Barbers Point area of Oahu, located in Campbell Estate Industrial Park, Kapolei, Hawaii. 1 10. [---] means [---] 11. [---] means [---] 12. "Carrier" means Buyer's Nominated Barge or designated trucking company. 13. "Certificate of Quality" means the means the formal document recording the Chevron laboratory determinations of the quality and BTU content of a particular sample which represents a specific Delivery, said laboratory determinations having been performed in accordance with the standard test methods described in Article 4. 14. "Certificate of Quantity" means the document issued by the Independent Inspector verifying the measurements and quantities of oil delivered to Buyer as determined under Article VIII. 15. [---] means [---] 16. "Chevron's Terminal" means Chevron's bulk petroleum receiving, storage and distribution facility used to Deliver Oil to a respective Buyer's Nominated Barge. 17. "CIFO" means Chevron Industrial Fuel Oil No. 6 as per Section 4.1. 18. "Contingency" means an act or event specified in Section 12.1 19. "Contract" means this Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract, between Chevron and HECO, MECO,HELCO, HTB & YB, the term of which commences January 1, 1998. 20. "Day" or "Days" means a calendar day of 24 hours 21. "Deliver, Delivery, Deliveries, or Delivered" refers to the Oil or Jet sold by Chevron and purchased by Buyer. 22. "Diesel" means Chevron Diesel Fuel No. 2 per Section 4.2. 23. "diesel" means either Chevron Diesel Fuel No. 2 or a third party diesel fuel similar to Chevron Diesel Fuel No. 2. 24. "Effective Date" means, for the purposes of this Contract, January 1, 1998 25. "Extension" means successive 12-Month periods in the term of this Contract in addition to and after the initial term of this Contract which is through December 31, 2004, each Extension beginning January 1. 26. "Fuel Oil" means either Chevron Industrial Fuel Oil No. 6 or third party industrial fuel oil similar to Chevron Industrial Fuel Oil No. 6. 27. "G.S.V." means gross standard volume in U.S. barrels or in U.S. gallons at 60 degrees Fahrenheit. 28. "gallon" means a United States gallon of 231 cubic inches at 60 degrees Fahrenheit 2 29. "HDT" means Chevron's Honolulu Distribution Terminal at Honolulu Harbor Pier 35. 30. "HMT" means Chevron's Honolulu Marine Terminal at Honolulu Harbor Piers 30 and 31. 31. "HT&B" means Hawaiian Tug & Barge Corp., which operates a tug and barge fleet. 32. "HECO" means Hawaiian Electric Company, Inc., which has electrical generating facilities on the island of Oahu. 33. "HELCO" means Hawaii Electric Light Co., Inc., which has electrical generating facilities on the island of Hawaii. 34. "Independent Inspector" means a qualified third-party petroleum inspection contractor acceptable to both Chevron and Buyer providing petroleum sampling, measurement and oversight over Delivery operations. 35. [---] 36. "Jet" means Chevron Jet Fuel per Section 4.3. 37. "jet" means either Chevron Jet Fuel or a third party jet fuel similar to Chevron Jet Fuel. 38. "Kaunakakai Terminal" means a third party Marine Terminal at Kaunakakai Harbor, Molokai. 39. "Loaded", when used in conjunction with Oil or Jet, refers to Buyer's Delivered Oil or Jet mixed with any cargo retains within Buyer's Nominated Barge. 40. "loaded", when used in conjunction with Oil or Jet, refers to Buyer's Delivered Oil or Jet or a third party's delivered oil or jet mixed with any cargo retains within Buyer's Nominated Barge. 41. "MECO" means Maui Electric Company, Ltd., which has electrical generating facilities on the islands of Maui, Lanai and Molokai. For the purposes of this Contract "MECO" refers to the operations on the island of Maui only. 42. "MECO-Molokai" means the Molokai Division of Maui Electric Company, Ltd., which has electrical generation facilities on the island of Molokai. 43. "Month" means a calendar month. 44. "Nominated Barge" means a petroleum tank barge or vessel designated by Buyer to receive Oil Delivered by Chevron when the defined term is used in conjunction with Buyer, as in "Buyer's Nominated Barge"; and means a petroleum tank barge or vessel designated by Chevron to Deliver Diesel when the defined term is used in conjunction with Chevron, as in "Chevron's Nominated Barge." 45. "Nominated Terminal" means a bulk petroleum receiving, storage and distribution facility designated by a respective Buyer to receive Diesel Delivered by Chevron at Kahului, Maui, Hilo, Hawaii or Kawaihae, Hawaii, when used in conjunction with "Buyer's" as in "Buyer's Nominated Terminal." 3 46. "Nominated Vessel" means a petroleum tank vessel designated by Buyer to deliver or receive Buyer's Petroleum Products when he defined term is used in conjunction with Buyer, as in "Buyer's Nominated Vessel." 47. "Oahu P/L" means Chevron's 8 inch white oil distribution pipeline between Chevron's Refinery and HMT with an interconnection to HECO's Waiau electric generating station. 48. "Oil" means either Chevron Industrial Fuel Oil No. 6 or Chevron Diesel Fuel No. 2. 49. "oil" means Chevron Industrial Fuel Oil No. 6, Chevron Diesel Fuel No. 2, a third party industrial fuel oil similar to Chevron Industrial Fuel Oil No. 6, or a third party diesel fuel similar to Chevron Diesel Fuel Oil No. 2. 50. "Received", when used in conjunction with Oil or Jet, refers to Buyer's Oil or Jet to be received by Chevron into its terminals on Maui and Hawaii. "Received", when used in conjunction with oil, means a third party industrial fuel oil similar to Chevron Industrial Fuel Oil No. 6 or a third party diesel fuel similar to Chevron Diesel Fuel Oil No. 2 received by Chevron into its terminals on Maui and Hawaii from Buyer's Nominated Barge. 51. "Returned", when used in conjunction with Oil, oil or Jet, refers to the Oil, oil or Jet returned by Chevron from its terminals on Maui and Hawaii to Buyer for Buyer's use in Buyer's electrical generating facilities. 52. "Refinery" means Chevron's oil refining and related facilities located in the Barbers Point area of Oahu, in Campbell Estate Industrial Park, Kapolei Hawaii. 53. "YB" means Young Brothers, Limited, which operates a general marine transportation business. 54. "Year" means a calendar year. ARTICLE II TERM ---- The term of this Contract shall be from January 1, 1998 through December 31, 2004, and shall continue thereafter for Extensions beginning each successive January 1, unless Buyer or Chevron gives written notice of termination at least 120 Days before the beginning of an Extension. ARTICLE III QUANTITY -------- Section 3.1: Minimum And Maximum Annual Quantities During each Year this Contract is in effect, Chevron shall sell and Deliver to Buyer, and Buyer shall purchase and receive from Chevron no less than the minimum nor more than the maximum annual quantity, except as otherwise expressly provided herein, of CIFO, Diesel and Jet as set out below for each Buyer and described in Article IV, from the HMT, the HDT, the Oahu P/L, Chevron-Nominated Barge at Kahului, Maui, Chevron-Nominated Barge at Hilo, Hawaii, Chevron- Nominated Barge at Kawaihae, Hawaii or a Chevron-Nominated Barge at the Kaunakakai Terminal, as described in Article VI. The purchase of CIFO and Diesel shall be at a reasonably uniform rate. Chevron shall sell and Deliver to Buyer and Buyer shall purchase and receive from Chevron CIFO and Diesel [---] 4
All quantities shall be stated in annual physical barrels. I. DIESEL 1998 MINIMUM MAXIMUM ---- ------- ------- HECO [---] [---] HELCO [---] [---] MECO [---] [---] MECO-Molokai [---] [---] HT&B and YB [---] [---] TOTAL [---] [---] 1999-2004 --------- HECO [---] [---] HELCO [---] [---] MECO [---] [---] MECO-Molokai [---] [---] HT&B and YB [---] [---] TOTAL [---] [---] II. CIFO 1998- MINIMUM MAXIMUM ----- ------- ------- HELCO [---] [---] MECO [---] [---] TOTAL [---] [---] 1999-2004 --------- HELCO [---] [---] MECO [---] [---] TOTAL [---] [---] III. JET 1998-2004 MINIMUM MAXIMUM ----------- ------- ------- HELCO 0 [---] MECO 0 [---] TOTAL 0 [---]
Upon prior written notice to Chevron, the respective Buyers may modify their individual minimum and maximum annual physical quantities of Fuel Oil and Diesel provided that the total annual minimum and maximum annual physical quantities of CIFO, Diesel and Jet which shall be sold and Delivered by Chevron and purchased and received by Buyers collectively, shall fall within the limits specified in this Section 3.1 The minimum and maximum annual volumes of CIFO, Diesel and Jet to be sold and Delivered by Chevron and purchased and received by Buyer shown above for Year 2004 shall also apply to any Extensions, unless mutually agreed otherwise . Subject to availability, Chevron will sell and Deliver and Buyer shall purchase and receive such additional volumes as are mutually agreed. Section 3.2: Forecast Prior to the [---] Day of each Month, Buyer shall give Chevron a forecast of each respective Buyer's Monthly lifting of Diesel, CIFO and Jet for each of the coming three Months. In addition and also prior to the [---] Day of each Month, Buyer shall provide Chevron a schedule of Buyer's Nominated Barge loadings for the following Month. Such schedule shall show the expected place, date and time of the commencement of the vessel's loading. 5 Each Buyer should update seller of any changes as they might occur. Buyer recognizes the importance to Chevron of reasonably accurate lifting forecasts because of Chevron's need to plan production and shipments. Section 3.3: Ratability Buyers' purchases and Chevron's Deliveries of CIFO and Diesel will occur in a reasonably ratable fashion throughout the Year. At the end of each Year, Buyers' CIFO and Diesel purchase performance will each be reviewed by Chevron for ratability. i. If upon review Buyers' volumes in any calendar quarter were [---] of the total minimum annual liftings for either CIFO or Diesel, [---] ii. If upon review Buyers' volumes in any calendar quarter were [---] of the total maximum annual liftings for either CIFO or Diesel, [---] iii. Chevron understands Buyers' Jet purchases will occur in a non-ratable fashion and no ratability premiums will be applied to Jet purchases Section 3.4: Effect of Purchase Power Agreements (PPA) If due to the commencement of commercial operation of a generating plant or generating plants supplying power to HELCO or MECO, or an increase in firm capacity output under contracts existing as of the Effective Date, in aggregate under one or more Purchase Power Agreements ("PPA") firm capacity in excess of twenty (20) megawatts (gross basis), HELCO's or MECO's anticipated demands for CIFO or Diesel results in Buyers' aggregate anticipated demand from Chevron on an annual basis during any Year during the term of this Contract for CIFO or Diesel to decline below the Buyers' aggregate minimum annual quantities set forth in Section 3.1 (the difference between Buyers' aggregate anticipated demand from Chevron and Buyers' aggregate minimum annual quantities being the "Fuel Requirement Reduction"), then Buyers shall give written notice to Chevron of Buyers' request that Chevron accept the Fuel Requirement Reduction. Chevron shall have fifteen (15) Days within which to accept Buyers' Fuel Requirement Reduction or reject Buyers' Fuel Requirement Reduction and request a renegotiation of HELCO's or MECO's, whichever is the affected Buyer, minimum annual quantities of CIFO or Diesel in Section 3.1 and/or the price of HELCO's or MECO's, whichever is the affected Buyer, CIFO or Diesel in Section 5.1 of this Contract. If Chevron either accepts Buyers' Fuel Requirement Reduction or fails to give any notice of acceptance or rejection within said fifteen (15) Day period, then Buyers' Fuel Requirement Reduction shall be deemed to have been accepted by Chevron and shall become effective upon the expiration of said fifteen (15) Day period. Should Chevron reject Buyers' request for the Fuel Requirement Reduction then, within sixty (60) Days following the date of any such rejection notice, if the parties are unable to renegotiate HELCO's or MECO's, whichever is the affected Buyer, minimum annual quantities and/or the price for HELCO's or MECO's, whichever is the affected Buyer, CIFO or Diesel, in a manner mutually satisfactory to both Chevron and the affected Buyer, then Chevron, upon thirty (30) Days written notice, may elect to terminate its obligation to sell CIFO or Diesel to the affected Buyer under this Contract. Until Buyers' request for a Fuel Reduction Requirement (i) is accepted or deemed accepted by Chevron, (ii) a mutually satisfactory provision for the affected Buyer's minimum annual quantities and/or the affected Buyer's price for CIFO or Diesel, is renegotiated, or (iii) the obligation to sell CIFO or Diesel to HELCO or MECO, whichever is the affected Buyer, under this Contract is terminated in accordance with this Section 3.4, the terms and conditions of this Contract shall be and remain in full force and effect. 6 Notwithstanding any item to the contrary herein, any reduction in Buyers' aggregated demand suppliers as a result of PPA's, shall be ratably allocated among all Buyers' suppliers and/or sellers on basis of actual sales from each supplier and/or seller over the immediately preceeding Year . Any reduction in Chevron's minimum annual quantities as a result of PPA's shall also identically reduce [---] ARTICLE IV QUALITY ------- Section 4.1: CIFO Specifications The CIFO to be supplied hereunder shall be Chevron's regular commercial grade of Chevron Industrial Fuel Oil No. 6, having the following specifications:
ASTM Item Specifications Test Method - ---------------------------- ------------------ --------------------- Gravity @ 60 degrees F, API 6.5 min. D1298 or D4052-86 Flash, degrees F 150 min. D93 Viscosity, SSF @ 122 degrees F 179 min., 226 max. D445/D2161 Pour Point, degrees F 55 max. D97 Sulfur, % Wt. 2.00 max. D1552, D2622 or D4294 Sediment & Water, % Vol. 0.5 max. D1796 BTU content *, MM BTU/BBL 6.0 D240 Vanadium **, PPM wt. 100 D5863 Nitrogen ***, PPM wt. 6500 D5762 or D4629
* Typical Value is 6.3 MM BTU/bbl, value is typical; it is not guaranteed. ** Typical Value is shown, value is not a specification limit. *** Typical Value is shown, value is not a specification limit. Section 4.2: Diesel Specifications The Diesel to be supplied hereunder shall be similar to Chevron's regular commercial grade of Chevron Diesel Fuel No. 2 and have the following specifications:
Specification Test Item Units Limits Method - --------------------------- ------------- ------------------- ------------------ Gravity @ 60 degrees F degrees API, 30.0 min., .88 max. D1298 or D4052-86 Specific Viscosity @ 100 DF SSU 32.3 - 40.0 D445, D2161 BTU content * MM BTU/BBL 5.84 Calculated or D240 Heat Value, Net MM BTU/BBL Report Calculated or D240 Flash Point, PM degrees F 150 min. D93 Pour Point * degrees F 35 D97 Ash PPM, wt. 100 max. D482 Cetane Index 40 min. D4737 Carbon Residue, 10% Residuum %, wt. 0.35 max. D524 Sediment & Water %, vol. 0.05 max. D1796 Sulfur %, wt. 0.40 max. D1552, D2622 or D4294 Distillation 90% Recovered degrees F 540 - 650 D86 Sodium+Potassium PPM, wt. 0.5 max. D3605 Solium+Potassium+Lithium PPM, wt. Report D3605 Vanadium ** PPM, wt. 0.8 D3605
7 Nitrogen *** PPM, wt. 120 D4629 or D5762
* Chevron does not provide specifications on these items. Values are typical; they are not guaranteed. ** Typical value is shown, value is not a specification limit. *** Typical value is shown, value is not a specification limit. Section 4.3: Jet Fuel Grade The Jet to be supplied hereunder shall be similar to Chevron's regular commercial grade of Chevron Jet Fuel; provided, however, Buyer agrees that the Jet shall be used exclusively as stationary combustion turbine start-up fuel. Any other use, including without limitation its use for aviation purposes, shall constitute foreseeable misuse. Section 4.4: No Warranty of Merchantability or Fitness CHEVRON MAKES NO WARRANTY, EXPRESSED OR IMPLIED IN FACT OR BY LAW, AS TO MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE concerning the Oil and Jet other than it shall comply with the quality herein specified, that the Diesel shall be suitable for use as a fuel, the CIFO shall be suitable for use as a boiler fuel, and the Jet shall be suitable for use as stationary combustion turbine start-up fuel. ARTICLE V PRICE, BTU DETERMINATION ------------------------ Section 5.1: Diesel, CIFO and Jet Prices I. NO. 2 DIESEL FUEL a. For HECO, HT&B, YB; and MECO or HELCO FOB point of Delivery as per Section 6.3, Section 6.2 and Section 6.1, respectively: [---] b. For MECO-Molokai/Delivered Kaunakakai: [---] c. For MECO-Maui/Delivered Kahului: [---] d. For HELCO-Hawaii/Delivered Hilo: [---] e. For HELCO-Hawaii/Delivered Kawaihae: [---] where: PD1 = Price per physical gallon for the Month of Delivery for No. 2 Diesel Fuel purchased by HECO, HT&B, YB, MECO or HELCO in U.S. Dollars ("$") per ("/") gallon. PD2 = Price per physical gallon for the Month of Delivery for No. 2 Diesel purchased by MECO-Molokai, in $/gallon. PD3 = Price per physical gallon for the Month of Delivery for No. 2 Diesel purchased by MECO-Maui, Delivered to Kahului Maui, in $/gallon. 8 PD4 = Price per physical gallon for the Month of Delivery for No. 2 Diesel purchased by HELCO-Hawaii, Delivered to Hilo Hawaii, in $/gallon. PD5 = Price per physical gallon for the Month of Delivery for No. 2 Diesel purchased by HELCO-Hawaii, Delivered to Kawaihae Hawaii, in $/gallon. DI = Index for No. 2 Diesel Fuel, which shall be the simple average of the high and low price assessments on all dates of publication for West Coast Pipeline, Los Angeles California Low Sulfur No. 2 Diesel as reported by Platt's Oilgram Price Report ("Platt's Oilgram") during the period beginning the 21st Day of the second preceding Month to the 20th Day of the Month preceding Delivery, expressed in $/gallon. [---] [---] [---] [---] LP1, LP2, LP3, and LP4 are [---] for Deliveries in bulk to the respective Buyer at Kaunakakai, Molokai, Kahului, Maui, Hilo, Hawaii or Kawaihae, Hawaii, during the period indicated and expressed in $ per gallon, as follows:
1988-1989 2000-2001 2002-2004 [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---]
TD1/TD2/TD3/TD4/TD5 = Taxes applicable to the sale of Diesel pursuant to Section 5.3 herein. II. CIFO [---] where: PF = Price per physical barrel for the Month of Delivery for CIFO, in $/barrel . FI = the Index for CIFO which shall be the simple average of the low and high price assessments for Los Angeles Bunker C Fuel Oil as reported by Platt's Oilgram Bunkerwire ("Platt's Bunkerwire") for all dates of publication from the 21st Day of the second preceding Month to 20th Day of the Month preceding Delivery expressed in $/barrel, converting to barrels from metric tons using a conversion factor of 6.368 barrels/metric ton. [---] [---] 9 [---] [---] TF = Taxes applicable to the sale of CIFO pursuant to Section 5.3 herein. III. JET. [---] where: PJ = price per physical barrel for the Month of Delivery for Jet, in $/gallon. JI = Index for jet fuel which shall be the simple average of the Friday high and low price assessments of West Coast Spot Pipeline price for jet fuel in Los Angeles as reported by Platt's Oilgram from the 21st of the second preceding Month to the 20th Day of the Month preceding Delivery expressed in $ per gallon. If Platt's Oilgram is not published or does not publish a high and low price for a particular Friday during the relevant period, the high and low prices for the closest preceding Day for which Platt's Oilgram publishes a price report will be used. TJ = Taxes applicable to the sale of Jet pursuant to Section 5.3 herein. Addendum No. 1 hereto contains an illustrative schedule of prices calculated pursuant to this Section 5.1 Section 5.2: Determination of Source of Raw Materials To provide the flexibility needed by Chevron to meet its obligations to Buyer, the source and type of crude oil and other raw material, the place of manufacture, and the manufacturer of Oil and Jet for Delivery to Buyer hereunder shall be determined solely by Chevron. The price of all Oil and Jet Delivered by Chevron to Buyer hereunder shall be determined in accordance with the terms of this Contract regardless of where, how and by whom such Oil and Jet is manufactured and regardless of the type or source of crude oil or other raw materials used in its manufacture. Section 5.3: Reimbursement of All Taxes, Assessments and Levies In addition to all other amounts payable by Buyer under this Contract, Buyer shall reimburse Chevron for all taxes, assessments, levies and imposts of whatsoever kind or nature imposed on Chevron by any governmental or quasi- governmental body as adjusted, modified or revised from time to time, including without limitation the Hawaii General Excise Tax, [---] the Hawaii Environmental Response Tax and Hawaii Liquid Fuel Tax, applicable to the sale of Diesel, with respect to the execution or performance of this Contract or the receipt by Chevron of payments hereunder. Notwithstanding the foregoing and any illustrative schedule of prices herein, Buyer shall not be required to reimburse Chevron for any tax measured by or based on the net income of Chevron. To avoid duplication of recovery, Buyer shall not be required to reimburse Chevron under this Section 5.3 for any item expressly mentioned by Platt's Oilgram Price Report or Platt's Bunkerwire, or confirmed by Platt's Oilgram Price Report or Platt's Bunkerwire in writing upon inquiry by either Buyer or Chevron, as being included in a price used to compute PD1, PD2, PD3, PD4, PD5, PD6, PF or PJ under Section 5.1. As of the Effective date of this Contract, the taxes and government fees which are currently in effect include the Hawaii General Excise Tax (4.166%), [---], the Hawaii Environmental Response Tax 10 ($0.05 per barrel or $0.0012 per gallon) and the Hawaii Liquid Fuel Tax, applicable to the sale of Diesel only, ($0.01 per gallon). The Hawaii Environmental Response Tax and Hawaii Liquid Fuel Tax are not subject to the Hawaii General Excise Tax [---] Section 5.4: Determination of BTU Content For Diesel Chevron will draw representative samples of all Diesel Delivered to each respective Buyer as per Sections 6.1, 6.3. ii and 6.5 to determine the BTU content per Section 7.1. If the weighted average BTU content per gallon of the representative samples of Diesel purchased by each respective Buyer during any calendar quarter [---] the price charged for the Diesel sold and Delivered to that respective Buyer during each Month of the calendar quarter in question shall be adjusted by multiplying the Diesel price determined in Article V, by the ratio of the actual heat content to a standard of [---]. If the weighted average BTU content per gallon of the representative samples of Diesel purchased by each respective Buyer during any calendar quarter [---], the price charged for the Diesel sold and Delivered to that respective Buyer during each Month of the calendar quarter in question shall be adjusted by multiplying the Diesel price determined in Article V, by the ratio of the actual heat content [---]. Chevron shall credit Buyer's account for overpayments and Buyer shall pay Chevron for underpayments resulting from the BTU adjustments as soon as reasonably possible after the close of the Month following the end of a calendar quarter. Such adjustments to either Buyer or Chevron will be handled as separate credits or invoices and each individual invoice drawn during the calendar quarter will not be corrected and reissued. Section 5.5: Determination of BTU Content for CIFO Chevron will draw representative samples of each CIFO Delivery to each respective Buyer as per Section 6.1, to determine the CIFO BTU content per Section 7.1. If the weighted average BTU content of the CIFO sold and Delivered to Buyer during any calendar quarter falls within the range [---] physical barrel, no price adjustment will be made. If the CIFO BTU content per physical barrel [---] per physical barrel, the price charged for the CIFO sold and Delivered to that respective Buyer during each Month of the calendar quarter in question shall be adjusted by multiplying the CIFO price as determined by Section 5.1.ii. by a ratio of actual average heat content to [---]. Chevron shall credit Buyer's account for overpayments and Buyer shall pay Chevron for underpayments resulting from the BTU adjustments as soon as reasonably possible after the close of Month following the end of a calendar quarter. Such adjustments to either Buyer or Chevron will be handled as separate credits or invoices and each individual invoice drawn during the Month will not be corrected and reissued. Section 5.6: Dispute The official BTU content determination shall be based upon Chevron's laboratory results provided that the arithmetic difference between Chevron's and Buyer's laboratory results is equal to or less than the then existing ASTM reproducibility standard (currently 0.4 MJ/kg, which shall be set equal to 60,000 BTU per barrel for CIFO and 1,200 BTU per gallon for Diesel for this purpose) for test D-240. If the difference between Chevron's and Buyer's laboratory results should fall outside the ASTM reproducibility standard for ASTM test D-240, at Chevron's or Buyer's option, the sealed sample in the possession of the Independent Inspector shall be provided to an independent laboratory for an official determination, which shall be binding upon the parties. Chevron and Buyer shall share equally the costs of independent tests and determinations. Section 5.7: Rounding of Prices All prices, adjustments thereto and other sums payable hereunder shall be stated in the nearest thousandth of a dollar when related to the sale and purchase of CIFO hereunder and all prices, adjustments thereto and other sums payable hereunder shall be stated in the nearest ten thousandth of a dollar when related to the sale and purchase of Diesel or Jet hereunder. 11 Section 5.8: Successor Publications Platt's Oilgram and Platt's Bunkerwire shall include any successor publication(s) and, in the event of either the discontinuance of these publications or the assessments of West Coast Pipeline, Los Angeles California Low Sulfur No. 2 Diesel, West Coast Spot Pipeline, Los Angeles Jet or Los Angeles Bunker C Fuel Oil, respectively, the parties shall agree upon an alternate price reporting services and publications or market price assessments and any modification of the per gallon or per barrel [---] for Diesel, Jet or CIFO, as applicable, as may be reasonable under the circumstances. ARTICLE VI DELIVERIES ---------- Section 6.1: Delivery of Diesel and CIFO to MECO and HELCO i. Chevron agrees to Deliver and MECO and HELCO agree to receive their Oil into Buyer's Nominated Barge, Free On Board ("F.O.B.") at HMT. The Delivery rate on Diesel shall be [---] minimum. The Delivery rate on CIFO at HMT shall be [---] minimum. Chevron agrees to make its best, reasonable efforts to load Diesel and CIFO concurrently, provided however that Buyer's Nominated Barge is capable of receiving same and to operate its current CIFO Delivery systems to Deliver CIFO into said Nominated Barge at a temperature [---] at HMT. Buyer acknowledges that the CIFO Delivery temperature is determined by Chevron's and HECO's scheduling of other fuels in Chevron's pipeline, and hence cannot be guaranteed. ii. [---]Chevron agrees to make its best, reasonable efforts to load Diesel and CIFO concurrently, provided however that Buyer's Nominated Barge is capable of receiving same and in operating its current CIFO Delivery systems to Deliver CIFO into said Nominated Barge at a temperature about [---]. Buyer acknowledges that the CIFO Delivery temperature is determined by Chevron's and HECO's scheduling of other fuels in Chevron's pipeline, and hence cannot be guaranteed. iii. Chevron and Buyer's agent or an Independent Inspector shall inspect the receiving barge cargo tanks to ensure that they contain only minimal remains of the previous cargo, before Chevron will Deliver Oil to be terminaled per Article XI. The Independent Inspector and shall draw composite samples of any diesel and fuel oil remains ("Buyer's Remains Samples") if such remains ("Remains") are accessible to standard sampling equipment. The Remain Samples shall be sealed and retained by the Independent Inspector for a period of not less than three (3) Months. The quality and quantity of the Remains exceeding common commercial practice shall be removed by Buyer to protect the quality of the Delivered Oil. Buyer or Buyer's agent may remove the Remains by any legal method at their disposal, including pumping the Remains into Chevron's slop tank at the HMT, if convenient to Chevron. Chevron shall have the right to charge Buyer for accepting Remains if the quantity to be removed from any barge or the number of barges requiring Remains to be removed becomes excessive. Chevron shall have the right to flush the receiving barge cargo tanks with a small quantity of Chevron's Oil before loading the Delivered Oil. iv. To provide an early warning of any quality problems with the Diesel or CIFO, Chevron agrees to perform a preliminary analysis ("Preliminary Analysis") including API gravity, and flash point on a composite sample(s) from the relevant HMT or Refinery issuing tank(s) and pipeline fill, if any, so as to be approximately representative of the quality of the Diesel and CIFO intended to be sold and Delivered to Buyer. The Independent Inspector shall ensure that copies of the Preliminary Analysis and other relevant quality documentation are placed on Buyer's Nominated Barge prior to its departure to be made available to representatives of the terminal facility receiving the cargo onboard Buyer's Nominated Barge. 12 Section 6.2: Delivery of Diesel to HT&B and YB Chevron agrees to Deliver and HT&B and YB agree to receive their Diesel into their nominated vessel F.O.B. the HMT, Pier 31 or 32. The Delivery rate shall be 175 BPH minimum. [---] Section 6.3: Delivery of Diesel to HECO Chevron agrees to Deliver and HECO agrees to receive its Diesel under either of the options below. i. Chevron will Deliver Diesel from the HDT into HECO's nominated tank truck at a Delivery rate of [---] minimum. ii. Chevron will Deliver Diesel from the Oahu P/L into HECO's storage at HECO's Waiau Power Plant, at a Delivery rate of [---] minimum. Section 6.4: Delivery of Jet to MECO and HELCO Chevron agrees to deliver and MECO and HELCO agree to receive Jet at MECO's or HELCO's respective power plant truck unloading rack. Section 6.5: Chevron's Delivery of Diesel to Molokai, Kahului, Maui, Hilo, Hawaii and Kawaihae, Hawaii i. Chevron agrees to Deliver Diesel in Chevron Nominated Barges and MECO-Molokai agrees to receive its Oil into its nominated marine terminal at Kaunakakai Harbor, Molokai. The Delivery rate shall be [---] minimum. Buyer will provide discharge facilities through an independent third party; Chevron has no responsibility to procure discharge facilities on the island of Molokai. ii. On a space available basis and when the date is mutually agreed to, Chevron may Deliver in Chevron's Nominated Barge and MECO and HELCO may receive into their nominated marine terminal at Kahului, Maui and Hilo and Kawaihae, Hawaii, respectively. The Delivery rate shall be [---] minimum. The respective Buyer is responsible for providing discharge facilities; Chevron has no responsibility to procure discharge facilities on the islands of Maui and Hawaii for the sole purpose of receiving Deliveries of Diesel in bulk from Chevron's Nominated Barge on behalf of Buyer. Section 6.6: Title and Risk of Loss i. For the Delivered Oil under Sections 6.1 and 6.2, care, custody, control, title and risk of loss shall pass to Buyer as the Oil passes the flange connecting Chevron's pipeline to the cargo hose of the Buyer's Nominated Barge or vessel. ii. For the Delivered Diesel under Section 6.3.i., care, custody, control, title and risk of loss shall pass to Buyer as the Oil passes the flange connecting the cargo hose at Chevrons' truck loading rack to the Buyer's nominated tank truck. iii. For the Delivered Diesel under Section 6.3.ii., care, custody, control, title and risk of loss shall pass to Buyer as the Oil passes the flange connecting Buyer's pipeline at the Chevron Oahu P/L to the Waiau Power Plant. iv. For the Delivered Diesel under Section 6.5.i and Section 6.5.ii, care, custody, control, title and risk of loss shall pass to Buyer as the Oil passes the flange connecting the cargo hose of the 13 Chevron's Nominated Barge or vessel to the Buyer's designated pipeline v. For the delivered Jet under section 6.4, care, custody, control, title and risk of loss shall pass to Buyer as the jet passes the flange connecting the cargo hose of the Chevron's tank truck and Buyer's truck unloading rack at HELCO's and MECO's respective power plant. Section 6.7: Notice of Delivery The respective Buyer, or its agent, shall provide Chevron with advance notice of Oil to be Delivered and received under Sections 6.1, 6.3ii, 6.4 and 6.5 in accordance with Section 3.2 or [---], and the respective Buyer shall provide telephone notification for Diesel to be Delivered under Section 6.2 or 6.3.i. Chevron shall make all reasonable effort to comply with this notice and advise Buyer promptly if the Delivery time cannot be met. ARTICLE VII DETERMINATION OF QUALITY ------------------------ Section 7.1: Sampling Procedures The quality of the Oil purchased by HECO, having its origination at HDT, the quality of Diesel purchased by HT&B and YB and the quality of Jet purchased by HELCO and MECO shall be determined on the basis of a volumetric weighted average composite of samples drawn from the issuing tank(s) by Chevron in such a manner as to be representative of each Delivery. Such samples of Oil or Jet shall be referred to as "Chevron's terminal samples" and shall be divided into a minimum of two (2) parts one of which shall be sealed and dated and retained by Chevron, or an Independent Inspector at the option of Chevron, for a period of not less than three (3) Months. The quality of Oil purchased by HECO and Delivered by Chevron from Chevron's Oahu P/L into HECO's storage at HECO's Waiau Power Plant shall be determined on the basis of a volumetric weighted average composite of samples drawn from Chevron's issuing tank(s) in such a manner as to be representative of the Delivery ("Chevron's piped sample"). In addition, a volumetric weighted average composite of samples from HECO's receiving tank(s) at HECO's Waiau Power Plant in such a manner as to be representative of the affected tank's contents ("Buyer's piped sample"). The Buyer's piped sample is to be divided into a minimum of two (2) parts one of which shall be retained by the Independent Inspector for a period of not less than three (3) Months. The quality of the Oil purchased by MECO-Molokai, and MECO or HELCO if Delivery is made pursuant to Section 6.5, shall be determined on the basis of a volumetric weighted average composite of samples drawn by Chevron from tanks of Chevron's Nominated Barge in such a manner as to be representative of the Delivered Oil ("Chevron's barge sample," can also be considered "Chevron's loaded sample" if the receiving tank is in Chevron's facilities on Maui or Hawaii"). In addition, the Independent Inspector shall draw a volumetric weighted average composite of samples from the receiving tank(s) at the Kaunakakai Terminal, or Buyer's Nominated Terminal in Kahului, Maui, Hilo, Hawaii and Kawaihae, Hawaii after the completion of each Delivery, in such a manner as to be representative of the Diesel inventory ("Buyer's terminal sample," can also be considered "Chevron's Received Sample" if the receiving tank is in Chevron's facilities on Maui or Hawaii). The Buyer's terminal sample is to be divided into a minimum of two (2) parts one of which shall be retained by the Independent Inspector for a period of not less than three (3) Months. Unless otherwise specifically agreed by the parties, the quality and heat content of the Oil Delivered by Chevron into Buyer's Nominated Barge at Chevron's HMT [---] shall be determined on the basis of a volumetric weighted average composite of samples ("Chevron's loaded sample") drawn by the Independent Inspector from the cargo tanks of Buyer's Nominated Barge at the completion of loading in such a manner as to be representative of the total volume of the Delivery. See Addendum No. 2 attached hereto for an overview of Chevron sampling. 14 The Chevron's loaded sample, Chevron's piped sample, Chevron's barge sample and any other sample not otherwise specifically provided shall be divided into three (3) parts and dated, such parts to be distributed as follows: 1. One part shall be provided to Chevron's laboratory for analysis and quality determination. 2. One part shall be provided to Buyer's laboratory for the purpose of verifying Chevron's determinations. 3. One part shall be sealed and retained by the Independent Inspector for a period of not less than three (3) Months. The determination of the Oil or Jet's quality and BTU content shall be reported through the preparation of a Certificate of Quality by Chevron's laboratory. Chevron agrees to provide Buyer and the Independent Inspector copies of the complete Certificate of Quality of the Oil or Jet; and will make best reasonable efforts to provide the Certificate of Quality no later than two (2) working days after the completion of the Delivery. Buyer shall have the right to perform laboratory analyses in order to verify the results of Chevron's quality and BTU content determinations. Section 7.2: Quality Disputes Within sixty (60) Days after the end of each Month, Buyer shall give Chevron notice of any disagreement with Chevron's quality or BTU content determination for Delivered Oil and Delivered Jet during such Month. Buyer shall present Chevron with documents supporting such disagreement and the parties will confer, in good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quality, if justified, for the Delivery in question. In the event that such disagreement is not resolved within thirty (30) Days of the date of Buyer's notice, the Independent Inspector shall prepare, in whole or in part from the samples in its possession, a representative sample of the disputed Delivery ("Referee Sample") which shall be submitted to a mutually agreed upon independent laboratory for a final determination, whose determination shall be final and binding on both parties. The Referee Sample shall include a volumetric weighted proportion of samples as are applicable to the Oil or Jet in question, including Buyer's remain samples, or in lieu thereof samples of the oil from the previous cargo, should the retains of the previous cargo be reasonably suspected as a cause of the quality problem.. Section 7.3: Impact of Less Than Quality Product If Buyer and Chevron agree or the Independent Inspector or independent laboratory determines that the quality of Delivered Oil and Delivered Jet did not equal the qualities described in Article IV (regardless of whether or not the Preliminary Analysis indicated a quality problem or whether such Oil and Jet passed tests of conditional acceptance), the Buyer and Chevron shall attempt to minimize the impact. This may include specification waiver especially if use of Oil and Jet will not harm Buyer or Chevron, or delivering higher quality Oil and Jet in a timely manner to produce a specification quality blend in Chevron's terminal or at Buyer's nominated vessel or terminal, wherever the Oil or Jet or oil or jet in question then resides. If all such, or similar efforts fail to resolve the quality problem, then Chevron at Chevron's expense, shall exchange the non-specification Oil and Jet and other oil downgraded by commingling with Chevron's Oil and Jet, with Oil and Jet meeting the qualities of Article IV. All costs and expenses, including testing, transportation, re-refining and handling costs incurred in returning and replacing off-specification Oil and Jet shall be paid by the responsible party as determined by the Independent Inspector, independent laboratory and any other available relevant evidence. However, in no event shall Chevron be liable for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise allegedly caused by or based upon the qualities of the Oil and Jet. 15 ARTICLE VIII MEASUREMENT OF QUANTITY ----------------------- Section 8.1: Determination of Quantity i. Quantities of the Oil sold and Delivered by Chevron and purchased and received by Buyers under this Contract at the HMT shall be determined at the time of each Delivery by gauging the HMT tanks before and after pumping under the supervision of the Independent Inspector. ii. Quantities of Oil sold by Chevron and purchased and received by Buyers under this Contract where Delivery of the Oil at the HMT pumped from the Refinery in direct continuation through Chevron's Oahu P/L or Chevron's Black Oil Pipeline, sold and purchased under this Contract and Delivered to Buyer at the Waiau Power Plant [---], shall be determined at the time of each Delivery by gauging Chevron's tanks at its Barbers Point Refinery before and after pumping under the supervision of the Independent Inspector. iii. Diesel sold by Chevron and purchased and received by Buyers under this Contract at the Kaunakakai Terminal, or at Buyer's Nominated Terminal at Kahului, Maui, Hilo Hawaii or Kawaihae, Hawaii shall be determined at the time of each Delivery by gauging Buyer's tank(s) at the Kaunakakai terminal or Buyer's Nominated Terminal before and after pumping under the supervision of the Independent Inspector. iv. Quantities Delivered hereunder shall be calculated in accordance with current measurement standards adopted by industry, ASTM, API and other standard-setting bodies as applicable in the opinion of the Independent Inspector and shall be expressed in G.S.V., U.S. barrels or U.S. gallons @ 60 degrees F. v. All such measurements shall be taken by a mutually agreed upon Independent Inspector who shall (1) prepare and sign a certificate stating the quantity of Oil determined according to the provisions of this Section 8.1 to have been Delivered to Buyer ("Certificate of Quantity"); (2) furnish Chevron and Buyer each with a copy of such Certificate of Quantity; and (3) advise by facsimile or electronic mail the quantity Delivered to Buyer. The data in the Independent Inspector's report and Certificate of Quantity prepared as provided herein shall, absent fraud or error and omissions, be binding and conclusive upon both parties, and shall be used for verification of the invoice and Bill of Lading . Chevron and Buyer shall share equally the cost of independent inspections. Chevron reserves the right to install meters on the Oahu P/L and to determine quantity as in Section 8.2. Section 8.2: Determination of Quantities at HDT Diesel sold and purchased under this Contract at the HDT and Jet sold and purchased by HELCO and MECO shall be determined at the time of each Delivery by reading calibrated meters, corrected in each instance to volume at 60 degrees F in accordance with current measurement standards adopted by industry, ASTM, API and other standard-setting bodies as applicable in the opinion of the Independent Inspector. The meters used at the HDT and Chevron's terminals on Hawaii and Maui shall be Chevron's meters. Both Buyer and Chevron shall have the right to review each other's routine certification documents. Section 8.3: Quantity Dispute If Buyer or Chevron has reason to believe that the quantity of Oil and Jet stated for a particular Delivery per Sections 8.1 or 8.2 is incorrect, the party shall within sixty (60) Days of the Delivery date, present the other party with documentation supporting such determination and the parties will confer, in good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quantity, if justified, for the Deliveries in question. 16 ARTICLE IX INVOICING AND PAYMENT --------------------- Section 9.1: Invoices Invoices for the sale of CIFO, Diesel, and Jet, which will show the price per physical barrel sold will be prepared and dated following Delivery, and for the services provided by Chevron as outlined in Article XI, shall be rendered promptly to Buyer. Original invoices shall include documentation acceptable to both parties, including Certificate of Quality, Certificate of Quantity or report of the Independent Inspector and price calculation; such documentation may, however, be provided to Buyer or its agent separately. Section 9.2: Payment Terms Payments shall be made in U.S. dollars. Subject to Section 8.3 herein, the timing of payments of invoices shall be as follows: i. Invoices to HECO, MECO, MECO-Molokai and HELCO: a. Payment for Deliveries and services from the first through the tenth Day of a Month for which invoices have been received is due on the twentieth Day of the Month. b. Payment for Deliveries and services from the eleventh through the twentieth Day of a Month for which invoices have been received is due on the last Day of the Month. c. Payment for Deliveries and services from the twenty-first through the last Day of a Month for which invoices have been received is due on the tenth Day of the following Month. Due dates are dates payments are to reach Chevron. If the due date falls on a Saturday, the payment shall be due on the preceding business day. If such date falls on a Sunday or a holiday, payment shall be due the following business day. ii. Payment for Deliveries to HT&B and YB for which invoices have been received shall be paid within thirty (30) Days of the Delivery date. iii. If an invoice incorporating an item at variance with the documentation or is disputed has been sent to Buyer, then Buyer shall hold said invoice without penalty until such error, variance with documentation or dispute is resolved and Buyer shall have received a corrected invoice or debit or credit issued subsequently to the original invoice. Buyer shall make payment for such subsequent invoices or debits in accordance with Section 9.2.i or Section 9.2.ii, whichever is applicable. If a disputed item has not been resolved in 30 Days from date of invoice, Buyer shall pay the undisputed amount. Section 9.3: Method of Payment Method of payment shall be as follows: i. Payments of HECO, MECO, MECO-Molokai, and HELCO shall be by bank wire transfer of immediately available funds to: First National Bank of Chicago, Chicago, Illinois 60607 Attention: GFTS for credit to the following accounts, depending on which Buyer is making a payment: a. HECO Chevron Products Company, a division of Chevron U.S.A. Inc Section #632 Account No. 1184762 17 b. HELCO Chevron Products Company, a division of Chevron U.S.A. Inc Section #632 Account No. 1237632 c. MECO Chevron Products Company, a division of Chevron U.S.A. Inc Section #632 Account No. 1237636 d. MECO-Molokai Chevron Products Company, a division of Chevron U.S.A. Inc Section #632 Account No. 6049549 For identification purposes, all wires must clearly indicate that payment is being made by order of Buyer and indicate the invoice reference number. In addition, written documentation evidencing specific invoices being paid shall be immediately forwarded to: Chevron Products Company, a division of Chevron U.S.A. Inc P.O. Box R Concord, California 94524 ii. Payment by HT&B and YB shall be mailed to: Chevron Products Company, a division of Chevron U.S.A. Inc c/o First Interstate Bank Dept. 7351 Los Angeles, CA 90088 Payment shall include written documentation evidencing specific invoices being paid. ARTICLE X CHEVRON'S FACILITIES ON OAHU ---------------------------- i. Chevron agrees to provide the use of its Oahu P/L for the Diesel Delivered to HECO's Waiau Power Plant per Section 6.3.ii. ii. Chevron agrees to make available on a [---] the use of [---], such use shall include an [---], if and whenever said [---] Contract and Addendum No. 3 attached hereto and incorporated herein by reference. 18 ARTICLE XI CHEVRON'S FACILITIES ON MAUI AND HAWAII --------------------------------------- As used in this Article XI, "Buyer" will refer only to MECO or HELCO. Section 11.1: Use of Chevron Storage and Handling Facilities i. Chevron agrees to provide MECO the use of its storage and handling facilities for Diesel Received at Kahului, Maui, and to provide HELCO the use of its storage and handling facilities for Diesel and CIFO Received at Hilo, Hawaii; for the Delivered Oil under Article VI and the third party oil purchased as a result of the force majeure conditions of Article XIII, on the terms and conditions described in this Article XI. To provide operating flexibility to a valued, long- term customer, Chevron shall grant HELCO the non-exclusive right to terminal oil purchased from third parties at Chevron's facility at Hilo, Hawaii up to a maximum quantity per Year of [---] and [---], which meet the specifications set out herein. Buyer agrees to schedule its deliveries such that they contain a minimum of [---] barrels of oil such that they arrive at regular intervals. For the same reasons, Chevron shall grant MECO the non-exclusive right to terminal No. 2 diesel fuel purchased from third parties at Chevron's facility on Maui up to a maximum quantity of [---] barrels per Year, which meets the specifications set out herein. Buyer agrees to schedule its deliveries such that they contain a minimum of [---] barrels of diesel fuel and that they arrive at regular intervals. ii. Whenever Buyer purchases third party oil which is to be terminaled in Chevron's facilities, Buyer shall obtain a sample representative of the oil in the barge cargo tanks, after the third party supplier has completed the loading of such oil into Buyer's Nominated Barge. Buyer shall provide a part of a volumetric weighted average composite sample representative of the oil in the barge cargo tanks upon completion of loading to the Independent Inspector who shall retain it for a period of not less than three (3) Months. This sample ("Buyer's loaded sample") shall be available for analysis by Chevron, Buyer or an independent laboratory should Chevron's subsequent sampling and analysis indicate a quality problem. This sample shall indicate the quality of this mixture of purchased oil and the previous cargo remains. To provide an early warning of any quality problems with the Received oil, Buyer agrees to instruct the Independent Inspector to provide Chevron a preliminary analysis of Buyer's loaded sample consisting of API gravity, appearance and, in the case of diesel fuel, flash point, at the time such third party oil is loaded for transport. Buyer also agrees to instruct the Independent Inspector to deliver one copy of such preliminary analysis promptly to Chevron's representative at the Honolulu Marine Terminal and to deliver a copy of the Preliminary Analysis and other relevant quality documentation in Buyer's or the Independent Inspector's possession to Buyer's Nominated Barge for delivery to Chevron's representative upon arrival at the appropriate outer island terminal. Buyer further agrees that the cost of any additives which may be required to eliminate compatibility problems between third party oil and Chevron's Oil at the outer island terminal shall be solely for Buyer's account. Section 11.2: Barge Schedule Notification Buyer shall provide Chevron with estimated arrival times of the barge transporting the oil for which Buyer desires to use Chevron's facilities on Maui or Hawaii. Buyer or Buyer's agent shall provide radio, phone or facsimile notification to Chevron's representative at each unloading location at least seven Days prior to a third-party supplied oil delivery and at least 24 hours prior to a Chevron supplied oil delivery. Buyer or Buyer's agent shall also provide the Captain of the Port with radio or phone notification at least 24 hours prior to any delivery. Should the estimated time of arrival change by two or more hours following the 24 hour arrival report, Buyer or Buyer's agent shall promptly report the change to Chevron's representative and the Captain of the Port at the place of planned arrival. 19 Section 11.3: Loaded Samples i. Chevron shall analyze Chevron's Loaded sample of Section 6.1.iv and review Buyer's supplied results from any Buyer's loaded sample of Section 11.1.ii for conditional acceptance for receiving the oil, and if warranted, analyze Chevron's Loaded sample of Section 6.1.iv and if a quality problem with the loaded oil is reasonably indicated, obtain and analyze a sufficient portion of Buyer's loaded sample of Section 11.1.ii for all the qualities described in Article IV, while Buyer's Nominated Barge is enroute to Maui or Hawaii, to reduce the risk of contaminating Chevron's terminal inventories. See Addendum No. 2 hereto for an overview of all Chevron sampling. If Buyer's supplied results from any Buyer's loaded sample fails conditional acceptance or Chevron's analysis of Buyer's loaded sample is not consistent with the qualities described in Article IV, Chevron shall promptly notify Buyer of any quality problems with the loaded oil. Both Buyer and Chevron shall attempt to minimize the impact of any quality problem by specification waiver especially if use of the loaded oil will not harm either Buyer or Chevron, or by Buyer or Chevron Delivering higher quality oil in a timely manner to produce a specification quality blend at Chevron's terminal. If all such, and similar, efforts fail to resolve the quality problem, then Buyer's loaded oil shall not be unloaded into Chevron's terminal tanks. Buyer may return non- specification Loaded Oil to Chevron's Barbers Point Refinery, in which case Chevron shall replace the non-specification Loaded Oil by Delivering an equal volume of Oil into Buyer's Nominated Barge at the HMT, in a timely manner. ii. All costs and expenses, including transportation, re-refining and handling costs incurred in returning and replacing non-specification loaded oil and Loaded Oil shall be paid by the party responsible for the contamination. Responsibility shall be determined by analyzing the Buyer's barge retain sample or Chevron's Loaded Sample of Section 7.1 and the Buyer's loaded sample of Section 11.1.ii. If Buyer and Chevron cannot agree whether the Chevron's Loaded Oil or the loaded oil meet the qualities specified in Article IV, then the applicable samples in the possession of Chevron, Buyer and the Independent Inspector which relate to the oil in question shall be submitted to a mutually agreed upon independent laboratory, whose determination shall be final and binding on both parties. Chevron shall have the responsibility for Buyer's transportation and handling costs for its own re-refining cost if it is determined that the qualities described in Article IV are not met by the Delivered Oil. Otherwise, Buyer shall be responsible for Chevron's handling and re-refining cost and its own transportation and handling costs. The responsible party shall reimburse the other party for such costs and expenses within sixty (60) Days of the delivery date of the non-specification loaded oil. However, in no event shall such party be responsible for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise allegedly caused by or based upon the quality of the non-specification loaded oil. Chevron and Buyer shall share equally the cost of any independent inspections. Section 11.4: Coast Guard Dock Watch Requirements Buyer shall be responsible for meeting all Coast Guard dock watch requirements at Hilo, Hawaii and Kahului, Maui. Charges levied by any governmental agency for the use of their facilities at Hilo, Hawaii or Kahului, Maui, including but not limited to the State of Hawaii's wharf and pipeline fees, shall be for Buyer's account. Section 11.5: Custody of Received Oil Chevron will accept custody and exercise control of Received oil having conditionally acceptable quality per Section 11.6 at the flange connecting Chevron's independently owned pipeline at each location [---]. Title and risk of loss shall remain with Buyer. Not withstanding Article 18, Chevron shall not be responsible for any type of loss of the oil while it is in Chevron's custody except when loss or damage is caused by Chevron's gross negligence or willful misconduct in receiving, handling, storing, or delivering such oil. Received oil will be commingled with Chevron's Oil in Chevron's tankage at Chevron's Kahului, Maui or Hilo, Hawaii terminals. 20 Section 11.6: Determination of Quality of Received Oil at Unloading i. Quality of Received oil at the unloading location shall be determined by testing a volumetric weighted average composite of representative samples taken from Carrier's barge tanks by the Independent Inspector. See Addendum No. 2 hereto for an overview of all Chevron sampling. Samples will be divided into three parts and dated. One part shall be tested promptly per Section 11.6.ii. One part shall be labeled "Chevron's Received Sample," one part shall be sealed and labeled "Chevron's Received Retain" which shall be retained by the Independent Inspector for a period of not less than three (3) Months. ii. To facilitate Buyer's barge turnaround, Chevron shall promptly perform a preliminary analysis on one part of the sample taken in Section 11.6.i for its API gravity, appearance and in the case of Diesel also for its flash point. Received Oil will be considered conditionally acceptable if its API gravity is within 0.3 degrees of its gravity delivered to Buyer under Article VI. Received oil will be considered acceptable if its API gravity is within 0.3 degrees of the Supplier's loaded sample gravity as determined in Section 11.1.ii, and for diesel cargoes, if its Flash point is above its 150 degrees F specification of Section 4.2. iii. Notwithstanding the above conditional acceptance, Chevron may use Chevron's Received Sample to determine all the qualities described in Article IV for Received oil. Within thirty (30) Days after each oil cargo unloading, Chevron shall give Buyer notice of any claim of contamination of Chevron's Oil from commingling with Received oil. In the event that such claim is not resolved within thirty (30) Days of the original claim, the Independent Inspector shall prepare, in whole or in part from the samples in its possession, a representative sample of the disputed delivery ("Referee Sample") which shall be submitted to a mutually agreed upon independent laboratory for a final determination, whose determination shall be final and binding on both parties. The Referee Sample shall include a volumetric weighted proportion of samples as are applicable to the oil in question, including Chevron's Received Retain Buyer's remain samples, or in lieu thereof samples of the oil from the previous cargo, should the retains of the previous cargo be reasonably suspected as a cause of the quality iv. If Buyer and Chevron agree or the Independent Inspector determines that the quality of the Received oil did not meet the qualities described in Article IV, and the Received oil has contaminated Chevron's terminal inventories, both Buyer and Chevron shall attempt to minimize the impact of any quality problem on Buyer by waiver of Buyer's requirement to meet specifications especially if Chevron's use of the oil will not significantly harm Chevron, or by Buyer or Chevron delivering higher quality oil in a timely manner to produce a specification quality blend at Chevron's terminal. If all such, and similar, efforts fail to resolve the quality problem, then Buyer will reimburse Chevron the transportation, handling and re-refining costs of exchanging Buyer's and Chevron's oil, with oil meeting the qualities described in Article IV. to the extent the contamination of Chevron's terminal inventories was not caused or contributed to by Chevron. Such reimbursement shall occur within sixty (60) Days of Chevron's original claim. However, in no event shall Buyer be liable for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise allegedly caused by or based upon the quality of the Received oil. Section 11.7: Determination of Quantity of Received Oil and Oil at Time of Custody Transfer The quantity of Received oil and Received Oil over which Chevron takes custody shall be determined at the time of each barge cargo unloading by gauging Chevron's terminal tank before and after pumping. Free water shall be drawn off prior to each level measurement. Volumes delivered hereunder shall be calculated in accordance with current measurement standards adopted by industry, ASTM, API and other standard-setting bodies as applicable in the opinion of the Independent Inspector and shall be expressed in G.S.V., U.S. barrels @ 60 degrees F. Measurements shall be taken by Chevron and witnessed by Buyer or Buyer's agent. However, at Buyer's option, such measurement shall be taken by a mutually agreed upon independent inspector. Buyer and Chevron shall share equally the cost of independent inspections. 21 Section 11.8: Commingle Product In the event that Buyer and Chevron have agreed to commingle their oil in a barge or vessel compartment to reduce freight costs, and there are discrepancies between either the quantities of oil loaded per Section 6.1 and unloaded per Section 11.7 or the qualities of oil loaded per Section 7.1 and unloaded per Section 11.6, then Buyer and Chevron shall share the benefits or losses of the discrepancy proportionally to the loaded volumes. Section 11.9: Transfer Notification From Kahului and Hilo Buyer will provide Chevron's terminal representative, during normal working hours, at least 24-hour notice of any transfers required from Chevron's facilities in Kahului or Hilo. Section 11.10: Custody of Returned Fuel Oil Buyer shall regain custody and control of Returned Fuel Oil at the flange connecting Chevron's Hilo terminal pipeline to Buyer's pipeline. i. The quantity of Fuel Oil over which Chevron returns custody shall be determined at the time of each transfer by gauging Chevron's terminal tank(s) before and after pumping. Volumes Returned hereunder shall be calculated in accordance with current measurement standards adopted by industry, ASTM, API and other standard-setting bodies as applicable in the opinion of the Independent Inspector and shall be expressed in G.S.V., U.S. barrels @ 60 degrees F. Measurements shall be taken by Chevron and witnessed by Buyer or Buyer's agent. However, at Buyer option, such measurements shall be taken by the Independent Inspector. Buyer and Chevron shall share equally the cost of independent inspections. ii. Chevron shall maintain a record of Buyer's net Fuel Oil inventory stored in its Hilo terminal based on receipts as determined in Section 11.7 and returns as determined in Section 11.10.i. Chevron will provide book inventory records once each week, convenient to Chevron's normal weekly inventory period.. Section 11.11: Custody of Returned Diesel Buyer shall regain, custody and control of Returned diesel at the end of the fill pipe connecting Chevron's terminal pipelines to Carrier's tank trucks. Transfers will be made in minimum 5,000 gallons per delivery load. i. The quantity of diesel over which Chevron returns custody shall be determined at the time of each transfer by reading Chevron's calibrated meters corrected in each instance in accordance with current measurement standards adopted by industry, ASTM, API and other standard-setting bodies as applicable in the opinion of the Independent Inspector and shall be expressed in G.S.V., U.S. barrels or U.S. gallons @ 60 degrees F. If Buyer or Chevron have reason to believe that the quantity of Returned diesel stated for a particular transfer is incorrect, that party shall within fifteen Days of the transfer date, present the other party with documentation supporting such determination and the parties will confer, in good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quantity, if justified, for the transfers in question. ii. Chevron shall maintain records of Buyer's net diesel inventories stored at each of its Kahului, Maui and Hilo, Hawaii terminals, based on receipts as determined in Section 11.7 and returns as determined in Section 11.11.i. Chevron will provide book inventory records once each week, convenient to Chevron's normal weekly inventory period. iii. Chevron will periodically reconcile meter measurements with tank gaugings. Buyer may review Chevron's reconciliation calculations. However, there will be no retroactive adjustments to the volumes delivered or received as a result of this procedure. 22 Section 11.12: Return Oil Quantities Chevron shall be under no obligation to provide Buyer quantities of Returned oil greater than Buyer's current net oil inventory. However, Chevron will attempt to meet Buyer's unanticipated needs, after considering the needs of its other customers and its own available inventory. Section 11.13: Transfer of Returned Oil i. Returned oil transferred by Chevron shall meet the qualities described in Article IV. Chevron, or at Buyer's option the Independent Inspector, shall draw a volumetric weighted average composite sample representative of the oil in Chevron's tanks on Maui and Hawaii after each receipt of Buyer's or Chevron's oil in order to verify the quality of the Returned oil in Chevron's terminal ("Chevron's Returned sample"). This sample will be divided into three parts and dated. . See Addendum No. 2 hereto for an overview of Chevron sampling. One part of this sample shall be promptly tested by Chevron for its API gravity, appearance and in the case of diesel also for its flash point. Buyer and Chevron agree that successful passage of the prompt test on this sample is sufficient evidence for Chevron to return oil to Buyer, without limiting Buyer's rights within Section 11.13.ii. One part of the Chevron's Returned sample shall be retained by Chevron and one part shall be sealed and shall be provided to the Independent Inspector to be retained for a period of not less than three (3) Months. ii. Notwithstanding the above conditional acceptance, if a quality problem with the Returned oil is reasonably indicated, Buyer may obtain and analyze a sufficient portion of Chevron's Returned Sample in the possession of the Independent Inspector to determine all the qualities described in Article IV for the Returned oil. Within thirty (30) Days after each oil delivery, Buyer shall give Chevron notice of any claim of contamination and of resulting losses. In the event that such claim is not resolved within thirty (30) Days of the original claim, the Independent Inspector shall prepare, in whole or in part from the samples in its possession, a representative sample of the disputed delivery ("Referee Sample") which shall be submitted to a mutually agreed upon independent laboratory for a final determination, whose determination shall be final and binding on both parties. The Referee Sample shall include a volumetric weighted proportion of samples as are applicable to the oil in question.. iii. If Buyer and Chevron agree or the Independent Inspector determines that the quality of the Returned oil did not meet the qualities described in Article IV and that and indicates that Chevron's terminal inventories, including Buyer's oil stored there and Buyer's power plant inventories are contaminated, both Buyer and Chevron shall attempt to minimize the impact of any quality problem on Chevron by waiver of Chevron's requirement to meet specifications, especially if Buyer's use of the oil will not significantly harm Buyer, or by Chevron Delivering higher quality oil to produce a specification quality blend at Chevron's terminal inventory and Buyer's plants. If all such, and similar, efforts fail to resolve the quality problem, then Chevron will, at Chevron's expense, exchange Buyer's Returned oil to the extent the contamination of Buyer's other similar oil was caused or contributed to by Chevron, and, if appropriate, any of Buyer's other similar oil which has been downgraded by commingling with the Returned oil, with oil meeting the qualities described in Article IV. Chevron shall make its best, reasonable effort to replace Buyer's oil in a timely manner. However, in no event shall Chevron be liable for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise allegedly caused by or based upon the quality of the Returned oil. Section 11.14: Terminaling and Handling Fees Effective upon the commencement of this Contract, Chevron will invoice Buyer and Buyer will pay Chevron per Article IX, terminaling and handling fees based on the quantities of oil determined in Section 11.7 at the rates listed below. 23 i. At Kahului, Maui, the terminaling and handling fee shall be [---] per gallon of diesel [---] per physical barrel of diesel). ii. At Hilo, Hawaii, the terminaling and handling fee shall be [---] per gallon of oil [---] per physical barrel of oil). iii. The terminaling and handling fees specified in Section 11.14i and Section 11.14.ii shall be subject to [---], 50% of the annual escalation factor shall be the arithmetic average of the hourly earnings in dollars per hour for the petroleum and coal products industry as shown in the "Employment and Earning" publication of the U.S. Department of Labor, Bureau of Labor Statistics, for the three Months of the second calendar quarter immediately preceding the calendar quarter of the Month in which services are rendered, divided by the arithmetic average of the hourly earnings in dollars per hour for the petroleum and coal products industry as shown in the "Employment and Earning" publication of the U.S. Department of Labor, Bureau of Labor statistics, for the Months January through March, 1997 (20.353);the remaining 50% of the annual escalation factor shall be the arithmetic average of the Producer Price Index (PPI) for Industrial Commodities as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the three Months of the second calendar quarter immediately preceding the calendar quarter of the Month in which services are rendered, divided by the arithmetic average of the Producer Price Index (PPI) for Industrial Commodities as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the Months January through March, 1997 (128.50). For the purpose of invoicing, the terminaling and handling services shall be considered received by Buyer when Chevron first takes custody of Buyer's oil per Section 11.5. ARTICLE XII CONTINGENCIES ------------- Section 12.1: Definition of Contingency As used in this Article XII, the term "Contingency" means: (a) any event reasonably beyond the control of the party affected; (b) compliance, voluntary or involuntary, with a direction or request of any government or person purporting to act with governmental authority; excluding, however, any such direction or request restricting or otherwise regulating combustion of the oil to be purchased by Buyer hereunder, the effect of which restrictions or regulation upon the parties' performance shall be governed by Section 12.5 of this Contract; (c) total or partial expropriation, nationalization, confiscation, requisitioning or abrogation or breach of a government contract or concession; (d) closing of, or restriction on the use of, a port or pipeline; (e) maritime peril (including but not limited to, negligence in navigation or management of vessel, collision, stranding, destruction, or loss of vessel), storm, earthquake, flood; (f) accident, fire, explosion; (g) hostilities or war (declared or undeclared), embargo, blockage, riot, civil unrest, sabotage, revolution, insurrection; (h) strike or other labor difficulty (whomever's employees are involved), even though the strike or other labor difficulty could be settled by acceding to the demands of a labor group; or, 24 (i) loss or shortage of supply, production, manufacturing, distribution, refining, transportation, Delivery facilities, receiving facilities, equipment, labor, material, power generation or power distribution caused by circumstances which the affected party is not able to overcome by the exercise of reasonable diligence or which the affected party is able to overcome only at substantial additional expense in relation to the expected revenue, benefits or rights related directly to this Contract. Section 12.2: Obligation to Supply Product Chevron shall not be obligated to sell or deliver Oil or Jet to the extent that performance of this Contract is prevented, restricted or delayed by a Contingency which significantly affects Chevron's ability to supply, manufacture or transport Diesel or Jet to Buyer under this Contract from [---]. In such circumstances, Deliveries of Oil or Jet to Buyer may be reduced on a basis as equitable to Buyer as to Chevron's and its affiliates' other customers of crude and petroleum products, and Chevron shall not be obligated to acquire additional crude, oil or jet but to the extent that it does acquire additional crude, oil or jet, Buyer shall be entitled to an equitable share of the oil or jet acquired or derived from the crude acquired, at a price to be agreed from time to time. Section 12.3: Obligation to Purchase Product Buyer shall not be obligated to purchase, receive or use Oil or Jet to the extent that performance of this Contract in the customary manner is prevented, restricted or delayed by a Contingency. In such circumstances, purchases from Chevron may be reduced on any basis as equitable to Chevron as to Buyer's other suppliers of oil or jet. Section 12.4: Price Determination Prevention If at any time any price determined under this Contract cannot be given effect because to do so would violate a direction or request of any government or person purporting to act with governmental authority, Buyer and Chevron shall attempt to agree on an alternate course of action but failing agreement within ten (10) Days the party adversely affected may suspend performance with respect to the quantity of Oil or Jet affected by the direction or request. Section 12.5: Governmental Regulation Requirements To the extent that any governmental regulation requires combustion of oil or jet meeting specifications other than those in Article IV, Buyer and Chevron shall negotiate in good faith to agree on an alternative course of action that will reasonably allow Buyer to comply with such regulation while fulfilling its minimum annual purchase volume commitment under Article III, at a price and on other terms and conditions that are fair to both parties. Chevron shall have no obligation to Deliver oil or jet meeting new specifications if it is not available for purchase from third parties and Chevron cannot manufacture such oil or jet in existing facilities without substantial new capital investment. If Buyer and Chevron do not agree on such an alternative course of action, then Buyer may comply with such regulation in any reasonable manner it chooses, including the option to purchase from other sources for its plants located within the area in which such regulation specifically applies, fuels which will enable Buyer to comply with such regulation. In such case, Buyer's minimum purchase requirement under Article III shall be reduced accordingly. Section 12.6: Chevron's Obligations Under Contract [---] 25 [---] [---] ARTICLE XIII EFFECT OF SUSPENSION OR REDUCTION --------------------------------- Section 13.1: Event of Suspension In the event of any suspension of sales and Deliveries under Article XII, Chevron shall not be obligated to sell and Buyer shall not be obligated to buy, after the period of suspension or reduction, the undelivered quantity of Oil or Jet which normally would have been sold and Delivered hereunder during the period of suspension or reduction. Section 13.2: Suspension For More Than 180 Days If sales and Deliveries are suspended under Article XII for more than one hundred eighty (180) Days, Chevron or Buyer shall then have the option while such suspension continues to terminate its obligations to the other party under this Contract on thirty (30) Days' written notice to the other party. Section 13.3: Notification of Suspension Any party which relies upon Article XII shall give the other party prompt notice thereof specifying the anticipated amount and duration of any suspension or reduction of Deliveries. It shall also give prompt notice when it no longer expects to rely on Article XII and Deliveries shall be reinstated subject to all conditions of this Contract, unless this Contract has been terminated previously under Section 13.2. Section 13.4: Obligation to Pay In Full Nothing in Article XII shall relieve Buyer of the obligations to pay in full in United States currency for the Oil or Jet sold and Delivered hereunder and for other amounts due to Buyer to Chevron under this Contract, nor relieve Chevron of the obligation to return to Buyer the net positive inventory of Buyer's oil stored in Chevron's Hilo, Hawaii and Kahului, Maui terminals. Section 13.5: Suspension Not A Breach Of Contract While Deliveries are suspended or reduced by Chevron pursuant to Article XII, it shall not be a breach of this Contract for Buyer to buy from a supplier other than Chevron the quantities of Oil or Jet which Chevron does not Deliver. During this period of time, there will be no minimum volume requirements. After any suspension or reduction has ended, minimum and maximum volume requirements for the semiannual period in which the suspension or reduction occurred will be reduced in proportion to the ratio of the number of Days within the semiannual period during which no suspension or reduction was in effect, to the number of Days within the semiannual period. ARTICLE XIV WAIVER AND NONASSIGNABILITY --------------------------- Section 14.1: Waiver By One Party Waiver by one party of the other's breach of any provision of this Contract shall not be deemed a waiver of any subsequent or continuing breach of such provisions or of the breach of any other provision or provisions hereof. 26 Section 14.2: Assignability of Contract This Contract shall not be assignable by either party without the written consent of the other, which shall not be unreasonably withheld, except that Chevron may assign this Contract to any affiliate, provided that any such assignment shall not release Chevron from any of its obligations hereunder, and except that HECO, MECO, MECO-Molokai, and HELCO may assign their interests in the Contract to the Trustee under their respective First Mortgage Bond Indentures. Chevron does not, by agreement to such an assignment, waive any right it may have to terminate this Contract for any breach hereof occurring at any time before or after any such assignment or release Buyer of any obligations arising under this Contract after any such assignment. Following any such assignment, no further assignment may be made without the consent of Chevron. ARTICLE XV CONFLICT OF INTEREST -------------------- Conflicts of interest related to this Contract are strictly prohibited. Except as otherwise expressly provided herein, neither party nor any director, employee or agent of a party shall give to or receive from any director, employee or agent of the other party any gift, entertainment or other favor of significant value, or any commission, fee or rebate. Likewise, neither party nor any director, employee or agent of a party shall enter into any business arrangement with any director, employee or agent of the other party (or any affiliate), unless such person is acting for and on behalf of the other party, without prior written notification thereof to the other party. In the event of any violation of this paragraph, including any violation occurring prior to the date of this Contract which resulted directly or indirectly in one party's consent to enter into this Contract with the other party, such party may, at its sole option, terminate this Contract at any time and, except for Buyer's obligation to pay in full in United States currency for the Oil sold and Delivered hereunder and for other amounts due by Buyer to Chevron under this Contract, and for Chevron's obligation to return to Buyer the net positive inventory of Buyer's oil stored in Chevron's Hilo, Hawaii and Kahului, Maui terminals, shall be relieved of any further obligation under this Contract. Both parties agree to immediately notify the other of any known violation of this Article. ARTICLE XVI DEFAULT ------- If Buyer or Chevron considers the other party to be in default of any obligation under this Contract, such party shall give the other party notice thereof. Such other party shall then have 30 Days in which to remedy such default. If the default is not remedied, the other party may, without prejudice to any other right or remedy of such party in respect of such breach, terminate its obligations under this Contract, except for Buyer's obligation to pay in full in United States currency for the Oil or Jet sold and Delivered hereunder and for other amounts due by Buyer to Chevron under this Contract, and for Chevron's obligation to return to Buyer the net positive inventory of Buyer's oil stored in Chevron's Hilo, Hawaii and Kahului, Maui terminals, by forty five (45) Days' written notice to the party in breach. Any termination shall be without prejudice to accrued rights. All rights and remedies hereunder are independent of each other and election of one remedy shall not exclude another. Except as provided under Sections 18.2 and 18.4, in no event shall either party be liable for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise. Chevron's termination of its obligations to a Buyer in this Contract due to default by that Buyer shall not terminate Chevron's obligations to the remaining Buyers not in default of this Contract. 27 ARTICLE XVII APPLICABLE LAW -------------- This Contract shall be construed in accordance with, and all disputes arising hereunder shall be determined in accordance with, the local law of the State of Hawaii, U.S.A. ARTICLE XVIII INDEMNITY --------- Section 18.1: Buyer Held Harmless for General Indemnity where title and risk of loss is with Chevron Chevron shall indemnify, defend and hold harmless Buyer, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) from and against all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses (including reasonable attorneys' fees), and proceedings of any nature whatsoever for personal injury (including death), or property damage, including but not limited to Buyer's facilities (collectively "Injury or Damage"), that results from non- specification or contaminated Delivered Oil or Jet, or that arises out of or is in any manner connected with the Delivery or Receipt of Oil or Jet related to this Contract at Chevron's facilities when in the custody of Chevron or the transportation of Oil or Jet related to this Contract when in the custody of Chevron, except to the extent that such Injury or Damage may be attributable to the negligence or willful action of Buyer. This Section 18.1 shall not include any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise. Section 18.2: Buyer Held Harmless for Releases to the Environment when title and risk of loss is with Chevron Without limiting the generality of Section 18.1, Chevron shall indemnify, defend and hold harmless Buyer, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) from and against all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses, and proceedings of any nature whatsoever directly or indirectly arising out of or attributable to the release, threatened release, discharge, disposal or presence of Oil, Jet or hazardous material related to this Contract when in the custody of Chevron, or of Diesel sold pursuant to the provisions of Section 6.5 herein when in the custody of any Chevron-chartered barge, except to the extent that such release, threatened release, discharge, disposal or presence of Oil, Jet or hazardous material may be attributable to the negligence or willful action of Buyer, including without limitation: (1) all foreseeable and unforeseeable consequential damages; (2) the reasonable costs of any required or necessary repair, cleanup or detoxification of an area of oil, jet or hazardous material and the preparation and implementation of any closure, remedial or other required plans; (3) the reasonable costs of the investigation of any environmental claims by Buyer; (4) the reasonable costs of Buyer's enforcement of this Contract; and (5) all reasonable costs and expenses incurred by Buyer in connection with clauses (1), (2), (3), and (4), including without limitation reasonable attorneys' fees and court costs. Section 18.3: Chevron Held Harmless For General Indemnity when title and risk of loss is with Buyer Buyer shall indemnify, defend and hold harmless Chevron, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) from and against all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses (including reasonable attorneys' fees), and proceedings of any nature whatsoever for personal injury (including death), or property damage, including but not limited to Chevron's facilities (collectively "Injury or Damage"), that results from non- specification or contaminated Received oil or jet, or that arises out of or is in any manner connected with the Delivery or receipt of oil or jet at Chevron's facilities when in the custody of Buyer, any carrier or subsequent buyer of oil or jet related to this Contract or the transportation of oil or jet when in the custody of Buyer, any carrier or subsequent buyer of oil or jet related to this Contract, except to the extent that such Injury or Damage may be attributable to the negligence or willful action of Chevron. This Section 18.3 shall not include any indirect, consequential, special or incidental 28 damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise. Section 18.4: Chevron Held Harmless for Releases to the Environment when title and risk of loss is with Buyer Without limiting the generality of Section 18.3, Buyer shall indemnify, defend and hold harmless Chevron, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) from and against all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses, and proceedings of any nature whatsoever directly or indirectly arising out of or attributable to the release, threatened release, discharge, disposal or presence of oil, jet or hazardous material related to this Contract when in the custody of Buyer, any carrier (except any Chevron- chartered barge carrying Diesel sold pursuant to the provisions of Section 6.5 herein) or subsequent buyer of oil or jet related to this Contract, except to the extent that such release, threatened release, discharge, disposal or presence of oil, jet or hazardous material may be attributable to the negligence or willful action of Chevron, including without limitation: (1) all foreseeable and unforeseeable consequential damages; (2) the reasonable costs of any required or necessary repair, cleanup or detoxification of an area of oil, jet or hazardous material and the preparation and implementation of any closure, remedial or other required plans; (3) the reasonable costs of the investigation of any environmental claims by Chevron; (4) the reasonable costs of Chevron's enforcement of this Contract; and (5) all reasonable costs and expenses incurred by Chevron in connection with clauses (1), (2), (3), and (4), including without limitation reasonable attorneys' fees and court costs. ARTICLE XIX PUBLIC UTILITIES COMMISSION --------------------------- Section 19.1: Filing Requirements; Buyers Energy Cost Adjustment Clause This Contract is required to be filed with the Hawaii Public Utilities Commission ("PUC") for approval. If in the proceedings initiated as a result of the filing of this Contract the PUC disapproves or fails to authorize the full recovery of the fuel costs incurred under this Contract through Buyer's Energy Cost Adjustment Clause, Buyer may terminate this Contract at any time within ninety (90) Days of disapproval by giving sixty (60) Days' written notice to Chevron. Section 19.2: Decision and Order Impairing Chevron In the event that a Decision and Order or other action by a governmental regulatory body impairs Chevron's ability to enforce any terminal and safety protection or operation provisions under this Contract, Buyer and Chevron shall attempt to agree on an alternate course of action, but failing agreement within 10 Days, the Chevron may suspend performance with respect to the quantity of oil or jet affected by said Decision and Order after giving Buyer ninety (90) Days' written notice. Section 19.3: Use as a Public Utility No use of the pipelines, facilities or equipment owned by Chevron and used in connection with this Contract shall be construed as having been dedicated by Chevron to a public use and it is hereby acknowledged by the parties that Chevron retains the exclusive right to determine who, other than the parties to this Contract, shall use said pipelines, facilities, and equipment. 29 ARTICLE XX INSURANCE --------- Section 20.1: Requirements Without in any way limiting Buyer's liability pursuant to this Contract, Buyer shall maintain and require any carrier or subsequent buyer of oil or jet related to this Contract to maintain the following insurance and all insurance that may be required under the applicable laws, ordinances, and regulations of any governmental authority: i. Workers' Compensation and Employers' Liability Insurance as prescribed by applicable law, including insurance covering liability under the Longshoremen's and Harbor Workers' Act, the Jones Act and the Outer Continental Shelf Land Act, if applicable. ii. Commercial General Liability Insurance including Bodily Injury and Property Damage Insurance with a limit not less than $1,000,000 combined single limit per occurrence. iii. Automobile Bodily Injury and Property Damage Liability Insurance on all owned, non-owned and hired vehicles used in receiving oil or jet from Chevron's facilities with a limit not less than $1,000,000 combined single limit per occurrence for bodily injury and property damage. iv. Hull and Machinery Insurance including collision liability and tower's liability on vessels engaged in towage with a limit at least equal to the actual value of each vessel and barge. v. Marine Insurance under one of the two following options: Option One: Protection and Indemnity Insurance including coverage for injuries to or death of masters, mates and crew and excess collision liabilities. The limits of such insurance shall not be less than $25 million per occurrence. Vessel pollution liability insurance including coverage for pollution liabilities imposed by federal and state laws now or hereafter in effect in an amount not less than $500 million; or, Option Two: Protection and Indemnity Insurance on a full entry basis with an International Group P&I Club. Such insurance shall include, but not be limited to, coverage for injuries to or death of masters, mates and crew; excess collision liabilities and pollution liabilities imposed by federal and state laws now or hereafter in effect). Such insurance shall be unlimited as per International Group, P&I Club rules except for pollution liabilities which shall be limited to $500 million or the maximum pollution limit offered by the P&I Clubs of the International Group. Section 20.2: Change of Insurance Notification The above insurance shall include a requirement that the insurer provide Chevron with 30 Days' written notice prior to the effective date of any cancellation or material change of the insurance. The insurance specified in Sections 20.1 (i) and 20.1 (iv) shall contain a waiver of subrogation against Chevron and an assignment of statutory lien, if applicable. The insurance specified in Sections 20.1 (ii), 20.1 (iii), and 20.1 (v) Option One Protection and Indemnity Insurance shall name Chevron as additional insured. Section 20.3: Certificate of Insurance From Subsequent Buyers and Carriers Before performance of this Contract, Buyer shall provide Chevron with certificates or other documentary evidence satisfactory to Chevron of the insurance coverages and endorsements. 30 Section 20.4: Obtaining Insurance Documents Without in any way limiting Chevron's liability, Chevron shall obtain from any Chevron carrier or subsequent buyer from Chevron of oil or jet related to this Contract the insurance coverages and endorsements set forth in this Article excepting that both Chevron and Buyer be named as additional insureds. Section 20.5: Terminaling and Handling Fees Insurance Exclusion The terminaling and handling fees listed in Section 11.14 do not include any insurance covering loss of Buyer's oil or jet while it is in the custody of Chevron. It is expressly understood and agreed that insurance, if any is desired by Buyer, shall be carried by Buyer at its own expense. ARTICLE XXI SAFETY AND TERMINATION PROTECTION --------------------------------- Section 21.1: Operating and Safety Regulations Any buyer or carrier of oil or jet related to this Contract or their agents shall comply with all of the operating and safety regulations of Chevron, as amended from time-to-time, when alongside, upon, or when approaching the premises of Chevron for the purpose of loading oil or jet related to this Contract or when departing Chevron's premises after loading oil or jet related to this Contract. In particular, all smoking shall be limited to such locations and occasions as are specifically authorized in writing by Chevron. If Chevron determines that an unsafe condition exists, Chevron may, at its absolute discretion, cease the loading or unloading operations and order any buyer or carrier of oil or jet related to this Contract or their agents to leave its place of mooring. Any loss or damage incurred by Chevron, any buyer or carrier of oil or jet related to this Contract or their agents due to any violation by any buyer or carrier of oil or jet related to this Contract or their agents of Chevron's operating and safety regulations shall be for Buyer's or Carrier's account. Copies of Chevron's operating and safety regulations are available upon request. Section 21.2: Right To Refuse Acceptance In addition to its rights under Section 21.1, Chevron shall have the[---] of any barge or vessel nominated by Buyer to load or discharge if in Chevron's Terminal's [---] for [---]. Chevron's Terminal's acceptance or rejection of Buyer's Nominated Barge or vessel shall be communicated to Buyer within [---] hours after the Terminal's receipt of nomination, and in the event Buyer's barge nomination is rejected, Chevron shall provide Buyer satisfactory documentation of the basis for the rejection of such nomination. Chevron's Terminal's acceptance or rejection of any barge or vessel shall not constitute a continuing acceptance or rejection of such barge or vessel for subsequent loading or discharge. Chevron shall not be liable for any loss, damage or delay caused by its rejection of a vessel nomination hereunder, nor any loss, damage or delay caused by its rejection of a vessel for failure to comply pursuant to Section 21.1. In no event shall the acceptance of a vessel by Chevron be construed in any manner as a representation as to the vessel's operational, environmental or safety status. Neither Buyer nor any other party shall be entitled to rely on any such acceptance of a vessel by Chevron hereunder. ARTICLE XXII POLLUTION MITIGATION -------------------- Section 22.1: Responsibility to Mitigate In the event an escape or discharge of oil or jet occurs from any barge or vessel carrying oil or jet related to this Contract and causes or threatens to cause pollution damage, Buyer or carrier will promptly take whatever measures are necessary to prevent or mitigate such damage. Buyer hereby authorizes Chevron, or its agent, at 31 Chevron's option, upon notice to Buyer or master on the tug, to undertake such measures as are reasonably necessary to prevent or mitigate the pollution damage. Chevron or its agent shall keep Buyer advised of the nature and results of any such measures taken and, if time permits, intended to be taken. Any of the aforementioned measures shall be at Buyer's sole expense (except to the extent that such escape or discharge was caused by the negligence or willful action of Chevron or its agent), provided that if Buyer considers said measures should be discontinued, Buyer shall so notify Chevron or its agent and thereafter Chevron or its agent shall have no right to continue said measures at Buyer's authority or expense except as provided in Section 18.4. This provision shall be applicable only between Buyer and Chevron and shall not affect, as between Buyer and Chevron, any liability of Buyer to any third parties, including but not limited to governments. Section 22.2: Cooperation With Chevron's Measures In addition to its duties under Section 22.1, Buyer agrees to cooperate with all efforts and to pay all reasonable costs associated with preventive booming or other preventive measures that Chevron reasonably determines is advisable on an isolated or routine basis. ARTICLE XXIII MISCELLANEOUS ------------- Section 23.1: Heading of Articles and Sections Headings of the Articles and Sections are for convenient reference only and are not to be considered part of this Contract. Section 23.2: Content of Document This document contains the entire agreement between the parties covering the subject matter and cancels, as of the Effective date hereof, all prior agreements of any kind between the parties covering such subject matter and any amendments thereto. There are no other agreements which constitute any part of the consideration for, or any condition to, either party's compliance with its obligations under this Contract. Section 23.3: Notification Except as otherwise expressly provided herein, all notices shall be given in writing, by letter, facsimile, electronic mail to the following addresses, or such other address as the parties may designate by notice, and shall be deemed given upon receipt. Chevron: Manager, Petroleum Coke, Heavy Fuels & Sulfur Chevron Products Company, A Division of Chevron U.S.A. Inc P.O. Box 7006 San Francisco, CA 94120-7006 FAX: (415) 894-1195 Buyer: Manager, Power Supply Services Department Hawaiian Electric Company, Inc. P.O. Box 2750 Honolulu, HI 96840-0001 FAX: (808) 543-4366 The Manager, Power Supply Services Department, for Hawaiian Electric Company, Inc., shall be responsible for forwarding notices to the other parties to this Contract. 32 Section 23.4: Court Rulings If any term or provision, or any part of any term or provision, of this Contract is held by any court or other competent authority to be illegal or unenforceable, the remaining terms, provisions, rights and obligations shall not be affected. Section 23.5: Benefit of And Binding This Contract shall inure to the benefit of and be binding upon the parties hereto, their successors and permitted assigns. Section 23.6: Effective Date and Supersedence Effective as of the Effective Date of the Term hereunder, this Contract hereby supersedes that certain Inter-Island Industrial Fuel Oil and Diesel Fuel Contract between the parties dated, November 20, 1995 and all amendments thereto. 33 IN WITNESS WHEREOF, the parties have caused these presents to become effective as of the day and year first herein above written. ACCEPTED AND AGREED: "Chevron" CHEVRON PRODUCTS COMPANY, A DIVISION OF CHEVRON U.S.A. INC BY: /s/ Phillip H. Fisher --------------------- Phillip H. Fisher TITLE: Manager, Petroleum Coke, Heavy Fuels & Sulfur "Buyers" HAWAIIAN ELECTRIC COMPANY, INC. MAUI ELECTRIC COMPANY, LTD. BY: /s/ Edward Y. Hirata BY: /s/ Edward Y. Hirata ------------------------------ ------------------------------ Edward Y. Hirata Edward Y. Hirata - ---------------------------------- ---------------------------------- (Printed or Typed Name) (Printed or Typed Name) TITLE: Vice President, Regulatory TITLE: Vice President, Regulatory Affairs Affairs --------------------------- --------------------------- BY: /s/ Marvin A. Hawthorne BY: /s/ Marvin A. Hawthorne ------------------------------ ------------------------------ Marvin A. Hawthorne Marvin A. Hawthorne - ---------------------------------- ---------------------------------- (Printed or Typed Name) (Printed or Typed Name) TITLE: Assistant Treasurer TITLE: Assistant Treasurer --------------------------- --------------------------- 34 HAWAII ELECTRIC LIGHT COMPANY, INC. HAWAIIAN TUG & BARGE CORP. BY: /s/ Edward Y. Hirata BY: /s/ Glenn K. Y. Hong ------------------------------ ------------------------------ Edward Y. Hirata Glenn K. Y. Hong - ---------------------------------- ---------------------------------- (Printed or Typed Name) (Printed or Typed Name) TITLE: Vice President, Regulatory TITLE: President Affairs --------------------------- --------------------------- HAWAII ELECTRIC LIGHT COMPANY, INC. HAWAIIAN TUG & BARGE CORP. BY: /s/ Marvin A. Hawthorne BY: /s/ Lisa M. K. Sakamoto ------------------------------ ------------------------------ Marvin A. Hawthorne Lisa M. K. Sakamoto - ---------------------------------- ---------------------------------- (Printed or Typed Name) (Printed or Typed Name) TITLE: Assistant Treasurer TITLE: Vice President --------------------------- --------------------------- YOUNG BROTHERS, LIMITED BY: /s/ Glenn K. Y. Hong ------------------------------ Glenn K. Y. Hong - ---------------------------------- (Printed or Typed Name) TITLE: President --------------------------- BY: /s/ Lisa M. K. Sakamoto ------------------------------ Lisa M. K. Sakamoto - ---------------------------------- (Printed or Typed Name) TITLE: Vice President --------------------------- 35 ADDENDUM NO. 1 ILLUSTRATIVE SCHEDULE OF PRICES ------------------------------- Illustrative Product Price Calculation for [---] I. NO. 2 DIESEL FUEL For HECO, HT&B, YB; and MECO or HELCO FOB point of Delivery as per Section 6.3, Section 6.2 and Section 6.1, respectively: [---] where PD1 is equal to the price per physical gallon for the Month of Delivery for No. 2 Diesel Fuel purchased by HECO, HT&B, YB, MECO or HELCO in U.S. Dollars ("$") per ("/") gallon. I. DI = Index for No. 2 Diesel Fuel, which shall be the simple average of the high and low price assessments on all dates of publication for West Coast Pipeline, Los Angeles California Low Sulfur No. 2 Diesel as reported by Platt's Oilgram Price Report ("Platt's Oilgram") during the period beginning the 21st Day of the second preceding Month to the 20th Day of the Month preceding Delivery, expressed in $/gallon.
Date Low High Average ---- --- ---- ------- [---] AVERAGE [---] IN USD [---] PER GALLON
II. [---] 36 Assume [---] per barrel premium values apply: [---] [---] [---] III. TD1/TD2/TD3/TD4/TD5 = Taxes applicable to the sale of Diesel pursuant to Section 5.3 herein. Hawaii General Excise Tax = 4.166% of pre-HGET price [---] Taxes after application of HGET [---] Hawaii Environmental Response Tax = $0.05 per barrel, $0.0012 per gallon Hawaii Liquid Fuel Tax = $0.01 per gallon IV. LP1, LP2, LP3, and LP4 are [---] for Deliveries in bulk to the respective Buyer at Kaunakakai, Molokai, Kahului, Maui, Hilo, Hawaii and Kawaihae, Hawaii, respectively, during the period indicated and expressed in $ per gallon, as follows:
1988-1989 2000-2001 2002-2004 LP1 [---] [---] [---] LP2 [---] [---] [---] LP3 [---] [---] [---] LP4 [---] [---] [---]
A. PRODUCT PRICE COMPUTATION FOR [---] DELIVERY OF NO. 2 DIESEL FUEL PURCHASED BY HECO, HT&B, YB, MECO OR HELCO HAVING A STANDARD BTU CONTENT OF [---] TO 141,000 BTU PER GALLON [---] = [---] = [---] where TD1 = sum of HGET = 4.166% of Diesel Index + [---] = 0.04166*[---]= [---] [---] of Diesel Index + [---] = [---] Hawaii Environmental Response Tax = $0.0012/gallon Hawaii Liquid Fuel Tax = $0.0100/gallon -------------- [---]
[---] = [---] = [---] PER GALLON 37 B. PRODUCT PRICE COMPUTATION FOR [---] DELIVERY OF NO. 2 DIESEL FUEL PURCHASED BY HECO, HT&B, YB, MECO OR HELCO HAVING OTHER THAN A STANDARD BTU CONTENT Assume the weighted average BTU content per gallon of the representative samples of Diesel purchased by a respective Buyer during a calendar quarter was [---]. The price charged for the Diesel sold and Delivered to that respective Buyer during each Month of the calendar quarter in question shall be adjusted by multiplying the Diesel price by the ratio of the actual heat content to a standard of [---]. [---] = [---] = [---] = [---] where TD1 = sum of HGET = 4.166% of adjusted (Diesel Index + [---] = [---] [---] of adjusted (Diesel Index + [---] = [---] Hawaii Environmental Response Tax = $0.0012/gallon Hawaii Liquid Fuel Tax = $0.0100/gallon -------------- [---]
[---] = [---] = [---] PER GALLON C. PRODUCT PRICE COMPUTATION FOR [---] DELIVERY OF NO. 2 DIESEL FUEL PURCHASED BY MECO AND HELCO TO BUYER'S NOMINATED MARINE TERMINAL AT KAUNAKAKAI, MOLOKAI, KAHULUI, MAUI, HILO, HAWAII OR KAWAIHAE HAWAII HAVING A STANDARD BTU CONTENT OF [---] 1. For MECO-Molokai/Delivered Kaunakakai: [---] Where PD2 is equal to the price per physical gallon for the Month of Delivery for No. 2 Diesel purchased by MECO-Molokai, Delivered to Kaunakakai, in $/gallon. Assume [---] value applies, thus [---] [---] [---] 38 where TD2 = sum of HGET = 4.166% of Diesel Index +[---] = [---] [---] [---] = [---] Hawaii Environmental Response Tax = $0.0012/gallon Hawaii Liquid Fuel Tax = $0.0100/gallon -------------- [---]
[---] = [---] = [---] PER GALLON 2. For MECO/Delivered Kahului: [---] Where PD3 is equal to the price per physical gallon for the Month of Delivery for No. 2 Diesel purchased by MECO-Maui, Delivered to Kahului, Maui, in $/gallon, Assume [---]value applies, thus [---] = [---] [---] = [---] = [---] where TD3 = sum of HGET = 4.166% of Diesel Index [---] = 0.04166*[---] = [---] [---] = [---] Hawaii Environmental Response Tax = $0.0012/gallon Hawaii Liquid Fuel Tax = $0.0100/gallon -------------- [---]
[---] = [---] = [---] PER GALLON 3. For HELCO/Delivered Hilo: [---] Where PD4 is equal to the price per physical gallon for the Month of Delivery for No. 2 Diesel purchased by HELCO-Hawaii, Delivered to Hilo Hawaii, in $/gallon. Assume [---] value applies, thus 39 [---] = [---] [---] = [---] = [---] where TD4 = sum of HGET = 4.166% of Diesel Index [---] = [---] [---] = [---] Hawaii Environmental Response Tax = $0.0012/gallon Hawaii Liquid Fuel Tax = $0.0100/gallon -------------- [---]
[---] = [---] = [---] PER GALLON 4. For HELCO/Delivered Kawaihae: [---] Where PD5 is equal to the price per physical gallon for the Month of Delivery for No. 2 Diesel purchased by HELCO-Hawaii, Delivered to Kawaihae Hawaii, in $/gallon. Assume [---] value applies, thus [---] = [---] [---] = [---] = [---] where TD5 = sum of HGET = 4.166% of Diesel Index [---] = [---] [---] = [---] Hawaii Environmental Response Tax = $0.0012/gallon Hawaii Liquid Fuel Tax = $0.0100/gallon -------------- [---]
[---] = [---] = [---] PER GALLON 40 D. PRODUCT PRICE COMPUTATION FOR [---] DELIVERY OF NO. 2 DIESEL FUEL PURCHASED BY MECO AND HELCO TO BUYER'S NOMINATED MARINE TERMINAL AT KAUNAKAKAI, MOLOKAI, KAHULUI, MAUI, HILO, HAWAII OR KAWAIHAE HAWAII HAVING A BTU CONTENT OF OTHER THAN STANDARD Assume the weighted average BTU content per gallon of the representative samples of Diesel purchased by a respective Buyer during a calendar quarter [---]. The price charged for the Diesel sold and Delivered to that respective Buyer during each Month of the calendar quarter in question shall be adjusted by multiplying the Diesel price by the ratio of the actual BTU content to a standard of [---]. For MECO-Molokai/Delivered Kaunakakai: [---] Where PD2 is equal to the price per physical gallon for the Month of Delivery for No. 2 Diesel purchased by MECO-Molokai, Delivered to Kaunakakai, in $/gallon. Assume [---] value applies, thus [---] = [---] [---] = [---] = [---] = [---] where TD2 = sum of HGET = 4.166% of adjusted (Diesel Index [---] = [---] [---] = [---] Hawaii Environmental Response Tax = $0.0012/gallon Hawaii Liquid Fuel Tax = $0.0100/gallon -------------- [---]
[---] = [---] = [---] PER GALLON Note on computation of other Diesel Delivered to Kahului, Hilo and Kawaihae: - ---------------------------------------------------------------------------- Price per physical gallon for the Month of Delivery for No. 2 Diesel purchased by MECO-Maui, Delivered to Kahului, HELCO-Hawaii, Delivered to Hilo, Hawaii and by HELCO-Hawaii, Delivered to Kawaihae, Hawaii in $/gallon having a BTU content other than standard would be determined in a manner logically consistent with than computed above for MECO-Molokai. CIFO For MECO or HELCO FOB their respective Nominated Barge: 41 [---] Where PF is equal to the price per physical barrel for the Month of Delivery for CIFO, in $/barrel. I. FI = the Index for CIFO which shall be the simple average of the low and high price assessments for Los Angeles Bunker C Fuel Oil as reported by Platt's Oilgram Bunkerwire ("Platt's Bunkerwire") for all dates of publication from the 21st Day of the second preceding Month to 20th Day of the Month preceding Delivery expressed in $/barrel
Date Low High Average ---- --- ---- ------- [---] [---] [---] [---]
AVERAGE [---] IN USD [---] PER [---] [---] = [---] [---] = [---] PER BARREL II. [---] Assume [---]per barrel premium values apply: [---] 42 Assume further that the barrel volume in the Delivery to be priced is [---], thus [---] = [---] III. TF = Taxes applicable to the sale of CIFO pursuant to Section 5.3 herein. Hawaii General Excise Tax = 4.166% of pre-HGET price [---] Taxes after application of HGET [---]: Hawaii Environmental Response Tax = $0.05 per barrel E. PRODUCT PRICE COMPUTATION FOR [---] DELIVERY OF CIFO PURCHASED BY MECO OR HELCO HAVING A STANDARD BTU CONTENT OF [---] BARREL [---] = [---] = [---] where TF = sum of HGET = 4.166% of CIFO Index [---] = [---] [---] = [---] Hawaii Environmental Response Tax = $0.050/barrel ------------- [---]
[---] = [---] = [---] PER BARREL F. PRODUCT PRICE COMPUTATION FOR [---] DELIVERY OF CIFO PURCHASED BY MECO OR HELCO HAVING OTHER THAN A STANDARD BTU CONTENT Assume the weighted average BTU content per barrel of the representative samples of CIFO purchased by a respective Buyer during a calendar quarter [---]. The price charged for the CIFO sold and Delivered to that respective Buyer during each Month of the calendar quarter in question shall be adjusted by multiplying the CIFO price by the ratio of the actual BTU content to a standard of [---]. [---] = [---] = [---] = [---] where TF = sum of 43 HGET = 4.166% of adjusted (CIFO Index +[---] = [---] [---] = [---] Hawaii Environmental Response Tax = $0.050/barrel ------------- [---]
[---] = [---] = [---] PER BARREL Note on items as they appear on invoices - ---------------------------------------- Actual invoices for sales and Deliveries of Diesel and CIFO may include additional charges for Hawaii DOT/Harbors Div. wharfage fees applied when Buyer's Nominated Barge is moored, all or in part, against or to State piers. For billing purposes, certain taxes, such as the HGET [---], on the sale and Delivery of Diesel may be consolidated with the corresponding tax charged on the sale and Delivery of CIFO. Actual invoices for sales and Deliveries of Diesel and CIFO may also contain comments which reference the wharfage charge per unit, and volume of Diesel and CIFO on which the wharfage fee is levied and the identifying number of the State pier for which wharfage is being levied. JET For MECO or HELCO FOB MECO's or HELCO's respective power plant truck unloading rack:. their respective Nominated Barge: PJ = JI + [---] + TJ Where PJ is equal to the price per physical barrel for the Month of Delivery for Jet, in $/gallon. I. JI = the Index for Jet which shall be the Friday simple average West Coast Spot Pipeline price for jet fuel in Los Angeles in the Month preceding Delivery, as reported by the Platt's Oilgram from the 21st of the second preceding Month to the 20th Day of the Month preceding Delivery.
Date Low High Average ---- ------- ------- ------- 08/22/97 $0.5850 $0.6025 $0.5938 08/29/97 $0.5775 $0.5850 $0.5813 09/05/97 $0.5750 $0.5875 $0.5813 09/12/97 $0.5700 $0.5800 $0.5750 09/19/97 $0.6025 $0.6150 $0.6088
AVERAGE OF MEAN IN USD $0.5880 PER GALLON II. TJ = Taxes applicable to the sale of Jet pursuant to Section 5.3 herein. 44 Hawaii General Excise Tax = 4.166% of pre-HGET price [---] Taxes after application of HGET[---]: Hawaii Environmental Response Tax = $0.05 per barrel, $0.0012 per gallon G. PRODUCT PRICE COMPUTATION FOR DELIVERY OF JET PURCHASED BY MECO OR HELCO PJ = $0.5880 + [---] + TJ = [---] + TJ where TJ = sum of HGET = 4.166% of Jet Index [---] = 0.04166* [---] = [---] [---] = [---] Hawaii Environmental Response Tax = $0.0012/gallon -------------- [---]
[---] = [---] = [---] PER GALLON 45 ADDENDUM NO. 2 QUALITY CONTROL SAMPLES SUMMARY -------------------------------
---------------------------------- FREQUENCY APPLICATION CONTRACT SELECTION -------------- ---------------------------------- TAKING THE SAMPLE METHOD & SAMPLE SAMPLE ACTION ON TYPE LABEL SAMPLE ANALYSIS LOCATION TAKING ANALYSIS FAILURE - ---- ----- -------------- ------------- -------------- ----------- -------- --------- 1. Refinery Production --- After Each After Each Composite N/A N/A N/A Tank Receipt Receipt from Refinery Tank 2. HMT Inventory --- After Each After Each Composite N/A N/A N/A Tank Receipt Receipt from HMT Tank 3. Delivered A. Buyer's During Each Only If Drip From 7.1 7.2 7.3 Sample Barge Necessary Loading Line Loading or at HMT or B. Chevron's Monthly Composite Sample from [---] C. Buyer's Retain 4. Loaded A. Chevron's After Each A. After Composite 6.1iii 11.3i 11.3I & Sample Barge Loading Each Loading From Barge 11.3ii B. Only If Tanks at HMT Necessary B. Buyer's Retain 5. Loaded (Third-Party) A. Buyer's After Each A. After Composite 11.1ii 11.3I 11.3I & Sample Barge Loading Each Loading from Barge 11.3ii of B.( Only If Tanks at Third-Party Necessary Third-Party B. Chevron's Oil Supplier's Sample Dock C. Buyer's Retain 6. Received A. Prompt Before Each A. Before Composite A. 11.6i 11.6ii 11.6iv Barge Each Loading from Barge B. Buyer's Unloading B.,C.,D. Tanks at Hilo B. 11.6Ii 11.6iii 11.6iv Sample Whether (Only if or Kahului Buyer's or Necessary) Harbor Chevron's C. Chevron's Sample D. Buyer's Retain 7. Returned A. Prompt After Each A. Before Composite A. 11.3i 11.13I 11.13iii Barge Each Loading from B. Buyer's B.,C.,D. Chevron's B. 11.3i 11.13ii 11.13iii Sample Unloading (Only if Tanks at Hilo Whether Necessary or Kahului Buyer's or Terminals C. Chevron's Chevron's Sample D. Buyer's Retain
46 ADDENDUM NO. 2 - QUALITY CONTROL SAMPLES SCHEMATIC Part 1 of 2 (diagram) 47 ADDENDUM NO. 2 - QUALITY CONTROL SAMPLES SCHEMATIC Part 2 of 2 (diagram) 48 ADDENDUM NO. 3 [---] SECTION 1 - --------- [---] (also referred to herein as the [---]). The provisions of [---] shall only apply to the [---] as described herein and shall [---]. If and whenever said [---] for the use of [---] and for the [---] provided: 1. Chevron shall have the right to review the quality of [---]; and 2. Buyer shall permit Chevron, its employees and agents (including but not limited to affiliates and contractors and their employees) to enter upon and inspect Buyer's Barbers Point Storage Facilities immediately prior to, during and immediately after [---] upon reasonable advance notice to Buyer and provided that such entry and inspection shall not interfere with operation of Buyer's Barbers Point Storage Facilities. 3. Buyer shall operate the [---] in a safe manner, in compliance with all applicable laws and regulations, and in accordance with good engineering and operating practices ("GEOPS") and in accordance with generally accepted industry practices. 4. Buyer's use of the [---] during any Year of this Contract, if and whenever said [---] are completed, shall be [---] SECTION 2 - --------- [---] need to be constructed in the location where [---] physically intersect and connect with the [---], which shall be taken to be at the[---]. Provided further: a. [---] shall be responsible for the design, engineering and construction and shall bear the costs arising therefrom of the [---] shall have the right to approve in advance, [---] designs, engineering and construction standards, provided, however, that such approval shall not be unreasonably withheld b. [---], may, at its option, engage third-party consultants or contractors to perform the design, engineering and construction of the [---], provided that [---] selection of such consultants and contractors shall be subject to [---] approval, provided, however, that such approval shall not be unreasonably withheld. 49 c. The design and engineering plans (the "Plans") for the [---] shall be developed in accordance with all applicable laws and regulations and GEOPS. [---] shall have twenty (20) working days following its receipt of the Plans ("20-day Period") to review the Plans and submit written comments to [---]. Should [---] fail to provide written notice to [---] of its approval, conditional approval or disapproval of the Plans prior to the end of said 20-day Period, [---] shall be deemed to have approved the Plans. d. [---] shall permit [---] to inspect the construction of the [---] at all times during normal business hours and upon reasonable advance notice. [--- ] shall perform all construction work in compliance with all applicable laws and regulations. e. Following the completion of the construction of the [---] shall transfer to [---] all of [---] rights, title and interest in and to the [---] which shall then be a part of the [---]. On and after such date and time of transfer, [---] shall own, operate and maintain the tee branch connection and other components of the [---]. Subject to the prior approval of [---], which shall not be unreasonably withheld, [---] shall schedule and perform such routine maintenance on the [---] as shall be required to by applicable laws, regulations, general industry practices and GEOPS. [---] shall reimburse [---] for its reasonable documented out of pocket costs and expenses incurred solely as a result of such routine maintenance. SECTION 3 - --------- Whenever [---] operates the [---], it shall do so at all times in a safe, effective and efficient manner, in compliance with all applicable laws and regulations, in a reasonable and prudent manner and in conformance with generally accepted industry practices and GEOPS. [---] operating standards and instructions shall be available for [---] inspection at [---]. SECTION 4 - --------- Consent of [---] shall not be required for routine maintenance of the [---], provided, however, [---] shall be required to advise [---] regarding the potential impact on shipments of [---] caused by any maintenance procedures or improvements which are not routine or minor in nature and which are not urgent and necessary to maintain the [---] in good order. Such maintenance shall be performed by [---] as may be required from time to time. [---] shall maintain accurate and complete records of maintenance performed and shall provide same and any other relevant supporting information as [---] may reasonably require. SECTION 5 - --------- If subsequent to [---], additions or modifications to any part of the [---] are reasonably required in the mutual opinion of [---] and [---] solely in order to accommodate [---] use, such modifications shall be designed, engineered and constructed in accordance with the provisions of Section 2 herein. All rights, title and interest in the addition or modification shall rest with [---] who shall own, operate and maintain such addition or modification in accordance with the provisions herein including but not limited to Sections 2, 3 and 4. [---] shall reimburse [---] for its reasonable costs and expenses incurred pursuant to the installation and maintenance of the addition or modification upon presentation of invoices or other suitable documentation in accordance with Section 2 and Section 11 herein. 50 SECTION 6 - --------- [---] will mutually coordinate the shipment of [---] through the [---]. Shipment scheduling shall be flexible to ensure that [---] shipments are not unreasonably interrupted. To assist in the coordination of shipments: 1. [---] shall provide [---] a forecast of intended shipments of [---] through the [---] ten Days prior to the beginning of any Month for the [--- ]. The forecast for the [---] shall define on a [---] basis the nature and volume of shipments. The forecast for the [---] shall specify the total volume of shipments for [---]. 2. With respect to each individual shipment of [---] though the [---] shall provide [---] a proposed 3-Day shipment period or window upon no less than ten (10) Days' notice prior to the first Day of the proposed shipment period ("10-Day Notice"). The 10-Day Notice shall also specify the amount of [---] to be shipped, subject to a variation of plus or minus twenty (20) percent with respect to the actual volume shipped. [---] may reject the proposed shipment period upon providing [---] notice, no later than one (1) business day from the receipt of [---] 10-Day Notice, of an alternate 3-Day shipment period where the date of the first Day of such alternate 3-Day period is within one (1) Day of the date of the first Day of [---] first proposed 3-Day shipment period. Subsequent to the agreement by the parties on the shipment period contained in the 10-Day Notice, [---] shall make reasonable best efforts to adjust the shipment period to accommodate the priority berthing of [---] at the [---]. Should [---] reasonably estimate that the duration of shipment operations will be less than 3 Days, the agreed 3-Day shipment period is to be narrowed by [---] to two (2) Days upon no less than five (5) Days' notice prior to the first Day of the 2-Day shipment period. Similarly, should [---] reasonably estimate that the duration of shipment operations will be less than 2 Days, the 2-Day shipment period is to be narrowed by [---] to one (1) Day upon no less than two (2) Days' notice prior to the date and time of commencement of shipment operations. Notices may be given by electronic mail, facsimile, radio or telephone. 3. Notwithstanding the estimated duration of shipment operations, the estimated date and time of the commencement of shipment operations shall be narrowed to 12 hours by mutual consent of [---] and [---] no later than two (2) Days prior to the estimated shipment commencement time and date 4. When [---] is ready to load or discharge, the master of said vessel shall provide [---] notice of readiness ("NOR"), and laytime shall commence six (6) hours after receipt of the NOR, or upon [---] arrival in berth (all fast), whichever first occurs. [---] shall be allowed laytime for loading or discharging [---] on the basis of the shipment volume in barrels divided by a pumping rate standard of [---] barrels per hour. Demurrage shall be payable to [---] against [---] invoice, supported by such data as may be reasonably requested, at a rate equal to [---] actual demurrage rate per hour for each hour used and prorated for each portion of an hour used in excess of allowable laytime and for all delays caused by [---] subsequent to six (6) hours after NOR is effective and prior to the time [---] is advised that a berth is available for the vessel except if such delay is caused by any event or acts beyond the reasonable control of [---], including but not limited to acts of God, fire, governmental acts or labor disturbances. 5. [---] shall vacate the berth at [---] when cargo operations are completed. [---] shall be responsible for any actual loss or damage incurred by [---] as a direct result of the failure of [---] to promptly vacate the berth except if such delay is caused by any event or acts beyond the reasonable control of [---], including but not limited to acts of God, fire, governmental acts or labor disturbances. In no event shall either party be responsible for loss of prospective profits, or consequential damages allegedly caused by or based upon failure of [---] to promptly vacate the berth. 51 SECTION 7 - --------- The quantity of each shipment of [---] shall be determined by an Independent Inspector in accordance with Article VIII. The Independent Inspector or [---] shall provide [---] with summary documentation of [---] shipments describing the volumes and dates of such shipments through the [---]. SECTION 8 - --------- Title to [---] transported through the [---] for [---] account shall at all times remain with [---]. SECTION 9 - --------- If for operational reasons it is necessary for [---] to deliver line displacement stock to [---], such line displacement stock shall be the least expensive grade or type available which is suitable for the purpose and the line displacement stock shall be of such quality specification that neither causes operational problems to [---] nor results in the contamination of [---] such that [---] fail to comply with the specification limits with which they would have otherwise been in compliance. If time permits, [---] shall have the right to approve in advance the suitability of such pipeline displacement stock, provided that such approval shall not be unreasonably withheld. [---] shall purchase such stock from [---] in accordance with the prices set forth in Article 5. The quantity of line displacement stock delivered to [---] shall be determined by the Independent Inspector in accordance with Article VIII. To the extent that small portions of [---] shipped through the [---] are delivered to [---] in the course of acting as an interface between [---] petroleum products in that portion of the [---] not used to ship [---] shall credit [---] for such transferred petroleum products at the prices set forth in Article V. The quantity of such transferred petroleum products shall be determined by the Independent Inspector in accordance with Article VIII. SECTION 10 - ---------- In consideration for its use of the [---] and for performing line displacement operations for [---] both before and after [---] use of the [---] shall pay to [---] a throughput charge ("Throughput") on each shipment of [---] transferred through the [---]. The Throughput shall be calculated by multiplying the number of physical barrels of [---] shipped through the [---] as determined by the Independent Inspector and the transport charge per physical barrel ("Rate"). The number of physical barrels of [---] shipped shall be determined pursuant to Article 8. The base Rate shall be [---] per barrel. [---]. Escalation factor A ("FA"), escalation factor B ("FB") and escalation factor C ("FC") are defined as follows: (i) A labor adjustment factor An which is defined as the arithmetic average of the hourly earnings in dollars per hour for the petroleum and coal products industry as shown in the "Employment and Earnings" publication of the U.S. Department of Labor, Bureau of Labor Statistics, for the three Months of the second calendar quarter immediately preceding the calendar quarter of the Month in which services are rendered, divided by (19.76). 52 (ii) An industrial commodities adjustment factor Bn which is defined as the arithmetic average of the Producer Price Index for Industrial Commodities as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the three Months of the second calendar quarter immediately preceding the calendar quarter of the Month in which services are rendered, divided by (128.0). (iii) A fuels and power adjustment factor Cn which is defined as the arithmetic average of the Producer Price Index for Fuels and Power (Code 5), as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the three Months of the second calendar quarter immediately preceding the calendar quarter of the Month in which services are rendered, divided by (88.9). [---] shall employ and also be responsible for costs of any support vessels, pilots, mooring masters, or line handlers supplied by [---] or otherwise required by [---], all of which shall become borrowed servants of [---]. Dues and other charges on [---] (whether or not such dues or charges are based on the quantity of [---] loaded or discharged or on the freight and without regard from whom such dues or charges are withheld) shall be paid by [---]. Any taxes on freight shall be borne by [---] shall be responsible for any State fee imposed for its use of the [---] in the nature of wharfage or pipeline toll. SECTION 11 - ---------- [---] shall issue invoices for Throughput or for reimbursement for additions or modifications in the Month following the Month in which the services or costs and expenses are incurred. [---] will pay on these invoices in accordance with Article IX. SECTION 12 - ---------- [---] shall each indemnify, defend and hold harmless the other party pursuant to Article XVIII herein. SECTION 13 - ---------- In the event an escape or discharge of [---] occurs from [---], the responsibilities of the respective parties shall be as per Article XXII herein. SECTION 14 - ---------- [---] shall comply with all applicable provisions of Article XX and XXI of this Contract, including but not limited to compliance with regulations, compliance with [---] vessel acceptance standards, compliance with [---] Operations Manual, pollution mitigation, required insurance, liability for dues and other charges on said vessel. SECTION 15 - ---------- Nothing herein shall be construed as a dedication of the [---] to public use pursuant to Section 19.3 of this Contract. 53 SECTION 16 - ---------- Neither [---] nor [---] shall commit or suffer to be committed any act or default whereby the rights and interests of either party in and under right of entry or easements shall be jeopardized. 54 EX-10.10 11 FACILITIES & OPERATING CONTRACT BETWEEN CHEVRON & HECO HECO Exhibit 10.10 ------------------ FACILITIES AND OPERATING CONTRACT by and between CHEVRON PRODUCTS COMPANY, A DIVISION OF CHEVRON U.S.A. INC and HAWAIIAN ELECTRIC COMPANY, INC. * * * * * * * * * * * TABLE OF CONTENTS
ARTICLE Page ARTICLE 1: Definitions.............................................................. 1 ARTICLE 2: Term of Contract......................................................... 5 ARTICLE 3: Transportation of LSFO to Kahe, Waiau, and Iwilei........................ 5 Section 3.1: Pipelines.......................................................... 5 Section 3.2A: Transport of LSFO.................................................. 5 Section 3.2.B: Operation and Maintenance of Pipelines............................. 5 Section 3.2.C: Maximum Viscosity.................................................. 6 Section 3.3: Compensation....................................................... 6 Section 3.3.A: Facility Charge................................................. 6 Section 3.3.B: Throughput Charges.............................................. 6 Section 3.3.C: Maintenance Charge.............................................. 7 Section 3.3.D: Invoices and Payment............................................ 9 Section 3.3.E: Pipeline Site Remediation....................................... 10 Section 3.3.F: Discontinued Operation of Honolulu Generating Plant............. 10 Section 3.4: Modification, Relocation, and Replacement of Facilities.............. 11 Section 3.5: LSFO Movement Coordination and Reporting............................. 12 Section 3.5.A: Coordination.................................................... 12 Section 3.5.B: Reporting....................................................... 12 Section 3.6: Title and Risk of Loss............................................... 13 Section 3.7: Chevron's Operating and Maintenance Offset........................... 13 Section 3.8: Review of Operating and Maintenance Procedures....................... 14 ARTICLE 3A: Budgeting............................................................ 14 ARTICLE 4: HECO'S Use of Chevron's Tanker Mooring Facilities and Submarine Lines..................................................... 15 Section 4.1: Use of Chevron's Facilities.......................................... 15 Section 4.2: Compensation......................................................... 17 Section 4.2.A: Compensation for LSFO Received.................................. 17 Section 4.2.B: Compensation for Line Displacement Stock........................ 17 Section 4.2.C: Credit for Cargo Used as Line Displacement Stock................ 17 Section 4.2.D: Clean Island Council............................................ 18 Section 4.3: LSFO Movement Coordination and Reporting............................. 18 Section 4.3.A: Notification of Estimated Vessel Arrival........................ 18 Section 4.3.B: Notice of Readiness............................................. 18
Section 4.3.C: Berth Time...................................................... 19 Section 4.3.D: Demurrage....................................................... 19 Section 4.3.E: Vessel Berth.................................................... 20 Section 4.3.F: Other Marine Provisions......................................... 21 Section 4.3.G: Reporting....................................................... 21 Section 4.4: Title and Risk of Loss............................................... 21 Section 4.5: Oil Pollution Insurance.............................................. 22 Section 4.6: Site Remediation..................................................... 22 ARTICLE 5: Operation and Maintenance of HECO's BPTF................................. 23 Section 5.1: Tank Field Facilities and Service.................................... 23 Section 5.1.A: Tank Field Facilities........................................... 23 Section 5.1.B: Services........................................................ 23 Section 5.1.C: Tank Field Facility Additions and Modifications................. 24 Section 5.1.D: Additional Services............................................. 25 Section 5.2: Compensation......................................................... 25 Section 5.2.A: Base Compensation............................................... 25 Section 5.2.B: Determination of Fees for Additional Operation and Maintenance..................................................... 27 Section 5.2.C: Invoices and Payment............................................ 27 Section 5.2.D: Chevron's Operating and Maintenance Offset...................... 27 Section 5.3: Reports.............................................................. 28 Section 5.4: Title and Risk of Loss............................................... 28 Section 5.5: Insurance............................................................ 28 Section 5.6: Barbers Point Site Remediation....................................... 29 ARTICLE 6: Waiau - Barbers Point Steam Exchange..................................... 30 Section 6.1: Facilities........................................................... 30 Section 6.2: Services............................................................. 30 Section 6.3: Measurement of Chevron's Steam Consumption........................... 31 Section 6.3.A: Steam Flow Meter Operable....................................... 31 Section 6.3.B: Steam Flow Meter Inoperable..................................... 31 Section 6.4: Compensation......................................................... 31 ARTICLE 7: Measurement of Quantity and Quality...................................... 32 Section 7.1: Measurement of Quantity.............................................. 32 Section 7.2: Determination of Quality............................................. 32 Section 7.3: Disputes of Quality and Quantity..................................... 33 ARTICLE 8: Line Displacement Stock and Line Warm Up Stock........................... 33 ARTICLE 9: Invoicing and Payment.................................................... 33 Section 9.1: Invoices............................................................. 33 Section 9.2: Payments............................................................. 34 Section 9.3: Method of Payment.................................................... 34 ARTICLE 10: Audits.................................................................. 35
Section 10.1: Audits Requiring Non-Confidential Information....................... 35 Section 10.2: Audits Requiring Confidential Information........................... 35 Section 10.3: Independent Audits Using Non-Confidential Information............... 35 Section 10.4: Adjustments From Audit Findings..................................... 35 ARTICLE 11: Contingencies........................................................... 35 Section 11.1: Definition of Contingency........................................... 35 Section 11.2: Relief of Obligations............................................... 36 Section 11.3: Pricing Affected by Government Direction............................ 36 Section 11.4: Event of Sale or Cessation of Chevron's Operations.................. 37 Section 11.5: Event of Sale or Cessation of HECO's Operations..................... 37 ARTICLE 12: Effect of Suspension or Reduction....................................... 37 Section 12.1: Notice of Suspension or Reduction................................... 37 Section 12.2: Chevron's and HECO's Rights during Suspension or Reduction 38 Section 12.3: Termination Rights.................................................. 38 Section 12.4: Payment for Services and Facility Usage Provided.................... 38 ARTICLE 13: Waiver and Non-Assignability............................................ 38 Section 13.1: Waiver.............................................................. 38 Section 13.2: Non-Assignability................................................... 38 Section 13.3: Definitions......................................................... 39 ARTICLE 14: Default................................................................. 39 Section 14.1: Default............................................................. 39 Section 14.2: Termination Rights.................................................. 39 ARTICLE 15: Conflict of Interest.................................................... 39 ARTICLE 16: Applicable Law.......................................................... 40 ARTICLE 17: Indemnity............................................................... 40 Section 17.1 HECO indemnifies Chevron............................................. 40 Section 17.2 Chevron indemnifies HECO............................................. 40 Section 17.3 Provision survival................................................... 42 ARTICLE 18: Public Utility Commission............................................... 42 Section 18.1: Approval............................................................ 42
Section 18.2: Use as a Public Utility.......................................... 42 ARTICLE 19: Miscellaneous........................................................... 42 Section 19.1: Headings............................................................ 42 Section 19.2: Entire Agreement.................................................... 42 Section 19.3: Contract is Not an Asset............................................ 43 Section 19.4: Notices............................................................. 43 Section 19.5: Severability........................................................ 43 Section 19.6: Successors and Assigns.............................................. 43 Section 19.7: Consequential Damages............................................... 43 Section 19.8: Termination of Prior Agreement...................................... 44 Signature page 44 ADDENDUM 1: Adjustment Factors for Adjustable Charges and Fees 45 ADDENDUM 2: Quality 46 ADDENDUM 3: Chevron's Mooring and Submarine Lines 47 ADDENDUM 4: Chevron Products Co Marine Terminal Manual for Barber's 48 Point Offshore Tanker terminal ADDENDUM 5: List of Facilities in HECO's BPTF System and Chevron's 49 Tank Field Support System ADDENDUM 6: List of Facilities in HECO's Waiau Steam System 51 APPENDIX 1: Chevron's and HECO's Fuel Oil Distribution Systems 52 APPENDIX 2: Summary of Vessel Requirements at Barbers Point 53 APPENDIX 3: Refinery Operating Standards and Instructions 56
FACILITIES AND OPERATING CONTRACT --------------------------------- THIS CONTRACT is dated as of November 14, 1997, by and between CHEVRON PRODUCTS COMPANY, A DIVISION OF CHEVRON U.S.A. INC., a Pennsylvania corporation, ("Chevron") and HAWAIIAN ELECTRIC COMPANY, INC., a Hawaii corporation, ("HECO"). WHEREAS, each party owns and operates certain distribution and storage facilities, including pipelines and terminals, suitable for use in the delivery of LSFO. WHEREAS, the parties desire to enter into this contract for the use of such facilities. NOW THEREFORE, the parties agree as follows: ARTICLE 1: Definitions Except where otherwise indicated, the following definitions shall apply throughout this contract: 1 "Barge Harbor Lines" means a fuel oil distribution pipeline system which may be constructed at some future date by Chevron, which would connect the Refinery with piping manifolds located at the pier face of the Barbers Point Barge Harbor. 2 "Black Oil Pipeline" means Chevron's pipeline that connects the Refinery to HMT, HECO'S power plant at Waiau and HECO'S Iwilei Tank Farm for use at its Honolulu power plant. 3 "BPTF" means HECO'S Barbers Point Tank Farm which is adjacent to the Refinery. 4 "Contract" means this Facilities and Operating Contract, between Chevron and HECO, the term of which commences January 1, 1998. 5 "Day" means a calendar day 6 "Effective Date" means, for the purposes of this agreement, January 1, 1998 7 "Facility Charge" means a monthly facility charge on each section of the Pipeline used by HECO, as set forth in Section 3.3A 8 "Facility Charge Account" means the total accumulated charges owed to Chevron by HECO for Facility Charges as set forth in Section 3.3A. 9 "HMT" means Chevron's Honolulu Marine Terminal 10 "Independent Inspector" means a mutually agreed upon qualified 3rd party petroleum
1 inspector
11 "Line Displacement Stock" means any petroleum product needed by Chevron, for line displacement purposes, to facilitate the deliveries of LSFO to HECO'S power plants. 12 "LSFO" means Low Sulfur Fuel Oil meeting specifications per Addendum 2. (This includes both Chevron and third party LSFO purchased by HECO for use in its power plants at Waiau, Honolulu, and Kahe). 13 "LSFO Supply Contract" means that certain separate agreement between Chevron and HECO of even date herewith, known as the Low Sulfur Fuel Oil Supply Contract 14 "Maintenance Charge" means a monthly maintenance charge on each section of the pipeline used by HECO,as set forth in Section 3.3C. 15 "Major Maintenance Year" - a Year during which Chevron schedules to perform major repair work on the Pipelines or HECO's BPTF such as major pipeline replacement work and/or performs major testing work 16 "Marine Facilities" means Chevron's Barbers Point tanker mooring facilities and one of Chevron's submarine lines, as set forth in Section 4.1. 17 "Non-Adjusting Capital Charge" means a monthly capital charge for the Kahe, Waiau, and Iwilei components of Pipelines and the modifications thereof as set forth in Section 3.3.A 18 [---] means the [---] in addition to the following: a) [---] b) [---] c) [---] d) [---] 1. [---] *** PAGE BREAK HERE *** 2. [---] e) [---] f) [---] g) [---] h) [---]
2 19 "Non-Major Maintenance Year" - a Year that is not a Major Maintenance Year. 20 "Physical Barrel" means 42 American bulk gallons at 60 degrees F. 21 "Pipelines" means Chevron's and HECO's pipelines as described in Section 3.1. 22 "Reasonable Costs" means, as to any expenditure under this Contract for services, materials or other items, an amount of money Chevron would be willing to pay, for its own account, for a similar service, material, or item under similar conditions and circumstances in Hawaii. 23 "Refinery" means Chevron's Refinery at Barbers Point, HI. 24 "Regulated Environmental Material" means any material for which HECO assumes risk of loss pursuant to Section 3.6, 4.4, and 5.4 released in connection with the provision of services and use of facilities in this Contract during the term of this Contract and discovered during the performance of any Site Remediation that, because of its quantity, concentration or physical or chemical characteristics, is regulated under Federal and/or state laws and regulations due to its actual or potential threat to human health and safety or to the environment if released into the workplace or the environment 25 "Site Remediation" means the cleanup or removal of released Regulated Environmental Material from the environment, such actions as may be necessary in the event of the threat of release of Regulated Environmental Material into the environment, such actions as may be necessary to monitor, assess, and evaluate the release or threat of release of Regulated Environmental Material, the disposal of removed material, or the taking of such other actions as may be necessary to prevent, minimize, or mitigate damage to the public health or welfare or to the environment.
3 26 "Site Remediation Costs" means the Reasonable Costs directly related to Site Remediation which Chevron incurs. These may include: 3RD Party Oil Spill response and clean up providers Containment equipment and materials (purchased and leased) Clean Island Council / Marine Spill Response Corp consulting, services and support Navy (shipyard, public works) restricted access area clean up Coast Guard support Advertisements (claim related) Insurance services Damage claim payments Land leases Environmental consultants Security services Landscaping services Travel / per diem / food and refreshments Employee Overtime Freight costs Government penalties Fuel costs Sampling and Testing Services Transportation services (air and water) Safety support (such as ambulance standby) Public Relations Consulting (provided that the Public Relations Consulting costs are agreed upon by both parties) 27 "Tank Field Support Systems" means the systems owned by Chevron as set forth in Section 5.1.A. 28 "Throughput Charge" means a monthly throughput charge for the transport of LSFO, Warm Up Stock, or Line Displacement Stock , as set forth in Section 3.3B. 29 "Transport Charge" means a monthly charge for transporting LSFO, Displacement Stock, and Warm Up Stock as set forth in Section 3.3.B. 30 "User Percentage" means the ratio calculated pursuant to Section 3.3C(v). 31 "Warm Up Stock" means any petroleum product used by Chevron to preheat any pipeline before an LSFO delivery to HECO's power plants and also used to flush the LSFO from the pipelines into Chevron storage tanks at the Refinery and HMT both before and after deliveries of LSFO to HECO's power plants. 32 "Year" means a calendar year.
4 ARTICLE 2: Term of Contract The term of this Contract shall be from January 1, 1998 (the "Effective Date"), through [---] and shall continue thereafter for additional 12-month periods (each such 12-month period being an "Extension") beginning each successive January 1, unless HECO or Chevron gives written notice of termination at least 120 days before the beginning of an Extension. ARTICLE 3: Transportation of LSFO to Kahe, Waiau, and Iwilei Section 3.1: Pipelines Chevron owns a fuel oil distribution pipeline system ("Black Oil Pipeline") which connects the Refinery to HMT and to HECO's tank fields at Waiau and Iwilei. HECO owns fuel oil pipeline systems which connect its BPTF and Kahe plant to Chevron's fuel oil distribution pipeline system described above. Together these fuel oil pipeline systems shall be referred to as "Pipelines" and are shown schematically in Appendix 1. Section 3.2A: Transport of LSFO Chevron and HECO agree that the LSFO delivered by pipeline from Barbers Point (either the Refinery or BPTF) into HECO's storage tanks at Kahe, Waiau and Iwilei may be transported using the Pipelines. Section 3.2.B: Operation and Maintenance of Pipelines Chevron shall operate Pipelines in compliance with all applicable laws and regulations and in accordance with Chevron's operating standards and instructions, copies of which are available for HECO's inspection at the Refinery. In carrying out its duties, Chevron shall exercise a similar degree of skill and care that Chevron utilizes in the operation of its pipelines. Applicable Chevron operating standards and instructions include, but are not limited to, those listed in Appendix 3. Chevron shall, at a minimum, maintain Pipelines in compliance with all applicable laws and regulations and in accordance with Chevron's Non- discretionary Maintenance. In carrying out its duties, Chevron shall exercise a similar degree of skill and care that Chevron utilizes in performing the Non- discretionary Maintenance on its pipelines. 5 Section 3.2.C: Maximum Viscosity The maximum LSFO viscosity for delivery to HECO's Waiau and Iwilei tank farms shall be 200 SUS at 210 degrees Fahrenheit. Section 3.3: Compensation As compensation for the utilization, operation and maintenance of the Pipelines to deliver HECO's or Chevron's LSFO to HECO's storage tanks at Kahe, Waiau and Iwilei, HECO shall pay to Chevron monthly delivery fees which are comprised of a Facility Charge, a Throughput Charge and a Maintenance Charge described herein. Section 3.3.A: Facility Charge A monthly Facility Charge for each of the Pipelines consists of the components as shown in the following table:
Adjustable Overhead Non-Adjusting Capital and Operating Labor Charge Charges -------------------- ----------------------- Kahe [---] [---] Waiau [---] [---] Iwilei [---] [---] Total [---] [---]
The Overhead and Operating Labor Charges shall be adjusted quarterly beginning January 1, 1998, in accordance with a factor ("An") based on the hourly earnings for the petroleum and coal products industry, described in Addendum 1 attached. The Non-Adjusting Capital Charge may be increased from time to time by separate agreement to compensate for modifications to these lines subsequent to the Effective Date of this Contract, as referenced in Section 3.4. Section 3.3.B: Throughput Charges An LSFO Throughput Charge is calculated by multiplying the number of Physical Barrels of LSFO transported to each of the generating plant tank fields by the respective Transport Charge per Physical Barrel of LSFO transported to that tank field. The base Transport Charges per Physical Barrel of LSFO are: 6 [---] [---] and [---] These per barrel base transport charges shall be adjusted quarterly beginning January 1, 1998, in accordance with a factor ("Cn") based on a Producer Price Index for Fuels and Power, described in Addendum 1, which is attached. The number of Physical Barrels of LSFO transported shall be determined pursuant to Section 7.1. A Warm Up Stock Throughput Charge is calculated by multiplying the number of Physical Barrels of Warm Up Stock used in the movement of LSFO to HECO's three generating plants by the respective Transport Charge per Physical Barrel of Warm up Stock used in the movement of LSFO to that generating plant. A Line Displacement Stock Throughput Charge is calculated by multiplying the number of Physical Barrels of Line Displacement Stock used in the movement of LSFO to the three generating plants by the respective Transport Charge per Physical Barrel of Line Displacement Stock used in the movement of LSFO to that generating plant; provided, however, notwithstanding anything else in this Section 3.3.B, there shall be no Throughput Charge for the Line Displacement Stock for movements from Chevron's HMT to the Refinery. The volume of Line Displacement Stock and Warm Up Stock used shall be the minimum amount necessary, in accordance with typical Chevron operating standards, to satisfactorily accomplish the task. The base Transport Charges per Physical Barrel of Warm Up Stock or Line Displacement Stock are: [---] [---] [---] [---] and [---] These per barrel base Transport Charges shall be adjusted quarterly beginning January 1, 1998, in accordance with a factor ("Cn") based on a Producer Price Index for Fuels and Power, described in Addendum 1 attached. The number of Physical Barrels used in LSFO movements shall be determined pursuant to Section 7.1. Section 3.3.C: Maintenance Charge The maintenance performed on all Pipelines shall be in compliance with then- current United States Department of Transportation regulations and periodic internal inspections utilizing then-current pipeline technology. A Maintenance Charge reflecting costs as incurred will be the sum of (i), (ii), (iii) prorated according to (v) below and 100% of (iv): 7 (i) [---] Reasonable Costs for maintenance materials, except as provided for in (iv) below. Material costs include all taxes paid on material purchased. (ii) [---] Reasonable Costs for labor which includes direct supervision and technical support, whether contract labor charges or Chevron's labor rate at equivalent Contractor's labor rate, which includes all overheads, benefits and burdens except as provided for in (iv) below. The term "Contractor" shall mean a mechanical contractor properly licensed in the State of Hawaii, which Contractor shall be experienced in the type of work to be done and shall be chosen at the sole discretion of Chevron. (iii)[---] Reasonable Costs for direct costs, including but not limited to such items as equipment usage charges (whether Contractor's or Chevron's at equivalent Contractor rates), permits and consulting fees except as provided for in (iv) below. (iv) Base monthly fees of [---] consisting of: [---] on the section of Chevron's Pipelines between BPTF and HECO's Waiau tank field, [---] on the section of Chevron's Pipelines between HECO's Waiau and Iwilei tank fields [---] on the section of Chevron's and HECO's Pipelines between BPTF and HECO's Kahe tank field; which reflect Chevron's total costs for maintenance of pumping and heating stations. The fees shall be adjusted quarterly beginning January 1,1998, using the composite factor (0.7 An + 0.3 Bn), where "An" and "Bn" are described in Addendum 1 attached. (v) HECO's share of the Maintenance Charges on each of the three sections of the Pipelines, pursuant to this Section 3.3.C will be calculated in accordance with the User Percentage. The User Percentage is determined by dividing (a) a numerator consisting of the total Physical Barrels of LSFO and Line Displacement Stock delivered to HECO, and the total Physical Barrels of Line Displacement Stock and Warm Up Stock (excluding that which is delivered to HECO) associated with LSFO movements through that particular Pipeline section during the immediately preceding twelve months by (b) a denominator consisting of the total Physical Barrels of all petroleum products delivered through that particular Pipeline section into both HECO's storage tanks and to and from Chevron's terminal facilities at Honolulu, which includes all Line Displacement Stock and Warm Up Stock associated with LSFO movements and with movements of other petroleum products during the immediately preceding 12 months; provided, however, that after such time, if ever, that Chevron commissions its new black oil Barge Harbor Lines and discontinues its use of the Black Oil Pipeline, the reference time period will be 8 reduced from the immediately preceding 12 months to the immediately preceding 1 month for both the numerator and denominator for the User Percentage. In determining the amount of Line Displacement Stock that is associated with LSFO movements, HECO will only be charged for what is pumped into the line from the delivering tanks located at the Refinery and for what is pumped from the receiving tanks located at HMT during the pump back operation in excess of the volume that is required to displace the oil in the Black Oil Pipeline from HMT to the Refinery. Chevron shall maintain adequate records to allow an audit of such records to verify to HECO that Chevron's Maintenance Charges are Reasonable Costs. Chevron shall provide HECO with monthly summaries within 10 days following the end of each month during the term hereof describing the maintenance performed during the month. All proposed work in this Section 3.3.C that has not been budgeted per Article 3A contained herein must be approved by HECO, whose approval shall not be unreasonably withheld. HECO will give Chevron either its approval or a reason why HECO is denying its approval within 10 business days upon receiving written notification from Chevron requesting approval from HECO for the proposed work to commence. HECO's approval will be granted to Chevron by default if HECO does not give Chevron its decision within 10 business days after receiving written notification from Chevron for the matter in question. HECO may request, and Chevron may not unreasonably withhold approval for HECO to perform itself all maintenance and construction work on the Kahe pipeline in lieu of paying Chevron a maintenance charge per section 3.3.C, (i), (ii), and (iii) for similar work which value would be in excess of $10,000 per Year. Chevron shall give HECO at least 30 calendar days notice, when practicable, of unbudgeted maintenance or construction projects of $10,000 or more, so that HECO may exercise its option. HECO must inform Chevron within 10 business days of such notice if it wishes to exercise its option or it will lose its ability to exercise the option. The quality of maintenance and construction work performed by HECO shall be in compliance with U.S. Department of Transportation (DOT) standards. Chevron reserves the right to provide an on-site representative to be charged per Section 3.3.C (ii) to monitor the work and maintain applicable records. A separate agreement between Chevron and HECO will specify who will be doing the work, their level of experience, and how they will be supervised. Section 3.3.D: Invoices and Payment Chevron will issue invoices for each month's Facility Charge on the fifteenth Day of the current month. Chevron will issue invoices for the Throughput and Maintenance Charges in the month following the month in which the services and expenses are incurred. HECO will pay these invoices in accordance with Article 9. 9 Section 3.3.E: Pipeline Site Remediation a) Responsibility Chevron shall expeditiously perform Site Remediation occurring from a leak, rupture or other incident to the Pipelines. To the extent such incidents derive from delivering LSFO or Line Displacement Stock on behalf of HECO (for which HECO has risk of loss pursuant to Section 3.6), or from movements of Line Displacement Stock or Warm Up Stock (for which HECO has risk of loss pursuant to Section 3.6) associated with LSFO movements on behalf of HECO, any Site Remediation Costs incurred by Chevron for such Site Remediation shall be entirely for the account of HECO and invoices for such services will be rendered by Chevron in accordance with Article 9 of this Contract; provided that HECO shall have no obligation to pay for any portion of Site Remediation Costs caused by the [---] negligence or [---] misconduct of Chevron, its employees and its contractors. b) Chevron Giving HECO Open Access to Records Given the nature of Site Remediation activity that typically requires prompt action, Chevron shall use reasonable efforts to provide HECO with open access to all records in a reasonably timely manner which contain information about: (1) any written communication received by Chevron from any agency regarding any discharge, spill or release of product, (2) notice of any demand, claim or suit regarding same, for which HECO may be responsible, and (3) all invoice data and operating/field information pertinent to Site Remediation activities which should reasonably be documented in monitoring Site Remediation activities. c) See Definitions for a definition of Site Remediation as described above. d) Chevron shall give reasonable efforts to give HECO access to all Site Remediation related meetings and activities and all individuals involved therewith. e) If, at any time, HECO determines that Chevron or its agents should discontinue Site Remediation activities, HECO shall so notify Chevron or its agent and thereafter Chevron or its agent shall have no right to continue said activities at HECO's expense; however such notification shall not affect any liability of HECO to Chevron or any third parties, including, but not limited to government agencies. f) The provisions of this Section 3.3.E shall survive the termination of this Contract to the extent they apply to events which occurred during the term of this Contract. Section 3.3.F: Discontinued Operation of Honolulu Generating Plant After HECO has discontinued operation at its Honolulu generating plant, and provided HECO, at its expense, has installed storage tanks and pumps as necessary to handle Line Displacement Stock and Warm Up Stock used in connection with movements of LSFO to Waiau, HECO shall 10 not be charged Facility, Throughput, or Maintenance Charges associated with the section of the Pipelines between HECO's Waiau and Iwilei tank fields. Section 3.4: Modification, Relocation, and Replacement of Facilities If subsequent to January 1, 1998, modifications to any part of Chevron's Black Oil Pipeline or any relocation or replacement is proposed by Chevron to HECO, and it has not been budgeted per Article 3A contained herein, HECO's approval is required, which approval shall not be unreasonably withheld. HECO will give Chevron either its approval or a reason why HECO is denying its approval within 10 business days upon receiving written notification from Chevron requesting approval from HECO for the proposed work to commence. HECO's approval will be granted to Chevron by default if HECO does not give Chevron its decision within 10 business days after receiving written notification from Chevron for the matter in question. Unless otherwise paid for by HECO, an additional Non-Adjusting Capital Charge component of the Facility Charge shall be established and assessed for the following scope of work to assure a [---] return after tax on the additional capital employed by Chevron using a [---] year economic life, except to the extent that such modification, relocation or replacement is reimbursed by another party, including but not limited to a governmental agency. HECO's share of any such additional Non-Adjusting Capital Charge component will be calculated according to the User Percentage. The work that would be pertinent to this Section 3.4 would include: (i) Replacement of any continuous section of Chevron's Black Oil Pipeline 1000 feet or more in length. (ii) Relocation of any continuous section of Chevron's Black Oil Pipeline 500 feet or more in length. (iii) Complete replacement of any single piece of equipment, costing more than $20,000 per occurrence. (iv) Any partial replacement of equipment costing more than $10,000 per occurrence. Coincident with the additional Non-Adjusting Capital Charge component for new portions of line, the adjustable and non-adjusting components of the Facility Charge shall be adjusted to reflect only the proportion of the Black Oil Pipeline and equipment that is still utilized after the replacement or relocation. Throughput Charges shall also be adjusted to reflect any change in the amount of power used for pumping and steam used for the reheat station at Waiau. Any charges for a modification, relocation or replacement will not begin until the complete commissioning of such changes. 11 Section 3.5: LSFO Movement Coordination and Reporting Section 3.5.A: Coordination Chevron and HECO will mutually coordinate the transport of LSFO from HECO's BPTF and the delivery of Chevron's LSFO (purchased under the LSFO Supply Contract, of even date herewith, between Chevron and HECO) to HECO's storage tanks at Kahe, Waiau and Iwilei. Transport scheduling shall be flexible to assure that HECO's generating plants' tankage is kept reasonably full and the LSFO which HECO is purchasing from Chevron is delivered from Chevron's Refinery at a reasonably uniform rate in accordance with the LSFO Supply Contract. To assist in the coordination of transport: i) HECO shall provide Chevron consumption forecasts ten days prior to the beginning of any month for the four subsequent months. The forecast for the first subsequent month shall define on a weekly basis the LSFO demands by each of HECO's power plants. The forecast for the second, third and fourth subsequent months shall define the LSFO requirements on a monthly basis for each such plant, and ii) Each week, Chevron shall provide HECO a schedule of daily transports of LSFO for each of the fourteen subsequent days. iii) If there is any subsequent change in the schedule of more than 48 hours or any change in volume of more than 10,000 barrels, Chevron will immediately inform HECO. For all LSFO deliveries, Chevron's designated operator shall call HECO's designated operator to confirm HECO tank readiness and confirm acceptable volumes prior to the line warm up operation which precedes the LSFO delivery. Chevron's designated operator shall also call the HECO's designated operator between 3 and 4 hours before the actual fuel delivery to HECO to re- confirm HECO tank readiness. Section 3.5.B: Reporting Chevron shall provide HECO with transport summaries as transports occur, describing the following: (i) Volumes, dates and sources of stock movements to HECO's storage tanks at Kahe, Waiau and Iwilei through the Pipelines, and (ii) Analysis of samples of HECO's stocks transported through the Pipelines, per Addendum 2. 12 Section 3.6: Title and Risk of Loss Title to and risk of loss for the LSFO, which is transported from the Refinery to the BPTF, shall transfer to HECO as the LSFO passes into HECO's pipeline at HECO's BPTF at points A in Appendix 1. For LSFO which is sent directly to the Kahe tank field from Chevron's Refinery without first being sent to HECO's BPTF, title and risk of loss shall transfer to HECO when the LSFO first enters HECO's Kahe pipeline at points B in Appendix 1. The title and risk for loss of the LSFO that is sent directly to HECO's tank fields at Waiau and Iwilei without first being sent to HECO's BPTF shall transfer to HECO when the LSFO first enters into Chevron's Black Oil Pipeline at point C in Appendix 1. HECO shall bear the risk of loss of LSFO transported in the Pipelines pursuant to this Section 3.6 except where such loss is attributable to Chevron's [---] negligence or [---] misconduct. Title to Line Displacement Stock and Warm Up Stock shall remain with Chevron except for the Line Displacement Stock that is used to complete deliveries of LSFO to HECO. HECO shall assume title of this Line Displacement Stock as it enters HECO's piping at its generating plants at points D in Appendix 1. Risk of loss for Line Displacement Stock and Warm Up Stock shall transfer to HECO when the Line Displacement Stock and Warm Up Stock leave the Refinery piping and enter into the Black Oil Pipeline at point C in Appendix 1. Risk of loss for the Line Displacement Stock and Warm Up Stock shall also transfer to HECO when the Line Displacement Stock and Warm Up Stock leave Chevron's piping at HMT and enters the Black Oil Pipeline when it is pumped back from HMT to the Refinery at point E in Appendix 1. HECO shall bear the risk of loss of Line Displacement Stock and Warm Up Stock transported in the Pipelines as described in this Section 3.6 except where such loss is attributable to Chevron's [---] negligence or [---] misconduct. Risk of loss for the Line Displacement Stock and Warm Up Stock shall transfer back to Chevron when the Line Displacement Stock and Warm Up Stock leave the Black Oil Pipeline and enter into Chevron's piping at HMT at point E in Appendix 1. Risk of loss for the Line Displacement Stock and Warm Up Stock shall also transfer back to Chevron during the pump back operation from HMT to the Refinery when the Line Displacement Stock and Warm Up Stock leave the Black Oil Pipeline and enter into Chevron's piping at the Refinery at point C in Appendix 1. Section 3.7: Chevron's Operating and Maintenance Offset Notwithstanding Article 17, if a cold plug occurs for any reason other than HECO's sole negligence, on the Black Oil Pipeline, Chevron shall credit HECO's Facility Charge Account for an amount which is the lesser of (1) [---] of the expenses incurred for removing the cold plug and (2) [---] per incident; provided, however, Chevron's payment under this Section 3.7 shall not be limited where such expenses are attributable to Chevron's [---] negligence or [---] misconduct. Notwithstanding Article 17, if an oil spill occurs, for which oil HECO has risk of loss pursuant to Section 3.6, on the Black Oil Pipeline whose cause was the direct result of Chevron's 13 negligence, Chevron shall credit HECO's Facility Charge Account for an amount which is the lesser of (1) [---] of the Site Remediation Costs and (2 [---] per incident; provided, however, Chevron's liability under this Section 3.7 shall not be limited where such expenses are attributable to Chevron's [---] negligence or [---] misconduct. Chevron shall credit HECO's Facility Charge Account per this Section 3.7 in the month following the month the expenses are incurred. Section 3.8 Review of Operating and Maintenance Procedures Chevron shall allow HECO reasonable access, at the Refinery, to Chevron's current published operating and maintenance procedures and invoice data pertinent to this Contract. The information shall include 3rd party invoices and proposed inspection and testing measures being implemented after the Effective Date of this Contract, that refer to the operation of the Kahe line, Black Oil Pipeline, and BPTF, for HECO's sole purpose to judge if Chevron's procedures and/or costs for rendering such services are acceptable to HECO. HECO's access to these procedures specifically excludes access to the operation and maintenance history, inspection records, etc. of the Black Oil Pipeline prior to the Effective Date of this Contract. HECO may enlist the aid of a Chevron approved third party (at HECO's expense) to review such procedures. If HECO determines that any such Chevron current operating or maintenance procedure does not meet HECO's minimum standards, or if HECO provides Chevron with different procedures which HECO believes to be better than Chevron's, Chevron and HECO shall meet within 30 Days after HECO submits written notice of its desire to meet with Chevron and review such procedures. As part of this review, as soon as possible but in no case later than 60 Days after meeting with HECO, Chevron shall inform HECO of the approximate costs of meeting these revised and/or new procedures. If after this joint review, both parties mutually agree to comply with any revised and/or new procedures, then HECO shall be responsible for any incremental Reasonable Costs incurred by Chevron to meet these revised and/or new procedures. ARTICLE 3A: Budgeting Upon May 15 of each year, Chevron shall submit to HECO for review and comment an itemized, monthly capital, operating, and maintenance budget for the next Year and an estimate of expenses for the following Year for the Pipelines, HECO's BPTF, and for any other pertinent area for which HECO must expend funds in the execution of this Contract. For a Major Maintenance Year, Chevron may budget up to a limit of [---] annually for Non-discretionary Maintenance items without HECO's approval. HECO's 14 approval is required for all Non-discretionary Maintenance work in excess of [---] and for all other capital and maintenance work; provided, however, Chevron may budget up to a limit of [---] per year for discretionary maintenance without HECO's approval. There shall be no less than two Non-Major Maintenance Years between Major Maintenance Years. For a Non-Major Maintenance Year, Chevron may budget up to a limit of [---] annually for Non-discretionary Maintenance items without HECO's approval. HECO's approval is required for all Non-discretionary Maintenance work in excess of [---] and for all other capital and maintenance work; provided, however, Chevron may budget up to a limit of [---] per year for discretionary maintenance without HECO's approval. The [---] threshold limit for Non-discretionary Maintenance for Non-Major Maintenance Years will be adjusted annually beginning January 1, 1998, using the composite factor (0.5 An + 0.5 Bn), where "An" and "Bn" are described in Addendum 1 attached. HECO will give Chevron either its approval or a reason why HECO is denying its approval within 120 Days upon receiving, in writing, Chevron's proposed budget; provided, however, HECO's approval shall not be unreasonably withheld. HECO's budget approval will be granted to Chevron by default if HECO does not give Chevron its decision within 120 Days after receiving Chevron's proposed budget. Upon the signing of this Contract, the parties shall meet as soon as practicable to review and approve the budget for the Year of the Effective Date of this Contract, and forecast of expenses for the following Year in accordance with the intent of this Article. ARTICLE 4: HECO's Use of Chevron's Tanker Mooring Facilities and Submarine Line Section 4.1: Use of Chevron's Facilities Chevron agrees to make available to HECO Chevron's Barbers Point tanker mooring facilities and one of Chevron's submarine lines ("Marine Facilities") as described in Addendum 3 hereto, on a non-exclusive basis for HECO to receive HECO's third party LSFO into HECO's BPTF provided: (A) Chevron shall have the right to review each vessel nominated by HECO or by a representative designated in writing by HECO ("HECO's vessel") prior to the use of the Marine Facilities. HECO may submit the names of vessels it will consider nominating to obtain early acceptance of such vessels from Chevron up to three months in advance of the actual nomination. At the time each specific vessel is submitted for early acceptance or nominated for actual use Chevron shall have the right to refuse acceptance of such vessel nomination if Chevron determines that such vessel is unacceptable; however, once given, Chevron's acceptance of a vessel shall remain in effect for six months or until the vessel 15 next discharges at the terminal, whichever occurs first; unless there is a significant change in the vessel's operational, environmental or safety status, in which case Chevron may cancel its acceptance. In making such determination, Chevron shall use the same standards in accepting vessels for HECO's use as Chevron uses in accepting vessels for its own use. Chevron's acceptance of a vessel shall not imply a continuing or future acceptance of the vessel, except as described herein. In the event a vessel submitted by HECO for early acceptance or for a specific nomination is rejected by Chevron, Chevron shall provide satisfactory documentation for the basis of rejection. Chevron's acceptance, cancellation or rejection of HECO's vessel nomination shall be communicated to the nominator of such vessel after Chevron's receipt of the nomination and all the information necessary for Chevron to determine the vessel's suitability, as follows: (i) Early acceptance or rejection of a vessel shall be given within seven Days. (ii) Acceptance or rejection of a specific nomination shall be given within one business day. All such communications may be made by electronic mail or facsimile. The typical information necessary to determine a vessel's suitability is documented in the Chevron Products Company Marine Terminal Manual for Barber's Point Offshore Tanker Terminal, which may be revised from time to time, and which is more particularly described Addendum 4. Chevron shall not be liable for any loss, damage or delay caused by its rejection of a vessel nomination as provided herein. In no event shall the acceptance or rejection of a vessel by Chevron be construed in any manner as a representation by Chevron of the vessel's operational, environmental or safety status. (B) The minimum cargo size shall be [---] Physical Barrels, except that HECO shall be permitted to deliver one [---] Physical Barrel cargo each calendar quarter. (C) HECO shall be responsible for any damage to the Marine Facilities, which arises from the use of the Marine Facilities under this Section 4.1, in accordance with Article 17 hereof. (D) HECO's vessel shall arrange to have, while at or near the Marine Facilities, the services of one of Chevron's mooring masters who shall be the servant of HECO's vessel. When HECO's vessel employs mooring launches and tugs for berthing and unberthing the vessel, they shall also be servants of HECO's vessel. The master of HECO's vessel shall remain in control of his vessel at all times. (E) HECO's vessel shall arrive with an empty compartment of at least 15,000 Physical Barrels capacity for the purpose of receiving a suitable displacement stock from Chevron's Refinery or, at Chevron's option expressed at the time of accepting the vessel nomination the vessel shall provide Bunker C quality flush oil, for the purpose of displacing LSFO from the submarine line after discharging its LSFO cargo. 16 Section 4.2: Compensation Section 4.2.A: Compensation for LSFO Received As compensation for the utilization of the Marine Facilities to receive LSFO for HECO, HECO shall pay to Chevron the sum of the following: (i) A fee for the use of the Marine Facilities of [---] per Physical Barrel of LSFO received for HECO. Thirty percent of the fee is deemed to be the capital component and shall not be adjusted, and seventy percent shall be adjusted quarterly beginning January 1, l998, in accordance with the composite factor (0.60 An + 0.20 Bn + 0.20 Cn), with "An", "Bn" and "Cn" defined in Addendum 1 hereto. The quantity of LSFO received for HECO shall be determined in the manner specified in Article 7. (ii) The actual Reasonable Costs Chevron is obligated to pay others for items such as, but not limited to, the use of tugs, launches, Chevron's mooring masters, or government fees. Section 4.2.B: Compensation for Line Displacement Stock To the extent it is necessary to deliver Line Displacement Stock to HECO, HECO shall purchase such stock according to Article 8. The quantity of Line Displacement Stock delivered to HECO shall be determined according to Article 7. Section 4.2.C: Credit for Cargo Used as Line Displacement Stock To the extent that small portions of HECO's LSFO cargo must be transferred into Chevron's Refinery tankage to protect the quality of the remaining LSFO cargo from being downgraded by commingling with low flash point Line Displacement Stock within the submarine line, Chevron shall credit HECO for such LSFO at Chevron's then current price of LSFO sold to HECO. To the extent that HECO's flush oil is transferred into Chevron's Refinery tankage or remains within the submarine line as Line Displacement Stock, Chevron shall credit HECO for such flush oil according to Article 8. The quantity of such LSFO or flush oils shall be determined according to Article 7. 17 Section 4.2.D: Clean Island Council HECO shall pay a pro-rated share of Chevron's fees to the Clean Island Council associated with the use of Chevron's Marine Facilities, which is calculated by first multiplying such fee by the total Physical Barrels of HECO's or HECO's third-party LSFO transported through the Marine Facilities during the immediately preceding twelve months and then dividing by the total Physical Barrels of hydrocarbons transported through Chevron's Marine Facilities during such twelve months. Section 4.3: LSFO Movement Coordination and Reporting Section 4.3.A: Notification of Estimated Vessel Arrival (i) HECO shall propose for Chevron's approval a four day arrival window for HECO's vessel at least 30 days in advance of estimated vessel arrival. After Chevron's approval, changes in the arrival window may only be made with mutual consent of the parties. (ii) HECO shall update Chevron weekly regarding the anticipated vessel arrival date. (iii) After HECO has proposed an arrival window and until HECO's vessel departs, Chevron shall provide HECO weekly updates on Chevron's marine terminal schedule. (iv) HECO shall give Chevron 7, 5, 4, 3, 2, and 1 day notice by electronic mail, facsimile, or telephone of the vessel's estimated time of arrival ("ETA") at the Marine Facilities. HECO will further notify Chevron of any ETA changes exceeding twelve hours and after the one- day notice, whenever a vessel's ETA changes by more than six hours. Section 4.3.B: Notice of Readiness (i) When HECO's vessel arrives at the customary anchorage or other place of waiting at the Marine Facilities and is in all respects ready to proceed to berth and commence discharging LSFO, the Master or his agent shall tender to Chevron or its agent at the Marine Facilities, a Notice of Readiness ("NOR") of the vessel to discharge LSFO, by letter, electronic mail, facsimile, radio, or telephone. (ii) If HECO tenders the vessel's NOR during its four day arrival window, the NOR shall be effective upon receipt. If HECO's vessel tenders NOR before the first day of the arrival window the NOR shall be effective 00:01 hours local time on the first day of the arrival window. However, Chevron shall give consideration on a reasonable efforts basis to allowing such vessel to berth and discharge prior to the 18 first day of the vessel's arrival window, provided that in Chevron's sole judgment operating circumstances at the receiving facility so permit. If HECO tenders the vessel's NOR after the end of the arrival window, the NOR shall be effective when the vessel is all fast in berth. (iii) HECO's vessel shall be provided a berth in its turn based upon the effective date and time of its NOR, provided that if HECO's vessel tenders NOR after the end of its arrival window, it shall be provided a berth as soon as is convenient for the Marine Facilities. Chevron shall exercise all reasonable efforts to accept the vessel for unloading at the earliest possible time. (iv) If HECO's vessel arrives within the previously agreed four day arrival window, Chevron shall have the right to delay berthing HECO's vessel, if necessary, for Chevron's operational, or other reasons, provided that Chevron maintains a reasonable pumping schedule to HECO's Kahe, Waiau and Iwilei storage tanks. If Chevron delays HECO's vessel under the circumstances defined in this Section 4.3.B (iv), then Chevron shall pay demurrage to HECO, against HECO's invoice, for delays to HECO's vessels so incurred, pursuant to Section 4.3.D. Section 4.3.C: Berth Time HECO shall be allowed berth time (defined as first line fast to all lines free) within which to complete discharging of each full or part cargo of LSFO. This berth time is the sum of six hours for berthing and unberthing and the number of hours to unload its LSFO at an unloading rate of 5,000 barrels per hour. If HECO's vessel exceeds berth time for any reason or if HECO's vessel fails to vacate berth after completing discharging, and failure to vacate is attributable to vessel's condition or breakdown and/or to owner, operator, master, officers or crew of the vessel, vessel's agent or HECO, such excess berth time shall be subject to demurrage claims of Section 4.3.D. Section 4.3.D: Demurrage (i) Chevron will pay demurrage to HECO against HECO's invoice, supported by such data as may reasonably be requested, for all delays caused by Chevron subsequent to six hours after NOR is effective and prior to the time HECO's vessel is advised by Chevron that a berth is available for the vessel, provided that Chevron shall not be liable for any delay caused by any contingency (as defined in Article 11) including fire, explosion, strike, lockout, stoppage or restraint of labor or by breakdown of machinery or equipment on or about the Refinery or Marine Facilities or, strike, lockout, stoppage or restraint of labor of master, officers or crew of HECO's vessel, or of tugboat or pilots, or for any other cause which is beyond Chevron's reasonable control, including weather delays. 19 (ii) HECO shall pay Chevron, against Chevron's invoice supported by such data as may reasonably be requested, for Reasonable Costs for demurrage, caused by HECO which Chevron may incur, including such as may be incurred due to resulting delay in the berthing of other vessels awaiting their turn at berth. (iii) For vessels not documented in the U.S., demurrage shall be paid for all delay time, on an hourly basis or pro rata thereof, at a rate in accordance with the U.S. dollar equivalent as stated in the Worldwide Tanker Nominal Freight Scale ("Worldscale"), or such generally accepted scale as may replace Worldscale, for the size vessel in question adjusted to the level of the Average Freight Rate assessment ("AFRA") or such generally accepted scale as may replace AFRA, in force on the day of commencement of loading for vessels of similar size, or the actual charter party demurrage rate at which HECO or Chevron has chartered the vessel, whichever is less. (iv) For vessels documented in the U.S., demurrage shall be paid for all delay time, on an hourly basis or pro rata thereof, at a rate in accordance with the U.S. dollar equivalent as stated in the American Tanker Rate Schedule Revised ("AR"), or such generally accepted scale as may replace AR, for the size vessel in question adjusted to the level of the U.S. Freight Rate Average ("USFRA") or such generally accepted scale as may replace USFRA, in force on the day of commencement of loading for vessels of similar size, or the actual charter party demurrage rate at which HECO or Chevron has chartered the vessel, whichever is less. Section 4.3.E: Vessel Berth Chevron shall provide a berth as described in Addendum 3, and meeting the requirements of Appendix 2, so that HECO's vessels meeting the requirements of Appendix 2 may proceed to, lie at and depart from such berth, and Chevron shall not be deemed to warrant the safety of public channels, fairways, approaches thereto, anchorages, or other publicly maintained areas either inside or outside the port area where Chevron's berth is located. If HECO's vessel fails to abide by the conditions of use, Chevron shall be entitled to order the vessel to vacate the berth, provided that the vessel shall be entitled to tender a new NOR as set forth in Section 4.3.A upon correction of the failure. Chevron shall not be liable for any loss, damage, injury or delay resulting from conditions at any ports, berths, docks, anchorages or other places not directly caused by Chevron's fault or neglect, or which could have been avoided by the exercise of reasonable care on the part of HECO's vessel's master. 20 Section 4.3.F: Other Marine Provisions (i) Hoses for discharging shall be furnished by Chevron in accordance with Chevron's normal practice and shall be connected to and disconnected from vessel's receiving flanges by HECO's vessel's crew. (ii) Vessels arranged for by HECO will fully comply (or will hold necessary waivers if not in compliance) with all applicable U.S. Coast Guard regulations. Any Reasonable Costs, including delays resulting from vessel's non-compliance with U.S. Coast Guard regulations, shall be at the expense of HECO. (iii) HECO's vessels when berthed at the Marine Facilities will maintain their engines in readiness and will be discharged in such a manner that they, at any stage of discharging operations, are able, if necessary for any reason, to immediately shut down cargo operations, and promptly disconnect hoses and mooring lines and vacate the berth. (iv) HECO's vessels will comply with all applicable Federal, state, regional and local government laws, regulations and ordinances, including but not limited, to air and water pollution. Section 4.3.G: Reporting Chevron will provide HECO with monthly summaries within ten days following the end of each month with the following information: (i) Vessel turnaround data, including pumping rates, for each cargo unloaded from HECO's vessels through Chevron's Marine Facilities. (ii) Analysis of samples of each cargo transferred through the submarine lines, per Addendum 2. Section 4.4: Title and Risk of Loss Title to third party LSFO purchased by HECO and transported for HECO in Chevron's Marine Facilities under this Article 4 shall at all times be with HECO. HECO shall bear the risk of loss of the LSFO transported for HECO in Chevron's Marine Facilities under this Article 4 except to the extent that such loss was due to the [---] negligence or [---] misconduct of Chevron or its agents. 21 Section 4.5: Oil Pollution Insurance HECO warrants that HECO's vessel's owner will have in place the standard oil pollution coverage available from their Protection & Indemnity Insurance Club (U.S. $500 million available as of February 20, 1995), together with all additional oil pollution coverage which is available as of the date of the use of the Marine Facilities through their P&I Club or through underwriters providing first class security (U.S. $200 million available as of February 20, 1995). HECO further warrants that such coverage will remain in effect during HECO's use of HECO's vessel. Such insurance shall include, but not be limited to, coverage for injuries to or death of masters, mates and crew; excess collision liabilities and pollution liabilities imposed by federal and state laws (if applicable). Section 4.6 Site Remediation a) Responsibility In the event an escape or discharge of oil occurs from HECO's vessels and causes or threatens to cause pollution damage, HECO or HECO's vessel's master will promptly take whatever measures are necessary to prevent or mitigate such damage. HECO hereby authorizes Chevron, or its agent, at Chevron's option, upon notice to HECO or HECO's vessel's master, to undertake such measures as are reasonably necessary to prevent or mitigate the pollution damage. Chevron shall expeditiously perform all Site Remediation relating to any release, discharge, spill or threat thereof, occurring from any leak, rupture or other incident to the Mooring Facilities and Submarine lines. To the extent any Site Remediation is undertaken as a result of receipts of HECO's third party LSFO or HECO's third party LSFO blend components or from movements of Line Displacement Stock or Warm Up Stock associated with such LSFO of LSFO blend component receipts, any Site Remediation Costs incurred by Chevron for such Site Remediation shall be entirely for the account of HECO and invoices for such services will be rendered by Chevron in accordance with Article 9 of this Contract; provided, however, that HECO shall have no obligation to pay for any portion of Site Remediation Costs caused by the [---] negligence or [---] misconduct of Chevron, its employees, and its contractors. b) Chevron Giving HECO Open Access to Records Given the nature of site remediation activity that typically requires prompt action, Chevron shall use reasonable efforts to provide HECO with open access to all records in a reasonably timely manner which contain information about: (1) any written communication received by Chevron from any agency regarding any discharge, spill or release of product, (2) notice of any demand, claim or suit regarding same, for which HECO may be responsible, and (3) all invoice data and operating/field information pertinent to Site Remediation activities which should reasonably be documented in monitoring Site Remediation activities. 22 c) See Definitions for a definition of Site Remediation as described above. d) Chevron shall use reasonable efforts to give HECO access to all Site Remediation related meetings and activities and all individuals involved therewith. e) If, at any time, HECO determines that Chevron or its agents should discontinue Site Remediation activities, HECO shall so notify Chevron or its agent and thereafter Chevron or its agent shall have no right to continue said activities at HECO's expense; however such notification shall not affect any liability of HECO to Chevron or any third parties, including, but not limited to government agencies. f) The provisions of this Section 4.6 shall survive the termination of this contract to the extent they apply to events which occurred during the term of this contract. ARTICLE 5: Operation and Maintenance of HECO's BPTF Section 5.1: Tank Field Facilities and Service Section 5.1.A: Tank Field Facilities HECO has a tank field facility (BPTF) located adjacent to Chevron's Barbers Point Refinery, which is for the receipt and storage of fuel. Chevron has Tank Field Support Systems which interconnect with its Refinery systems to provide services to HECO's BPTF. HECO and Chevron agree that Chevron shall operate and maintain HECO's BPTF as if it were an extension of Chevron's Refinery tank field. In that regard, HECO and Chevron agree that HECO's BPTF and Chevron's Tank Field Support System shall include only the facilities outlined in Addendum 5 and the additions made per Section 5.1C. Together these tank field and tank field support facilities shall be referred to as "Tank Field Facilities." HECO shall provide electrical power to its BPTF. Chevron shall provide low pressure steam and firewater to HECO's BPTF. Section 5.1.B: Services Chevron shall operate HECO's BPTF in compliance with all applicable laws and regulations, in accordance with Chevron's operating standards and instructions. In carrying out its duties, Chevron shall exercise a similar degree of skill and care that Chevron utilizes in the operation of its tanks, pipelines, and other equipment. Chevron shall, at a minimum, maintain Pipelines in compliance with all applicable laws and regulations and in accordance with Chevron's Non- discretionary Maintenance. In carrying out its duties, Chevron shall exercise a similar degree of skill and care that Chevron utilizes in performing the Non- discretionary Maintenance on its tank fields and related equipment. 23 Chevron's duties include: (i) Overall supervision of the BPTF, (ii) Handling receipt of fuel into the BPTF, (iii) Gauging and sampling tanks, (iv) Handling movement of LSFO from tankage to pipeline booster pumps for transfer to HECO's storage tanks at Kahe, Waiau and Iwilei and occasionally to the Kalaeloa Combined Cycle Power Plant storage tanks at Barbers Point. (v) Handling movement of fuel within the BPTF, including tank-to-tank transfers and tank mixing. (vi) Accounting and reporting, (vii) Maintenance of all BPTF equipment, (viii) Housekeeping, (ix) Security, (x) Laboratory services. Chevron's operating standards and instructions are available for HECO's inspection at Chevron's Refinery. Applicable operating standards and instructions include, but are not limited to, those listed in Appendix 3. Section 5.1.C: Tank Field Facility Additions and Modifications Any time during the term of this Contract that HECO and Chevron agree that additions or modifications to HECO's BPTF or to Chevron's Tank Field Support Systems, as listed in Addendum 5, are desired or required for the purpose of operating and maintaining HECO's BPTF in accordance with this Article 5, or if said additions or modifications are required by government regulations, HECO and Chevron further agree that: (i) Additional facilities or modifications to Chevron's Tank Field Support System(s) shall be designed and constructed by Chevron. (ii) Additional facilities or modifications to HECO's BPTF shall be designed and constructed using standards that are acceptable to both HECO and Chevron. In that regard, Chevron shall have the right and opportunity to review and approve the design and construction specifications for the BPTF on all facility replacements or modifications; provided, however, Chevron's approval shall not be unreasonably withheld. Chevron agrees to conduct such review in an expeditious manner. Chevron shall have the right to inspect HECO's BPTF during the construction of additions or modifications in order to assure conformance with the 24 specifications reviewed and accepted by Chevron. It is expressly understood and agreed by the parties hereto that Chevron's acceptance of the design and construction specifications of HECO's BPTF or additions shall in no way imply any responsibility therefor by Chevron and it is expressly agreed by HECO that Chevron shall, as a result of its review and acceptance of said specifications, assume no liability whatsoever for the accuracy, correctness or proper modification or replacement thereof. (iii) Chevron shall maintain and operate HECO's additional or modified Tank Field Facilities in accordance with Section 5.1.B. (iv) HECO shall pay Chevron a fee that is in addition to the fee described in Section 5.2.A, as determined in accordance with Section 5.2.B. The costs of additions or modifications to Chevron's Tank Field Support Systems shall be allocated between Chevron and HECO on a pro-rata basis, determined by the benefits received by each party. The cost of additions and modifications to the BPTF shall be determined in accordance with Section 5.2.A. (iii). Any allocation of costs to HECO exceeding one hundred thousand dollars ($100,000) requires HECO's consent HECO's approval will be granted to Chevron by default if HECO does not give Chevron its decision within 10 business days after receiving written notification from Chevron for the matter in question. The notification from Chevron shall include the information necessary to make a reasonable determination on the matter in question. Section 5.1.D Additional Services If at any time HECO desires Chevron to provide services in addition to those described in Section 5.1.B, said additional services must be acceptable to Chevron. HECO shall pay Chevron an additional fee for the additional services, as determined in accordance with Section 5.2.B. Section 5.2: Compensation Section 5.2.A: Base Compensation As compensation for the operation and maintenance of HECO's BPTF in accordance with the terms and conditions hereof, HECO shall pay to Chevron the following fees: (i) A Base Fee of [---] per month; [---] of which is to cover normal operation, maintenance and services which shall be subject to adjustment quarterly beginning January 1, 1998, in accordance with factor "An" defined in Addendum 1 attached; and [---] of which is a monthly management fee which shall not be subject to adjustment during the term of this Contract. 25 (ii) Monthly steam costs for heating fuel in tankage and piping and through heat exchangers for pumping. A portion of the low pressure steam shall be exchanged with the steam used by HECO for Chevron pursuant to Section 6.4.A. The remaining portion, if any, shall be charged at [---] per 1000 pounds, and shall be adjusted each month in accordance with the ratio of the then-current LSFO price within the Chevron-HECO LSFO Supply Contract, divided by $15.50. (iii) The cost of any complete replacement of HECO's equipment, or any partial replacement of HECO's equipment, in which the cost exceeds Ten Thousand Dollars ($10,000) per incident; and any costs incurred by Chevron for additions or modifications to HECO's BPTF or Chevron's Tankfield Support System, as described in Section 5.1.C. These costs shall be determined as follows: a) [---] Reasonable Costs for maintenance materials. Material costs include all taxes paid on material purchased. b) [---] Reasonable Costs for labor which includes direct supervision and technical support, whether contract labor charges or Chevron's labor rate at equivalent Contractor's labor rate, including overheads and benefits. The term "Contractor" shall mean a mechanical contractor properly licensed in the State of Hawaii, which Contractor shall be experienced in the type of work to be done and shall be chosen at the sole discretion of Chevron. c) [---] Reasonable Costs for direct costs, including but not limited to, such items as equipment usage charges (whether Contractor's or Chevron's at equivalent Contractor rates), permits and consulting fees. d) All proposed work in this Section 5.2.A(iii) that has not been budgeted per Article 3A contained herein must be approved by HECO, whose approval shall not be unreasonably withheld. HECO will give Chevron either its approval or a reason why HECO is denying its approval within 10 business days upon receiving written notification from Chevron requesting approval from HECO for the proposed work to commence. HECO's approval will be granted to Chevron by default if HECO does not give Chevron its decision within 10 business days after receiving written notification from Chevron for the matter in question. e) HECO may request, and Chevron may not unreasonably withhold approval for HECO to perform itself all maintenance and construction work on the BPTF in lieu of paying Chevron a maintenance charge per this section 5.2A (iii) for similar work which value would be in excess of $10,000 per year. Chevron shall give sufficient notice to HECO of maintenance or construction work to be performed so that HECO may exercise its option. Chevron shall give HECO at least 30 Days notice when practicable of unbudgeted maintenance or construction projects of $10,000 or more so that HECO may exercise its option. HECO must inform Chevron within 10 business days of such notice if it wishes to exercise its option or it will lose its ability to exercise the option. Chevron reserves the right to 26 provide an on-site representative to be charged per Section 3.3.C (ii) to monitor the work and maintain applicable records. Section 5.2.B: Determination of Fees for Additional Operation and Maintenance The amount of the additional fee paid by HECO to Chevron for the operation and maintenance of such additional facilities or modifications described in Section 5.1.C and such additional services described in Section 5.1.D shall be negotiated by HECO and Chevron. If the parties fail to agree upon a new fee within 90 days from date of notice, such new fee shall be determined by arbitration to be conducted in accordance with the rules of the American Arbitration Association then obtaining. The dispute shall be heard by three arbitrators, and the cost of the arbitrators shall be shared equally between HECO and Chevron. Each party shall pay its own legal costs. The arbitration shall be held in Honolulu, Hawaii, however the selection of arbitrators may not be limited to Hawaii. The sole purpose of the arbitration shall be to determine an additional fee for the expense to Chevron in the performance of its services under Sections 5.1.C and 5.1.D hereto. Section 5.2.C: Invoices and Payment Chevron will issue invoices for each month's Base Fee on the fifteenth day of the current month. Chevron will issue invoices for the monthly steam costs and the costs for the replacements, additions and modifications under Section 5.2.A. (iii) in the month following the month in which these costs are incurred. HECO will pay these invoices in accordance with Article 9. Section 5.2D: Chevron's Operating and Maintenance Offset Not withstanding Article 17, if an oil spill occurs, for which oil HECO has risk of loss pursuant to Sections 4.4 or 5.4, at HECO's BPTF because one of its tanks was overfilled due to Chevron's negligence, Chevron shall credit HECO's Facility Charge Account for an amount which equals the lesser of (1) [---] of the Site Remediation Costs and (2) [---] per incident; provided, however, Chevron's payment under this Section 5.2.D shall not be limited where such expenses are attributable to Chevron's [---] negligence or [---] misconduct. Chevron shall credit HECO's Facility Charge Account per this Section 5.2.D in the month following the month the expenses are incurred. 27 Section 5.3: Reports Chevron shall provide HECO with monthly summaries within 10 days following the end of each month during the term hereof describing the following: (1) Analysis of samples of each stock transferred in or out of HECO's BPTF in accordance with Addendum 2 attached, (2) Summary of maintenance performed during the month. (3) Chevron shall report to HECO "stock summaries" or tank gauging records for each tank, showing volumes, times, dates, sources, and destinations of stock movements at intervals not to exceed 2 working days, (4) Chevron will report to HECO as soon as practicable but in no case more than 24 hours from the time of occurrence, the volumes drained, spilled or lost from HECO's BPTF. Section 5.4: Title and Risk of Loss Title and risk of loss of LSFO blend stock imported by Chevron and stored in HECO's BPTF shall remain with Chevron until blended to LSFO which is in conformance with addendum 2, where upon verification by Chevron lab test (and as specified in the LSFO Fuel Supply Contract of even date herewith and subject to HECO's timely verification, or at HECO's option, HECO's verbal notice to Chevron allowing release for shipment prior to verification), title and risk of loss shall pass to HECO. Title and risk of loss to the LSFO Blend Stock imported by HECO and stored in HECO's BPTF shall at all times remain with HECO. HECO shall bear the risk of loss or damage to HECO's petroleum products unless such loss or damage is due to the [---] negligence or [---] misconduct of Chevron, its employees, or its contractors. Section 5.5: Insurance HECO shall maintain at its own expense during the term hereof insurance, in respect of business, and all activities on or about or in connection with HECO's Tank Field Facilities, of the types and in the minimum amounts described generally as follows: (A) Commercial Liability Insurance including Bodily Injury and Property Damage Insurance (also including explosion hazard) affording premises, products, completed operations, contractual and contingent liability (with respect to subcontractors) coverage of not less one million dollars ($1,000,000) combined single limit per occurrence for bodily injury and property damage. 28 (B) A first excess policy over the above Commercial Liability Insurance policy with limits of not less than five million dollars ($5,000,000) combined single limit. (C) Fire insurance of not less than the value of HECO's tanks plus HECO's inventory of fuel therein from time to time to insure property owned by HECO which is in the care, custody and control of Chevron. Such insurance shall contain a clause waiving subrogation to any rights of HECO against Chevron in the event of loss. The insurance provided above shall include Chevron and its affiliated companies named as additional insured, it being the intention of the parties that the insurance so affected shall protect both HECO and Chevron and be the primary insurance for any and all losses in respect of business and all activities on or about or in connection with, during the term of this Contract and any extensions thereof unless such losses or activities are a result of the [---] negligence of Chevron as provided herein with respect to the activity that is the subject of the respective insurance claim. HECO shall furnish certificates satisfactory to Chevron as evidence of such insurance. The insurance shall contain provisions that no cancellation or material changes in any policy shall become effective except upon thirty days' written notice to Chevron. Section 5.6: Barbers Point Site Remediation a) Responsibilities If requested by HECO, Chevron shall perform all Site Remediation relating to any release, discharge, spill or threat thereof, occurring from any leak, rupture or other incident to HECO's BPTF. All Site Remediation Costs incurred by Chevron for any such Site Remediation shall be entirely for the account of HECO and invoices for such Site Remediation will be rendered by Chevron in accordance with Article 9 of this Contract; provided however, HECO shall have no obligation to pay for any portion of Site Remediation Costs caused by the [---] negligence or [---] misconduct of Chevron, its employees, and contractors. b) Chevron Giving HECO Open Access to Records Given the nature of Site Remediation activity that typically requires prompt action, Chevron shall use reasonable efforts to provide HECO with open access to all records in a reasonably timely manner which contain information about: (1) any written communication 29 received by Chevron from any agency regarding any discharge, spill or release of product, (2) notice of any demand, claim or suit regarding same, for which HECO may be responsible, and (3) all invoice data and operating/field information pertinent to Site Remediation activities which should reasonably be documented in monitoring Site Remediation activities. c) See Definitions for a definition of Site Remediation as described above. d) Chevron shall use reasonable efforts to give HECO access to all Site Remediation related meetings and activities and all individuals involved therewith. e) If, at any time, HECO determines that Chevron or its agents should discontinue Site Remediation activities, HECO shall so notify Chevron or its agent and thereafter Chevron or its agent shall have no right to continue said activities at HECO's expense; however such notification shall not affect any liability of HECO to Chevron or any third parties, including, but not limited to government agencies. f) The provisions of this Section 5.6 shall survive the termination of this contract to the extent they apply to events which occurred during the term of this contract. ARTICLE 6: Waiau - Barbers Point Steam Exchange Section 6.1: Facilities Chevron has facilities at Waiau ("Waiau Reheat Station") to reheat Chevron's and HECO's fuel oil being transported, respectively, to Chevron's marine terminal at Honolulu and to HECO's tank field at Iwilei. HECO has facilities at Waiau ("Waiau Steam System") to provide 6,000 pounds per hour of 60 Pounds Per Square Inch Absolute ("PSIA") saturated steam to the plot limit of the Waiau Reheat Station. HECO and Chevron agree that the Waiau Steam System includes only the facilities listed in Addendum 6 attached. Section 6.2: Services HECO and Chevron agree that HECO shall operate and maintain the Waiau Steam System and provide steam to Chevron at the steam and condensate flanges at the plot limit of the Waiau Reheat Station. HECO shall operate and maintain the Waiau Steam System in accordance with generally accepted industry practice and shall provide for the accurate measurement of steam delivered to Chevron. HECO will have the capability of delivering to Chevron at the Waiau Reheat Station 6,000 pounds per hour of 60 Pounds Per Square Inch Absolute ("PSIA") saturated steam at any time upon two hours prior request to HECO. If at any time HECO is unable or anticipates it may be unable to deliver the requested steam, it shall promptly notify Chevron. HECO shall also provide Chevron at least 72 hours prior notice of planned outages. In addition, HECO shall notify Chevron of any unplanned outages or failure within two hours of such 30 occurrence. HECO shall not be held liable for any damages to the Waiau Reheat Station due to any outage, scheduled or unscheduled, where the steam supplied to the reheat station is terminated. Section 6.3: Measurement of Chevron's Steam Consumption Section 6.3.A: Steam Flow Meter Operable Chevron's steam consumption shall be measured as determined by the Waiau Steam System steam flow meter. HECO shall take and record meter readings at the beginning and the end of each month. HECO shall transmit monthly readings to Chevron's Barbers Point Refinery Financial Accounting Department within five working days of the month's end. HECO will keep the steam flow charts at Waiau for 12 months and if requested will send copies to Chevron. Chevron has the right to witness HECO's calibration of the Waiau Steam System steam meter and to receive supporting documentation. Section 6.3.B: Steam Flow Meter Inoperable In the event steam is delivered to Chevron at a time when the Waiau Steam System steam flow meter is malfunctioning, or in the event HECO, in its sole discretion, chooses not to maintain and operate its Steam Flow Meter, Chevron's steam usage during that period shall be determined by multiplying the sum of the total Physical Barrels of LSFO transported to Iwilei during the period of meter malfunction and the sum of the total Physical Barrels of Warm Up Stock and Line Displacement Stock that is heated at the Waiau Reheat Station and the total Physical Barrels of Chevron Industrial Fuel Oil No. 6 ("CIFO") transported to Chevron's marine terminal at Honolulu during the period of meter malfunction by 7.2 pounds of steam used per Physical Barrel of petroleum product delivered. Quantities of such LSFO and CIFO shall be submitted to HECO within five working days from the billing month's end. Section 6.4: Compensation Chevron shall compensate HECO for the operation and maintenance of the Waiau Steam System in the following manner: (A) Low pressure steam shall be exchanged with steam used by Chevron for HECO pursuant to Section 5.2.A.(ii). If HECO provides more steam herein than Chevron provides under Section 5.2.A.(ii), HECO may charge such excess at the rates set forth in Section 5.2.A (ii). (B) Any costs incurred by HECO for additions or modifications to the Waiau Steam System that may be required by Chevron. 31 (C) The cost of any complete or partial replacement of the Waiau Steam System equipment costing more than $1,000. Said replacements to be approved by Chevron. (D) HECO will issue invoices for the monthly steam costs and the costs for the replacements, additions and modifications under Section 6.4 in the month following the month in which these costs are incurred. Chevron will pay these invoices via Chevron company check which will be issued in accordance with Section 9.2. ARTICLE 7: Measurement of Quantity and Quality Section 7.1: Measurement of Quantity Quantities of LSFO, Warm Up Stock, and Line Displacement Stock delivered under this Contract shall be determined at the time of transport by gauging the following shore tanks before and after such delivery: (A) Quantities delivered from Chevron tanks shall be determined by gauging such tanks. (B) Quantities delivered from HECO's tanks or marine vessels shall be determined by gauging HECO's tanks. (C) Quantities delivered from HECO's marine vessels into Chevron's tanks shall be determined by gauging Chevron's tanks. For transfers from shore tanks, measurements shall be taken by Chevron or Chevron's agent and witnessed by HECO or HECO's agent. However, at HECO's option, measurements may be taken by a mutually agreed upon Independent Inspector at both delivery and receiving facilities. If a mutually agreed upon Independent Inspector is used, Chevron and HECO shall share equally the cost of such independent inspections. For transfers from HECO's vessels, measurements shall be taken under the supervision of an Independent Inspector, whose costs shall be for HECO. Volumes delivered hereunder shall be converted to 60 degrees F, using the latest revision of ASTM Table 6. Section 7.2: Determination of Quality The quality of fuel transported to HECO shall be determined on the basis of samples drawn in such a manner as to be representative of each individual transport. For transfers from shore tanks, samples shall be drawn by Chevron from the shore tanks prior to transport. For transfers from HECO's vessels, samples shall be drawn by or under the supervision of an Independent Inspector, whose costs shall be for HECO. Samples shall be divided into two parts. One part 32 shall be used by Chevron to determine qualities according to Addendum 2 attached. The other part shall be sealed and retained separately by HECO. Section 7.3: Disputes of Quality and Quantity If Chevron or HECO has reason to believe that the quality or quantity of product stated for a particular transport per Sections 7.1 or 7.2 is incorrect, that party shall within sixty days of the transport date, present the other party with documentation supporting such determination and the parties will confer, in good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quality and quantity, if justified, for the transports in question. ARTICLE 8: Line Displacement Stock and Line Warm Up Stock HECO shall purchase from Chevron the Line Displacement Stock and Line Warm Up Stock that is required for Chevron to initiate and complete the deliveries of LSFO and received into HECO's tankage at Kahe, Waiau and Iwilei. The price of No. 2 diesel fuel or No. 6 fuel oil used as Line Displacement Stock shall be the then-current pricing for the fuel comprising the Line Displacement Stock in Chevron's LSFO Fuel Supply Contract with HECO and HECO's affiliates on a FOB Refinery basis, if such a supply contract is in effect; otherwise its price shall be the then-current Honolulu posted price for such fuel, less normally available discounts, if any, at the time of purchase. The price of No. 5 fuel oil used as Line Displacement Stock shall be the sum of 40% of the then-current No. 2 diesel fuel pricing and 60% of the then-current No. 6 fuel oil pricing in Chevron's LSFO Fuel Supply Contract with HECO and HECO's affiliates, if such a supply contract is in effect; otherwise its price shall be the then-current Honolulu posted price for No. 5 fuel oil, less normally available discounts, if any, at the time of purchase. The line displacement and warm up operations shall be performed with Line Displacement Stock and Warm Up Stock of a sufficiently good quality and in such a manner that the Line Displacement and Warm Up operations do not result in noncompliance with the specifications listed in Addendum 2 for the delivered product that would otherwise be in compliance. ARTICLE 9: Invoicing and Payment Section 9.1: Invoices Invoices for the services performed pursuant to Articles 3, 4, 5, and 6 and for Line Displacement Stock sold will be prepared and dated following delivery and shall be rendered from time to time each calendar month. The invoices shall be supported by such documentation to allow easy verification of the charges therein. 33 Section 9.2: Payments Payment of any invoices issued pursuant to this contract shall be made in U.S. dollars. Timing of payments of sales and deliveries received shall be based upon the invoice issue date, which shall be the invoice date or postmarked mailing date of the invoice, whichever is later, as follows: (A) Payment for a received invoice dated from the 1st through the 10th of a month is due on the 20th of the same month. (B) Payment for a received invoice dated from the 11th through the 20th of a month is due by the last day of the same month. (C) Payment for a received invoice dated from the 21st through the last day of the month is due on the 10th day of the following month. Due dates are the dates payments are to reach the other party. If the due date falls on a Saturday, the payment shall be received on the preceding business day. If such date falls on a Sunday or a holiday, payment shall be received the following business day. Section 9.3: Method of Payment Payments shall be by bank wire transfer of immediately available funds to: Chevron Products Company, a division of Chevron U.S.A. Inc Account Number 59-51755 First National Bank of Chicago, Chicago, IL ABA Ref. No. 071000013 For identification purposes, all wires must clearly indicate that payment is being made by order of HECO and provide the invoice reference number. In addition, written documentation evidencing specific invoices being paid shall be immediately forwarded to: Utility Fuel Receivables Chevron Products Company, a division of Chevron U.S.A. Inc P.O. Box 7006, Room 2228 San Francisco, California 94120-7006 Fax: (415) 894-1195 34 ARTICLE 10: Audits Section 10.1: Audits Requiring Non-Confidential Information On request of HECO, Chevron shall furnish to HECO such full and complete documentation as HECO reasonably shall require in order to satisfy itself that data used by Chevron to establish all amounts charged hereunder are accurate. Section 10.2: Audits Requiring Confidential Information Notwithstanding the foregoing, in order to preserve the confidentiality of certain information not generally available, Chevron may elect to furnish some or all of such documentation to an independent auditor chosen by Chevron and HECO. In such an event, Chevron and HECO shall meet promptly to provide mutually satisfactory instructions to such auditor as to the facts to be verified in order to establish the accuracy of data used by Chevron to establish such charges. Chevron and HECO shall share equally the cost of such independent verification of the accuracy of data used by Chevron. Section 10.3: Independent Audits Using Non-Confidential Information In addition to the foregoing, HECO shall have the right to utilize such auditor at HECO's sole cost and expense to further certify the accuracy of any generally available information, and the accuracy of any and all amounts charged hereunder providing such auditor shall continue to be under the duty to Chevron to preserve the confidentiality of information furnished to it by Chevron. Section 10.4: Adjustments From Audit Findings Any findings of inaccuracies from the audits under Sections 10.1 and 10.3, including but not limited to billings, shall be resolved between the parties by negotiation, and failing resolution by arbitration, and appropriate adjustments to the charges shall be made. Any findings of inaccuracies from the audits under Section 10.2 shall be accepted by the parties and appropriate adjustments to the charges shall be made. ARTICLE 11: Contingencies Section 11.1: Definition of Contingency As used in this Article 11, the term "contingency" means: (A) any event reasonably beyond the control of the party affected; 35 (B) compliance, voluntary or involuntary, with a direction or request of any government or person reasonably evidencing to act with governmental authority; including that limiting HECO's recovery of all fuel costs incurred under this Contract; (C) total or partial expropriation, nationalization, confiscation, requisitioning or abrogation or breach of a government contract or concession; (D) closing, or restriction on the use of, a port or pipeline; (E) maritime peril (including but not limited to, negligence in navigation or management of vessel, collision, stranding, destruction, or loss of vessel), storm, earthquake, flood; (F) accident, fire, explosion; (G) hostilities or war (declared or undeclared), embargo, blockage, riot, civil unrest, sabotage, revolution, insurrection; (H) strike or other labor difficulty (whomsoever's employees are involved), even though the strike or other labor difficulty could be settled by acceding to the demands of a labor group; (I) loss or shortage of production, manufacturing, power generation or distribution, transportation, delivery or receiving facilities, equipment, labor or material caused by circumstances not due to the affected party's lack of diligence. Section 11.2: Relief of Obligations Any obligation of either party under this Contract shall be excused only to the extent and for the period that such party's inability to perform is caused by a contingency event. The party so excused shall make all reasonable efforts, including all reasonable expenditures of necessary funds to cure, mitigate, or remedy a contingency event. Any payment due as compensation for the obligation so excused shall also be excused to the extent and for so long as the obligation is not performed due to a contingency event. Section 11.3: Pricing Affected By Government Direction If at any time any price determined under this Contract cannot be given effect because to do so would violate a direction or request of any government or person acting with government authority, HECO and Chevron shall attempt to agree on an alternate course of action but failing agreement within 10 days the party adversely affected may suspend performance with respect to the services or use of facilities affected by the direction or request. 36 Section 11.4 Event of Sale or Cessation of Chevron's Operations Chevron shall have the right to terminate this Contract in the event : 1. The ownership and operation of its refining and delivery facilities in Hawaii are transferred to an entity other than an affiliate; or 2. Chevron ceases Crude Unit Distillation operations at its Refinery or products delivery systems in Hawaii. Chevron shall give Buyer 6 months written notice of its change in obligation due to the contingencies in this Section 11.4. Section 11.5 Event of Sale or Cessation of HECO's Operations HECO's obligations under this Contract shall be contingent and HECO shall have the right to terminate this Contract in the event : 1. The ownership and operation of its power generation or its power delivery facilities in Hawaii are transferred to an entity other than an affiliate; or 2. HECO ceases operations at its electrical power plants at Waiau and Honolulu. HECO shall give Buyer 6 months written notice of its change in obligation due to the contingencies in this Section 11.5 . ARTICLE 12: Effect of Suspension or Reduction Section 12.1: Notice of Suspension or Reduction Any party which relies upon Sections 11.1 through 11.3 shall give the other party prompt notice thereof specifying the anticipated amount and duration of any suspension or reduction of services provided or received, or the use of facilities. It shall also give prompt notice when it no longer expects to rely on Sections 11.1 through 11.3, and services provided or received and use of facilities shall be reinstated subject to all conditions of this Contract, unless this Contract has been terminated previously in accordance with this Contract. 37 Section 12.2: Chevron's and HECO's Rights During Suspension or Reduction While services or the use of facilities are suspended or reduced by one party pursuant to Sections 11.1 through 11.3, it shall not be a breach of this Contract for the other party to use the services or facilities of a third party. After any suspension or reduction has ended, there shall be no obligation on either party to make up for the services or facility usage not provided or used during the suspension or reduction. Section 12.3: Termination Rights If services and the use of facilities are suspended under Article 11 for more than 180 days, HECO or Chevron shall then have the option while such suspension continues to terminate its obligations to the other party under this Contract on 30 Days notice to the other party. Section 12.4: Payment for Services and Facility Usage Provided Nothing in Sections 11.1 through 11.3 nor Section 12.3 shall relieve HECO or Chevron of the obligation to pay in full in United States currency for the services and the use of facilities actually provided hereunder and for other amounts due by one party to the other under this Contract. ARTICLE 13: Waiver and Non-Assignability Section 13.1: Waiver Waiver by one party of the other's breach of any provision of this Contract shall not be deemed a waiver of any subsequent or continuing breach of such provisions or of the breach of any other provision or provisions hereof. Section 13.2: Non-Assignability This Contract shall not be assignable by either party without the written consent of the other, which shall not be unreasonably withheld, except that either party may assign this Contract to any affiliate, provided that any such assignment shall not release that party from any of its obligations hereunder, and except that HECO may assign this Contract to the Trustee under its First Mortgage Bond Indentures. Neither party, by agreement to such an assignment, waives any right it may have to terminate this Contract for any breach hereof occurring at any time before or after any such assignment or release the other party of any obligations arising under this Contract after any such assignment. Following any such assignment, no further assignment may be made without the consent of Chevron. 38 Section 13.3: Definitions In Articles 13, l5 and 17, "affiliate" shall mean any corporation controlling, controlled by or under common control, with either Chevron or HECO. "Control" of a corporation shall mean ownership, directly or indirectly, of at least 50% of the voting shares of such corporation. ARTICLE 14: Default Section 14.1: Default If HECO or Chevron considers the other party to be in default in any obligation under this Contract, such party shall give the other party notice thereof. Such other party shall then have 30 Days in which to remedy such default. If the default is not cured, the other party may, without prejudice to any other right or remedy of such party in respect of such breach, terminate its obligations under this Contract by 45 Days notice to the party in breach. Any termination shall be without prejudice to accrued rights. All rights and remedies hereunder are independent of each other and election of one remedy shall not exclude another. In no event shall either party be liable for prospective profits or special, indirect or consequential damages. Section 14.2: Termination Rights If one party fails to perform any obligation under Articles 3, 4, 5 and 6 of this Contract, and such failure is not cured within 30 Days after written notice thereof is given by the other party, the other party may give notice to the first party terminating the parties' rights and obligations under those Articles immediately. ARTICLE 15: Conflict of Interest Conflicts of interest related to this Contract are strictly prohibited. Except as otherwise expressly provided herein, neither party nor any director, employee or agent of a party shall give to or receive from any director, employee or agent of the other party any gift, entertainment or other favor of significant value, or any commission, fee or rebate. Likewise, neither party nor any director, employee or agent of a party shall enter into any business arrangement with any director, employee or agent of the other party or any affiliate, unless such person is acting for and on behalf of the other party, without prior written notification thereof to the other party. In the event of any violation of this Article 15, including any violation occurring prior to the date of this Contract which resulted directly or indirectly in one party's consent to enter into this Contract with the other party, such other party may at its sole option terminate this Contract at any time and, except for obligations to pay in full in United States currency for the outstanding payment obligations hereunder, shall be relieved of any further obligation under this Contract. 39 Both parties agree to immediately notify the other of any known violation of this Article. ARTICLE 16: Applicable Law This Contract shall be construed in accordance with, and all disputes arising hereunder shall be determined in accordance with, the local law of the State of Hawaii, U.S.A. ARTICLE 17: Indemnity Section 17.1 HECO indemnifies Chevron [---] (i) [---] (ii) [---] (iii) [---] (iv) [---] [---] Section 17.2 Chevron imdenifies HECO [---] Chevron agrees to release, defend indemnify and hold harmless, HECO and its officers, directors, agents, employees and invitees from and against 40 all claims, losses, damages, expenses, costs and liability (including attorneys fees and costs of litigation), including without limitation for injuries to or deaths of persons or damage to property (including LSFO, its components, Line Displacement Stock, Warm Up Stock, risk of loss which is in HECO), but excluding consequential damages or punitive damages (other than punitive damages actually paid by HECO to a third party), arising or resulting from or related in any manner whatsoever to: (i) the operation and maintenance of the Pipelines, BPTF and Marine Facilities by Chevron hereunder, to the extent such claims, losses, damages, expenses, costs and liability, including without limitation for injuries to or deaths of persons or damage to property (including LSFO, its components, Line Displacement Stock, Warm Up Stock, risk of loss which is in HECO), are caused by the negligence or willful misconduct of, respectively, Chevron, or its officers, directors, agents, employees and invitees, (ii) any loss, release, discharge, spill, or threat thereof, of any petroleum product for which Chevron has risk of loss, occurring from any leak, or other incident except to the extent such claims, losses, damages, expenses, costs and liability, including without limitation for injuries to or deaths of persons or damage to property (including LSFO, its components, Line Displacement Stock, Warm Up Stock, risk of loss which is in HECO), are caused by the gross negligence or willful misconduct of, respectively, HECO, or its officers, directors, agents, employees and invitees, (iii) any LSFO, its components, Line Displacement Stock, Warm Up Stock, the risk of loss of which is with Chevron), which does not meet specifications or is contaminated, except to the extent such off spec or contaminated products, claims, losses, damages, expenses, costs and liability, including without limitation for injuries to or deaths of persons or damage to property (including LSFO, its components, Line Displacement Stock, Warm Up Stock, risk of loss which is in HECO), are caused by the gross negligence or willful misconduct of, respectively, HECO, or its officers, directors, agents, employees and invitees, or (iv) any LSFO, its components, Line Displacement Stock, Warm Up Stock, the risk of loss of which is with HECO, which does not meet specifications or is contaminated, to the extent such off spec or contaminated products, claims, losses, damages, expenses, costs and liability, including without limitation for injuries to or deaths of persons or damage to property (including LSFO, its components, Line Displacement Stock, Warm Up Stock, risk of loss which is in HECO), are caused by the negligence or willful misconduct of, respectively, Chevron, or its officers, directors, agents, employees and invitees. HECO agrees to promptly notify Chevron of any claim, loss, cost, damages, expense or liability and to provide Chevron reasonable information and assistance related to any claim or action of the defense thereof. 41 Section 17.3 Provision Survival The provisions of this Article 17 shall survive the termination of this Contract to the extent that they apply to events which occurred during the term of this contract. ARTICLE 18: Public Utility Commission Section 18.1 Approval This Contract is required to be filed with the Hawaii Public Utilities Commission ("PUC") for approval. If in the proceedings initiated as a result of the filing of this Contract the PUC disapproves or fails to authorize the full recovery of the fuel costs incurred under this Contract through HECO's "Energy Cost Adjustment Clause", HECO may terminate this Contract by 30-days' written notice to Chevron. Section 18.2 Use as a Public Utility. No use of the pipelines, facilities or equipment owned by Chevron and used in connection with this Agreement shall be construed as having been dedicated by Chevron to a public use and it is hereby acknowledged by the parties that Chevron retains the exclusive right to determine who other than the parties to this agreement shall use said pipelines, facilities, and equipment. ARTICLE 19: Miscellaneous Section 19.1: Headings Headings of the Articles and Sections are for convenient reference only and are not to be considered part of this Contract. Section 19.2: Entire Agreement This document contains the entire agreement between the parties covering the subject matter and cancels, as of the effective date hereof, all prior agreements of any kind between the parties covering such subject matter and any amendments thereto. There are no other agreements which constitute any part of the consideration for, or any condition to, either party's compliance with its obligations under this Contract. 42 Section 19.3: Contract is Not an Asset This Contract shall not be deemed to be an asset in, and, at the option of a party, shall terminate in the event of any voluntary or involuntary receivership, bankruptcy or insolvency proceedings affecting the other party. Section 19.4: Notices Except as otherwise expressly provided herein, all notices shall be given in writing, by letter, facsimile, or electronic mail, to the following addresses, or such other address as the parties may designate by notice, and shall be deemed given upon receipt. Chevron: Manager, Petroleum Coke, Heavy Fuels & Sulfur Chevron Products Company, a division of Chevron U.S.A. Inc P.O. Box 7006 San Francisco, CA 94120-7006 Facsimile: (415) 894-1195 HECO: Manager, Power Supply Services Department Hawaiian Electric Company, Inc. Box 2750 Honolulu, HI 96840-0001 Facsimile: (808) 543-7788 Section 19.5: Severability If any term or provision, or any part of any term or provision, of this Contract is held by any court or other competent authority to be illegal or unenforceable, the remaining terms, provisions, rights and obligations shall not be affected. Section 19.6: Successors and Assigns This Contract shall inure to the benefit of and be binding upon the parties hereto, their successors and permitted assigns. Section 19.7: Consequential Damages In no event shall either party be liable for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise. 43 Section 19.8: Termination of Prior Agreement As of the Effective Date, this Contract hereby supersedes that certain Facilities and Operating Contract between the parties dated November 20, 1995, and all amendments thereto. IN WITNESS WHEREOF, the parties hereto have executed this Facilities and Operating Contract dated as of the date first herein above written. CHEVRON PRODUCTS COMPANY, HAWAIIAN ELECTRIC A DIVISION OF CHEVRON U.S.A. INC COMPANY, INC. By: /s/ Phillip H. Fisher By: /s/ Edward Y. Hirata ----------------------- ---------------------- Phillip H. Fisher Edward Y. Hirata ---------------------- (Printed or Typed Name ) Its Manager, Petroleum Coke, Its: Vice President, Heavy Fuels & Sulfur -------------------- Regulatory Affairs By: /s/ Marvin A. Hawthorne ----------------------- Marvin A. Hawthorne ------------------- (Printed or Typed Name ) Its: Assistant Treasurer --------------------- 44 ADDENDUM 1 Adjustment Factors for Adjustable Charges and Fees The various adjustable charges and fees of Articles 3, 4, 5, and 6 of this Contract shall be adjusted as described therein based on the following factors. Section l: Labor Adjustment, "An" ---------------------------------- The labor adjustment factor, An, shall be defined as: The arithmetic average of the hourly earnings in dollars per hour for the petroleum and coal products industry as shown in the "Employment and Earning" publication of the U.S. Department of Labor, Bureau of Labor Statistics, for the three months of the second calendar quarter immediately preceding the calendar quarter of the month in which services are rendered, divided by the arithmetic average of the hourly earnings in dollars per hour for the petroleum and coal products industry as shown in the "Employment and Earning" publication of the U.S. Department of Labor, Bureau of Labor statistics, for the months October through December 1996 (19.76). Section 2: Industrial Commodities Adjustment, "Bn" --------------------------------------------------- The industrial commodities adjustment factor, Bn, shall be defined as: The arithmetic average of the Producer Price Index (PPI) for Industrial Commodities as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the three months of the second calendar quarter immediately preceding the calendar quarter of the month in which services are rendered, divided by the arithmetic average of the Producer Price Index (PPI) for Industrial Commodities as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the months October through December 1996 (128.0) Section 3: Fuels and Power Adjustment, "Cn" -------------------------------------------- The fuels and power adjustment factor, Cn, shall be defined as: The arithmetic average of the Producer Price Index (PPI) for Fuels and Power (Code 5), as published by the U.S. Department of Labor Bureau of Labor Statistics, for the three months of the second calendar quarter immediately preceding the calendar quarter of the month in which services are rendered, divided by the arithmetic average of the Producer Price Index (PPI) for Fuels and Power (Code 5), as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the months October through December 1996 (88.9). 45 ADDENDUM 2 Quality The LSFO transported hereunder shall be analyzed for the following qualities. HECO's LSFO specifications are shown for reference.
HECO Reference ASTM Test Specification LSFO specification method Units Limits - ------------------ --------- ----- -------------- API Gravity D4052 Deg 12 min 24 max Sulfur D4292 Wt % 0.50 max Flash Point (1) D93 Deg F 150 min Pour Point D97 Deg F 125 max Viscosity D445 SSU at l00 min 210 Deg F 450 max Ash D482 Wt % 0.05 max Gross Heating D240 MM BTU/Bbl 6.000 min Value Nitrogen D4629 Wt % 0.50 max Water & Sediment D1796 Wt % 0.50 max
Note: (1) Flash point shall be at least 50 degrees F above the pour point or 150 degrees F, whichever is greater. 46 ADDENDUM 3 Chevron's Mooring and Submarine Lines 1. Geographical Description of Mooring Area Chevron U.S.A. Inc., Hawaiian Refinery has been granted the use of the following anchorage for its Barbers Point Offshore Tanker Terminal: The waters of the Pacific Ocean within an area beginning at a point in latitude 21 degree 16' 58" N and longitude 158 degree 04' 39" W, thence on a bearing of 090 degree true, 850 yards, thence on a bearing of 180 degree true, 450 yards, thence on a bearing of 270 degree true, 850 yards, thence on a bearing of 000 degree true, 450 yards to the point of beginning. The center of the above described area is on an "approximate" bearing of 119 degree true, 2.3 miles from the Barbers Point light. Four corners of the area are marked by buoys. The two southerly corners of the area are marked by lighted buoys which are painted yellow and are in 84 feet of water. The northerly corners of the area are marked by a white spar buoys and are in 66 feet of water. The northwesterly corner of the area is unmarked. The area is designated as area "C" on the chart attached hereto this Addendum 3. Within the mooring area, there are seven mooring buoys. Vessels moor by using the ship's bow anchors and by running lines to the mooring buoys. 47 ADDENDUM 4 The terms and conditions of that certain "Chevron Products Company Hawaii Refinery Marine Terminal Manual for Barbers Point Offshore Tanker Terminal, Oahu, Hawaii (revised June 1997)" and as hereinafter revised from time to time, are hereby incorporated herein by reference and made a part hereof. 48 ADDENDUM 5 List of Facilities in HECO's BPTF System and Chevron's Tank Field Support System Section 1: HECO's Facilities 1) Three LSFO storage tanks. 2) Two LSFO feeder pumps (main and spare) with electric drivers. 3) Jet mixing facilities for all LSFO tanks using feeder pumps as motive force. 4) Internal tank heaters -- pancake coil tank heaters using low pressure steam. 5) Tank Gauging System -- compatible with and connected to Chevron's Refinery tank gauging system. 6) Storm Water Drainage System -- gravity drainage system to drain storm water to Chevron's Refinery tank field impounding basin. 7) Single dike for area and gravity drainage system to drain a major oil spill to Chevron's Refinery tank field impounding basin. 8) Lighting System 9) Fire Fighting System -- consisting of a looped waterline extending from Chevron's Refinery tank field fire water system. 10) Electrical Substation and Electrical Distribution System 11) Steam Systems -- nominal 40 psig system to supply tank heating coils, steam tracing system and exchangers. 12) Condensate System -- collection and pumping system to recover and return 100 percent of condensate to Chevron's Refinery condensate system. 13) Related Piping Systems -- a) LSFO -- steam traced and insulated lines needed to receive LSFO into tank field, transfer LSFO from tank to tank, and transfer LSFO to Chevron's Pipeline booster pumps. b) Steam and Condensate -- insulated steam and condensate pipelines. 49 14) Related Pipeline Systems -- that section of pipeline which is connected to BHP, Inc. or other facilities and falls within the legal boundaries of HECO's BPTF. Section 2: Chevron's Tank Field Support System 1) Low Pressure Steam System -- insulated supply line with valves and meter routed from Chevron's Refinery low pressure steam system to HECO's tank field plot limit. 2) Condensate System -- insulated condensate line with valves routed from HECO's tank field plot limit to Chevron's Refinery condensate system. 3) Fire Water System -- two supply lines with valves routed from Chevron's Refinery tank field fire water system to HECO's tank field plot limit for HECO's looped fire water system. 4) Storm Water Drainage System -- system is routed via gravity to Chevron's Refinery tank field impounding basin. 5) Tank Gauging System -- signals from HECO's tank gauging system are routed to and connected into Chevron's Refinery tank field control house tank gauging system. 6) LSFO Receiving Line -- steam traced and insulated line with valves routed from Chevron's marine unloading line to HECO's tank field plot limit. 7) LSFO Delivery Line -- steam traced and insulated line with valves routed from HECO's plot limit to Chevron's pipeline booster pumps' suction manifold. 50 ADDENDUM 6 List of Facilities in HECO's Waiau Steam System 1) Steam Piping -- insulated piping from HECO's Waiau Unit No. 7 and No. 8 reboiler steam system to the plot limit of Chevron's Waiau Reheat Station 2) Condensate Inspection Tank 3) Two Condensate Drip Pumps 4) Steam Flow Meter 5) Miscellaneous -- pipeline valves, instrumentation and fittings 51 APPENDIX 1 Chevron's and HECO's Fuel Oil Distribution Systems 52 CHEVRON'S AND HECO'S FUEL OIL DISTRIBUTION SYSTEMS (map) 52ii TRANSITION FROM REFINERY TO HECO BPTF LSFO TITLE TRANSFER POINT A (diagram) 52iii TRANSITION FROM REFINERY TO KAHE PIPELINE LSFO TITLE TRANSFER POINT B (diagram) 52iv TRANSITION FROM REFINERY TO BLACK OIL PIPELINE - LSFO TITLE TRANSFER POINTS AND LINE DISPLACEMENT/WARM-UP OIL RISK OF LOSS (diagram) 52v TRANSITION FROM BLACK OIL PIPELINE TO WAIAU POWER PLANT DISPLACEMENT TITLE TRANSFER POINT D (WAIAU POWER PLANT) (diagram) 52vi TRANSITION FROM BLACK OIL PIPELINE TO HECO IWILEI TANK FIELD TITLE TRANSFER POINT D (AT IWILEI TANK FIELD) (diagram) 52vii TRANSITION FROM BLACK OIL PIPELINE TO HMT - LINE DISPLACEMENT AND WARM UP OIL RISK OF LOSS TRANSFER POINT E (diagram) 52viii APPENDIX 2 Summary of Vessel Requirements at Barbers Point A. Maximum Deadweight Tons - 150,000 B. Maximum Length Overall - 1,000 feet C. Maximum Draft - 50 feet (a maximum draft of 52 feet may be allowed from about April through about October) D. Maximum Distance Stern to Center Manifold - 500 feet. GENERAL REQUIREMENTS E. No cast iron is permitted in vessel's riser valves, pipes and fittings outboard of the last fixed rigid support to the deck. F. Vessel's port side manifold piping, valves and ancillary equipment necessary to retrieve, secure and release the submarine cargo transfer hose(s), shall be in accordance with the latest edition of the Oil Companies International Marine Forum, OCIMF, Standards for Oil Tanker Manifolds and Associated Equipment, which shall be an integral part of this agreement. G. All ground tackle must be in good working condition. Vessels up to 50,000 DWT shall have at least l0 shots of chain on each anchor. Vessels over 50,000 DWT shall have at least 12 shots of chain on each anchor. H. Vessels should be equipped with a searchlight on each bridge wing to assist in illuminating buoys during mooring and unmooring at night. I. Handling of the submarine cargo transfer hose(s) shall be performed by the vessel's crew under the supervision of a ship's officer as designated by the vessel's master, as directed by the Chevron's Mooring Master in attendance. J. All vessels shall comply with regulations and procedures set forth in the Marine Terminal Manual for Barbers Point Offshore Tanker Terminal in Oahu, Hawaii in its latest revision, in addition to U.S. Coast Guard and other government regulations. Vessels shall comply with all additions and revisions to the regulations and procedures in the Marine Terminal Manual upon sixty days' written notice or whatever shorter notice is required to comply with a mandate by government authority. 53 K. All vessels are subject to inspection by Chevron upon arrival to determine their suitability for the berth. Vessels not meeting the standard requirements in the Marine Terminal Manual for Barbers Point Offshore Tanker Terminal in Oahu Hawaii, may be refused for berthing. L. Vessels may be required to unberth and/or otherwise incur delay during adverse weather conditions. All costs, expenses, etc., or unberthing and reberthing shall be to the vessel's or HECO's account as the case may be. M. All vessels must have the capability of maintaining at least 30% of vessels DWT at all times while in the berth. N. Only uncontaminated SBT Ballast may be discharged to sea after a visual inspection of its surface has verifes\ d its integrity. O. Vessels shall be equipped with seven (7) mooring wires, l000 feet in length and mounted on winches. For vessels up to 70,000 DWT, the wire breaking strength shall be at least 65 metric tons; for vessels over 70,000 DWT, the breaking strength shall be least 75 metric tons. If vessel's wires are used in combination with synthetic tails (pendants), these shall be in good condition and have a breaking strength at least equal to l.25 times that of the wire they serve. In addition, vessels shall be equipped with at least seven (7) synthetic mooring ropes, 720 feet in length, in good condition and with a nominal breaking strength of 75 metric tons. Synthetic mooring ropes should be made of polyester fiber or equivalent Polypropylene and nylon ropes are not acceptable. P. Winches and fittings must be so placed that mooring wires and synthetic lines can be run as follows:
Port Center Stbd Main deck fwd l each l each Main deck aft l each l each Poop deck l each l each l each
Each synthetic rope shall be secured to a separate bitt using both horns of the bitt. Winch arrangements shall be such that port and starboard mooring wires/ropes may be handled simultaneously. 54 Q. Portside hose boom and related equipment shall have a minimum safe working load capacity of ten long tons The vessel's hose boom and cargo manifold must be able to connect to one 12" over-the-rail hose. Hose boom topping life and runner must be of wire line and not synthetic line. 55 APPENDIX 3 Refinery Operating Standards and Instructions - - - - - - - - - - A. Operating Standards ------------------- H-4210 - Operation of the Main Pumphouse - Included by reference in H-4210 are: AR-9000 - General Operating Instructions AR-9060 - Sampling Oil AR-9209 - Breaking Lines AR-9220 - Operation of Tanks AR-9230 - Gauging Tanks AR-9240 - Cleaning Tanks AR-9410 - General Pumping Instructions AR-9422 - Operation of Centrifugal Pumps and Drivers AR-9920 - Safe Practices for Entering and Working in Enclosed Equipment AR-9510 - Care and Operation of Refinery Sewers and Draining Systems AR-9249 - Precautions in Repairing Tanks AR-9900 - Release of Operating Equipment for Mechanical Work AR-942l - Care and Operation of Reciprocating Pumps H-4050 - Operation of Electrical Distribution System AR-9070 - Static Electrical and Lightning Protection AR-9710 - Operation of Metering and Control Equipment H-9510 - Operation of Drainage and Effluent Treating Systems B. Refinery Instructions --------------------- Ref. Inst. No. 3 - Refinery Security Refinery Inst. No. 80 - Good Housekeeping C. Emergency Plans and Procedures - Emergency Fire Organization --------- ----- --- ---------- --------- ---- ------------ D. Engineering (Maintenance) Instructions ----------- ------------- ------------ All instructions directly applicable to tank field and pipeline maintenance work. 56 EX-10.11 12 OIL SUPPLY CONTRACT BTWN BHP AND HECO HECO Exhibit 10.11 ------------------ LOW SULFUR FUEL OIL SUPPLY CONTRACT by and between BHP PETROLEUM AMERICAS REFINING INC. and HAWAIIAN ELECTRIC COMPANY, INC. * * * * * * * * TABLE OF CONTENTS
ARTICLE PAGE ARTICLE I: Definitions 1 ARTICLE II: Agreement 5 ARTICLE III: Term 5 ARTICLE IV: Product & Quality 5 ARTICLE V: Quantity 6 Section 5.1: Quantity 6 Section 5.2: Reallocation of Deliveries 8 ARTICLE VI: Price 8 Section 6.1: Determination of Product Price 8 Section 6.2: Taxes, Assessments, Levies and Imposts 12 ARTICLE VII: Delivery 13 Section 7.1: Notification and Product Delivery 13 Section 7.2: Delivery Ratability 14 Section 7.3: Purchase Deficit 15 Section 7.4: Failure to Supply 16 Section 7.5: Pipeline Delivery 16 Section 7.6: Marine Delivery 20 Section 7.7: Title and Risk of Loss 23 Section 7.8: Dispute 24 ARTICLE VIII: Payment 25 Section 8.1: Invoices 25 Section 8.2: Method of Payment 26 Section 8.3: Payments 27 Section 8.4: Interest 27 ARTICLE IX: Notices 28 ARTICLE X: [---] 28 ARTICLE XI: Force Majeure 30 Section 11.1: Force Majeure 30 Section 11.2: Obligations Suspended 30 Section 11.3: Notice of Force Majeure 30 Section 11.4: No Make-Up Requirement 31 ARTICLE XII: Price and Allocation Controls 31 Section 12.1: Regulatory Price Suspension 31 Section 12.2: Government Regulations 32 ARTICLE XIII: Assignment 32 ARTICLE XIV: Applicable Law 33 ARTICLE XV: Public Utilities Commission 33 ARTICLE XVI: Entire Agreement, Waiver and Illegality 33 ARTICLE XVII: Indemnity 34 ARTICLE XVIII: Default 35
ii
ARTICLE XIX: Counterparts 36 EXHIBIT A: Product Specifications A-1 EXHIBIT B: Illustrative Schedule of Prices B-1 EXHIBIT C: Example Determination of Freight Components Pursuant to Article VI C-1
iii LOW SULFUR FUEL OIL SUPPLY CONTRACT ----------------------------------- This Contract is made and entered into this 14th day of November, 1997, by and between BHP PETROLEUM AMERICAS REFINING INC., a corporation duly incorporated under the laws of the State of Hawaii, having its principal place of business at 733 Bishop Street, Honolulu, Hawaii 96813, (hereinafter called "SELLER"), and HAWAIIAN ELECTRIC COMPANY, INC., a corporation duly incorporated and authorized to do business under the laws of the State of Hawaii, having its principal place of business at 900 Richards Street, Honolulu, Hawaii, (hereinafter called "BUYER"). NOW, THEREFORE, the parties agree as follows: ARTICLE I DEFINITIONS ----------- Except where otherwise indicated, the following definitions shall apply throughout this Contract: 1. "Additional Term" means any Contract term in addition to and after the Original Term, each of which is a 12-Month period beginning January 1. 2. "API" means American Petroleum Institute, a long-established petroleum industry organization. 3. "ASTM" means the American Society for Testing and Materials, a long- established source of standard testing and evaluation methods for petroleum. 4. "barrel" means 42 United States Gallons at 60 degrees Fahrenheit. 1 5. "BPTF" means BUYER's Barbers Point Tank Farm petroleum storage and distribution facilities located in the Barbers Point area of Oahu, in Campbell Estate Industrial Park, Kapolei, Hawaii. 6. "BTU Content" means British Thermal Unit content and refers to the standard assessment of gross heat of combustion, gross heating value or gross heat content of Product determined in accordance with the test method specified in Exhibit A. 7. "Certificate of Quality" means the formal document recording SELLER's laboratory determination of quality and BTU Content of a particular sample which represents a specific Delivery of Product, said laboratory determinations having been performed in accordance with the test methods specified in Exhibit A. 8. "Contract" means this Low Sulfur Fuel Oil Supply Contract, between BHP Petroleum Americas Refining Inc. and Hawaiian Electric Co., Inc., the term of which commences January 1, 1998. 9. "Day" or "Days" means a calendar day of 24 hours. 10. "Deliver," "Delivery," "Deliveries," or "Delivered" refers to the physical movement of Product or transfer of title attendant upon the sale of Product by SELLER and its receipt and purchase by BUYER which commences at the initiation of pumping from SELLER's refinery tank(s), nominated issuing tank(s) or vessel to BUYER's BPTF and ends with the subsequent cessation of continuous pumping of the Product. 11. "DF" means degrees Fahrenheit. 12. "Force Majeure" means an act or event as per the provisions of Section 11.1. 13. "G.S.V." means gross standard volume in U.S. barrels at 60 degrees Fahrenheit. 2 14. "Independent Inspector" means a qualified third-party petroleum inspection contractor acceptable to both BUYER and SELLER providing petroleum sampling, measurement, quantity determination and other such services before, during and after a Delivery of Product. 15. "LSFO" means low sulfur fuel oil of a quality generally consistent with that of Product as specified in Exhibit A. 16. "LSWR" means Low Sulfur Waxy Resid, mixed/cracked quality, a common grade of low sulfur fuel oil typically sold in Singapore, Indonesia and elsewhere in the Far East. 17. "Marine Delivery" or "Marine Deliveries" means a Delivery of Product and/or the constituents and components thereof, including blend stock, all or part of which are Delivered by SELLER from a marine vessel into BUYER's receiving pipelines, facility and storage tanks at BPTF. 18. "Month" means a calendar month. 19. "Month-To-Date Ratable" means a rate of sales, Deliveries, invoicing, receipts or purchases of Product equivalent to BUYER's cumulative Nominations as of a specified Day in a Month where said sales, Deliveries, invoices, receipts or purchases for the Month which includes the specified Day are calculated by (1) determining the Monthly rate of ratability by dividing the Month's aggregate Nomination amount by the number of Days in that specified Month and (2) multiplying by the number of Days in that Month up to and including the specified Day. 20. "Nominate," "Nomination," and "Nominated" means the amount of Product specified by BUYER to be sold and Delivered by SELLER and purchased and received by BUYER for a specified Month. 3 21. "Nominated Month of Delivery" means the Month specified by BUYER for which a specified amount of Product is to be sold and Delivered by SELLER and purchased and received by BUYER. 22. "Original Term" means the first term of this Contract which commences January 1, 1998 and concludes December 31, 2004. 23. "Pipeline Blend" means the mixture of SELLER's Pipeline Fill and Product, having the quality as represented by the Tank Final Sample, which is to be considered Product sold and Delivered by SELLER and purchased and received by BUYER with respect to the provisions of this Contract including, but not limited to, price and quality. 24. "Pipeline Fill" means the petroleum residing in the pipelines through which SELLER makes Delivery of Product to BUYER which may be of a different quality than Product. 25. "Pipeline Delivery" or "Pipeline Deliveries" means a Delivery of Product from SELLER's Refinery to BUYER's petroleum receiving and storage tanks at BPTF via pipeline from SELLER's Refinery interconnecting BUYER's BPTF pipeline. 26. "Product" means Low Sulfur Fuel Oil suitable for use as a boiler fuel of the quality specifications per Exhibit A. 27. "Refinery" means SELLER's oil refining and related facilities located in the Barbers Point area of Oahu, in Campbell Estate Industrial Park, Kapolei, Hawaii. 28. "Reverse Line Displacement" means an operation where BUYER pumps BUYER's LSFO into the pipeline which SELLER uses to Deliver Product to BUYER in order to displace SELLER's Pipeline Fill and thereby prevent an unwanted mixture of SELLER's Pipeline Fill and the Product to be Delivered to BUYER. 4 29. "USD" means currency denominated in U.S. dollars. 30. "Year" means a calendar year. ARTICLE II AGREEMENT --------- SELLER shall sell and Deliver or cause to be Delivered, and BUYER shall buy, receive and pay for Product in the quantity described herein. ARTICLE III TERM ---- The Original Term of this Contract shall be from January 1, 1998 through December 31, 2004 and shall continue in succession thereafter for Additional Terms, each for a period of 12-Months, beginning January 1, 2005, unless BUYER or SELLER gives written notice of termination at least one hundred twenty (120) Days prior to the expiration of the then current term, including the Original Term and any Additional Term. ARTICLE IV PRODUCT & QUALITY ----------------- SELLER shall sell and Deliver and BUYER shall purchase and receive Product that shall comply with the specifications as shown in Exhibit A attached hereto and incorporated herein by reference. 5 ARTICLE V QUANTITY -------- SECTION 5.1: QUANTITY During each Year that this Contract is in effect, SELLER shall sell and Deliver to BUYER, and BUYER shall purchase and receive from SELLER, Product at a reasonably uniform rate during each Month as set out below:
Annual Average Daily Rate in Physical Barrels Per Day ----------------------------------------------------- PERIOD MINIMUM MAXIMUM ------ ------- ------- 1998 -1999 [---] [---] MINIMUM MAXIMUM ------- ------- 2000-2004 [---] [---]
The minimum annual volume of Product to be sold and Delivered by SELLER and Nominated, purchased and received by BUYER under this Contract during each of Years 1998 and 1999 is [---] barrels; the minimum annual volume of Product to be sold and Delivered by SELLER and Nominated, purchased and received by BUYER under this Contract during each of Years 2001, 2002 and 2003 is [---] barrels; and the minimum annual volume of Product to be sold and Delivered by SELLER and Nominated, purchased and received by BUYER under this Contract during each of Years 2000 and 2004 is [---] barrels. The maximum annual volume of Product to be 6 sold and Delivered by SELLER and Nominated, purchased and received by BUYER under this Contract during each of Years 1998 and 1999 is [---] barrels; the maximum annual volume of Product to be sold and Delivered by SELLER and Nominated, purchased and received by BUYER under this Contract during each of Years 2001, 2002 and 2003 is [---] barrels; and the maximum annual volume of Product to be sold and Delivered by SELLER and Nominated, purchased and received by BUYER under this Contract during each of Years 2000 and 2004 is [---] barrels. The minimum and maximum annual volumes of Product to be sold and Delivered by SELLER and to be Nominated, purchased and received by BUYER during each Year of any Additional Term shall be determined by multiplying the Days of that Year by the annual average daily rate indicated for Year 2004, unless otherwise mutually agreed. Subject to availability, SELLER shall sell and Deliver and BUYER shall purchase and receive such additional volumes in excess of the maximum annual volumes as are mutually agreed. Except as otherwise expressly provided herein, during each of the Years 1998 and 1999, the minimum and maximum volumes sold, Delivered, purchased and received during each Month shall be determined by multiplying the Days of that Month by [---] barrels per Day and [---] barrels per Day, respectively; and during each of the Years 2000, 2001, 2002, 2003 and 2004, the minimum and maximum volumes sold, Delivered, purchased and received during 7 each Month shall be determined by multiplying the Days of that Month by [---] barrels per Day and [---] barrels per Day, respectively. SECTION 5.2: REALLOCATION OF DELIVERIES If during any fifteen (15) Day period, fewer than 30,000 barrels of LSFO are delivered by SELLER to Kalaeloa Partners, L.P. ("Kalaeloa") due to an unanticipated equipment outage at the oil-fired combined cycle facility owned by Kalaeloa at Campbell Industrial Park, SELLER and BUYER shall agree to reallocate to BUYER said un-delivered LSFO, the quality of which shall be in conformance with the specifications of Article IV, to the extent required by BUYER and not required by Kalaeloa. The price for such reallocated Product shall be the same as the price of sales of LSFO to Kalaeloa for the Month in question if the reallocated Product had been previously washed and treated; otherwise the reallocated Product shall be priced on the basis of sales of Product to BUYER as determined in Section 6.1 During any period when Product is being reallocated by SELLER to BUYER, the volume of such reallocated Product shall not be included in the determination of the volume of Product purchased and received by BUYER with respect to the minimum and maximum annual and Monthly volumes specified in Section 5.1. ARTICLE VI PRICE ------ SECTION 6.1: DETERMINATION OF PRODUCT PRICE The price in USD per barrel of Product Delivered to meet the Nominated commitment of a Month shall be determined Monthly according to the following price formula: 8 [---] = [---] Where: P = Product price in USD per barrel for the Nominated Month of Delivery. S1 = Base price expressed in USD per barrel which shall consist of the simple average of the daily high and low or bid and asked market prices for Singapore or Singapore/Indonesia cracked, mixed/cracked or equivalent quality LSWR, as assessed on all dates of publication of [---] during the period beginning the 21st of the second Month immediately preceding the Nominated Month of Delivery and ending the 20th of the Month immediately preceding the Nominated Month of Delivery. [---] = [---] S2 = The simple average of the high and low prices for Los Angeles Bunker C fuel as reported by the Platt's Oilgram Bunkerwire ("Platt's Bunkerwire") for all dates of publication during the period beginning the 21st Day of the second Month immediately preceding the Nominated Month of Delivery and ending the 20th Day of the Month immediately preceding the Nominated Month of Delivery, expressed in USD per barrel using a conversion factor of 6.368 barrels per metric ton. F1 = A factor for quality differential of Product Delivered such as sulfur content, where F1 = 0.10 * (S2 - (S1+R1)). F2 = The BTU Content of each Product Delivery pursuant to Article VII and Exhibit A, expressed in million BTUs per barrel with three significant figures to the right of the decimal point. F3 = A factor for tanker freight defined as follows: F3 = F5 + FRD1 + FRD2 9 Where F3 is a market index for freight, defined for each calendar quarter as the sum of: F5 = The simple average of the Average Freight Rate Assessment ("AFRA") Worldscale Points for the average of Large Range 1 vessels, as published Monthly by London Tanker Brokers Panel Limited for the three Monthly publications in the calendar quarter immediately preceding the calendar quarter of the Nominated Month of Delivery, multiplied by the Worldscale 100 rate for voyages between Singapore and Barbers Point, Hawaii, applicable to the Year of the quarter of the referenced AFRA data, expressed in New Worldscale rates, as published by Worldscale Associates (London Limited) in its New Worldscale Nominal Freight Scale (Worldscale). Monthly AFRA publications show rates of vessel voyages which occurred during the period beginning the 16th Day of the second Month immediately preceding that publication and ending the 15th Day of the Month immediately preceding the publication. Exhibit B includes an illustrative computation; plus, FRD1 = A fixed rate differential for segregated ballast tank configured tankers ("SBT Tankers"), if and as provided by Worldscale, with respect to the Additional Insurance Premium for Basic ($500 Million) coverage of Oil Pollution Liability Insurance on vessels carrying persistent oils to and from the U.S.A., consistent with a typical vessel derived in Exhibit C attached to this Contract; plus, FRD2 = A fixed rate differential for SBT Tankers, if and as provided by Worldscale, with respect to the Additional Insurance Premium for Excess ($200 Million) coverage of Oil Pollution Liability Insurance on vessels carrying persistent oils to and from the U.S.A., consistent with a typical vessel derived in Exhibit C attached to this Contract. This market index for freight will be expressed in USD per barrel, using a conversion factor of 6.75 barrels per metric ton. [---] = [---] 1998-1999 --------- [---] [---] per barrel 10 2000-2004 --------- [---] [---] per barrel T = The Hawaii General Excise Tax, the Hawaii Environmental Response Tax and any other tax properly imposed on the sale of Product pursuant to Section 6.2 herein. The per barrel premium, Product price formula component F4, applicable to Product sold and Delivered by SELLER to meet the Nominated commitment of a Month in 2004 shall also apply to Product sold and Delivered by SELLER and purchased and received by BUYER during each Year of any Additional Term, unless otherwise mutually agreed. The price for Product Delivered shall be based on the price for the Month of Delivery originally Nominated by the BUYER, regardless of the Month in which the quantity of Product Nominated is actually Delivered. All prices, price components, price component elements, including their averages and factors, adjustments thereto and other sums payable hereunder in this Contract shall be stated in the nearest thousandth of a dollar unless specifically stated otherwise. Exhibit B, attached hereto and included herein by reference, contains an illustrative schedule of prices calculated pursuant to this Section 6.1. [---] and Platt's Bunkerwire shall include any successor publication(s) and, in the event of discontinuance of any of these publications or the price assessments of Singapore or Singapore/Indonesia cracked, mixed/cracked or equivalent quality LSWR, or the [---] or the assessment of Los Angeles Bunker C fuel, or the publications referred to in the definition of price formula components for freight F3, F5, FRD1, FRD2 or Exhibit C, the parties shall mutually agree upon the use of alternate reporting services or publications or similar price 11 assessments and any resulting modification of the per barrel premium, i.e. Product price formula component F4, as may be reasonable under the circumstances. SECTION 6.2: TAXES, ASSESSMENTS, LEVIES AND IMPOSTS In addition to all other amounts payable by BUYER under this Contract, BUYER shall reimburse SELLER for all taxes, assessments, levies, and imposts of whatsoever kind or nature imposed on SELLER by any governmental or quasi- governmental body, as adjusted, modified or revised from time to time, including without limitation the Hawaii General Excise Tax and the Hawaii Environmental Response Tax, with respect to the execution or performance of this Contract or the receipt by SELLER of payments hereunder. Notwithstanding the foregoing and any illustrative price calculation, such as contained in Exhibit B, BUYER shall not be required to reimburse SELLER for any tax measured by or based on the net income of SELLER or for real property taxes or to duplicate any item of expense of SELLER which is recovered by SELLER under the Product prices provided for in Article VI. BUYER shall not be required to reimburse SELLER under this Article VI for any item expressly mentioned by [---] and [---], or confirmed by [---] or [---] in writing upon inquiry by either BUYER or SELLER, as being included in a price assessment incorporated in Article VI. There shall be no modification in the calculation of any unit of measure conversion, sulfur adjustment, BTU Content adjustment, or similar computation of other quality components solely due to the presence or absence of any tax, assessment, levy, impost or other such similar item of expense contained in any such component. At the execution of this Contract, the taxes, assessments, levies or imposts which are currently in effect include the Hawaii General Excise Tax (4.166%) and the Hawaii Environmental Response 12 Tax ($0.05 per barrel). The Hawaii Environmental Response Tax is not subject to Hawaii General Excise Tax. ARTICLE VII DELIVERY -------- SECTION 7.1: NOTIFICATION AND PRODUCT DELIVERY Subject to the minimum and maximum amounts specified in Section 5.1, BUYER will provide SELLER written notice of the Nominated rate of Delivery for each Month [---] Days prior to the first Day of said Month. No later than ten (10) Days prior to the beginning of each Month, SELLER shall provide BUYER a proposed schedule of Pipeline Deliveries and Marine Deliveries ("Delivery Schedule") to be made by SELLER for the following two Months. The proposed Delivery Schedule shall specify the type of Delivery, Pipeline Delivery or Marine Delivery, approximate quantity, the approximate date and a characterization of the approximate viscosity, either low, 100 - 200 SSU at 210 DF, medium, 201 - 350 SSU at 210 DF, or high, 350 - 450 SSU at 210 DF, for each individual Delivery. BUYER shall notify SELLER of its acceptance or rejection of the proposed Delivery Schedule within three (3) business days of its receipt, such notice to include the cause or reasons for BUYER's rejection. BUYER may reject the proposed Delivery Schedule because the proposed date or volume of an individual Delivery is inconsistent with the limits on Product Delivery ratability specified in this Article VII. If BUYER rejects the proposed Delivery Schedule because the necessary space in BUYER's storage tanks at BUYER's BPTF is unavailable or as a result of some other similar operational consideration, BUYER shall make 13 reasonable efforts to rearrange other schedules to provide SELLER a satisfactory alternate Delivery date or alternate Delivery volume. In this and all such similar efforts, SELLER and BUYER shall make reasonable efforts to coordinate their individual Pipeline Deliveries and Marine Deliveries into and out of BUYER's BPTF to minimize operational difficulties and costs. SELLER shall notify BUYER of a change in the proposed Delivery Schedule due to any of the following causes with respect to any Delivery when it shall become known to SELLER: a) A change in the previously advised volume of a Pipeline Delivery, if such change is in excess of 10,000 barrels or a change in the previously advised volume of a Marine Delivery, if such change is in excess of 20,000 barrels. b) A change in the date of a Delivery, if such change is more than 2 Days earlier or later than the previously advised date; or c) A change in the previously advised viscosity characterization of a Delivery. SECTION 7.2: DELIVERY RATABILITY BUYER shall not be required to take Delivery, and SELLER shall not be required to make Delivery of more than [---] percent of a Monthly Nomination in any [---] consecutive Day period. The minimum and maximum amounts specified in Section 5.1 to be Delivered in any given Month may be further modified upon mutual agreement of the parties. Unless waived by BUYER, SELLER's Deliveries of Product, inclusive of any and all components, shall be limited to [---] barrels for any individual Pipeline Delivery, and limited to [---] barrels for any individual Marine Delivery. BUYER shall be under no obligation to receive a Pipeline Delivery from SELLER if SELLER's Delivery status on a Month-To-Date Ratable basis would be in excess of plus [---] barrels upon completion of the Pipeline 14 Delivery in question. Similarly, BUYER shall be under no obligation to receive a Marine Delivery from SELLER if SELLER's Delivery status on a Month-To-Date Ratable basis would be in excess of [---] barrels upon completion of the Marine Delivery in question. SECTION 7.3: PURCHASE DEFICIT If for reasons other than Force Majeure, BUYER's anticipated demand for Product on an annual basis during any Year during the term of this Contract should reasonably indicate that its Monthly Delivery requirements for the balance of the Year will result in its annual purchases of Product from SELLER declining below the BUYER's minimum annual quantity set forth in Section 5.1 (the difference between BUYER's anticipated demand and BUYER's minimum annual quantity being a "Purchase Deficit Position"), then BUYER shall give prompt written notice to SELLER. So long as the BUYER is in a Purchase Deficit Position, BUYER shall purchase and receive from SELLER, [---] The Purchase Deficit Position shall terminate when total cumulative purchases under this Contract exceed the minimum annual quantities prorated on a Monthly basis. This Section 7.3 is without prejudice to any other remedies SELLER may have under this Contract with respect to BUYER's failure to comply with Section 5.1. 15 SECTION 7.4: FAILURE TO SUPPLY Except in the event of Force Majeure or an agreement by the parties to the contrary, if SELLER's anticipated Pipeline Deliveries and Marine Deliveries of Product shall reasonably indicate that the cumulative quantity of its Deliveries to BUYER shall result in a Delivery status on a Month-To-Date Ratable basis in excess of [---] barrels. SELLER shall be deemed to be in a "Failure to Supply Position" and shall give prompt written notice of same to BUYER. In the event that the SELLER is in a Failure to Supply Position, both BUYER and SELLER shall attempt to minimize the impact of any Failure to Supply Position such that it not impose an unreasonable risk to BUYER. If [---] SELLER's Delivery Status is [---] on a [---] BUYER may, [---] The BUYER will [-- - -] and the SELLER shall [---] If the BUYER [---] under this Section 7.4, the [- - --] for the Year in question, shall be [---] This Section 7.4 is without prejudice to any other remedies BUYER may have under this Contract with respect to SELLER's failure to comply with Section 5.1. SECTION 7.5: PIPELINE DELIVERY Pipeline Deliveries shall be made by SELLER from SELLER's Hawaii Refinery through SELLER's pipelines to BUYER at BUYER's BPTF. Title to Product and the risk of loss of Product Delivered by Pipeline Delivery shall pass from SELLER to BUYER as per Section 7.7. 16 All samples, measurements and determinations drawn, taken and made, respectively, under this Section 7.5 shall be under the supervision of the Independent Inspector. SELLER and BUYER shall share equally the cost of independent inspections. The quality and BTU Content of the Product Delivered by Pipeline Delivery shall be determined on the basis of a volumetric weighted average composite of samples drawn by the Independent Inspector from SELLER's issuing tank(s) in such a manner as to be representative of each individual Pipeline Delivery ("Tank Final Sample"). The Tank Final Sample shall be divided into a minimum of three (3) parts as follows: 1. One part shall be provided to SELLER's laboratory for analysis to determine quality including BTU Content per barrel. 2. One part shall be provided to BUYER for the purpose of verifying SELLER's determinations. 3. At least one part shall be sealed and provided to the Independent Inspector to be retained for a period of at least three (3) Months. SELLER agrees to provide BUYER and the Independent Inspector with a copy of SELLERis preliminary laboratory analyses of the Tank Final Sample ("Pre-shipment Report") and shall provide this Pre-shipment Report prior to shipment of the Product. SELLER agrees to provide BUYER and the Independent Inspector with the Certificate of Quality representing the Tank Final Sample and will make a reasonable good faith effort to provide this Certificate of Quality no later than twenty four (24) hours after the completion of the Pipeline Delivery. If the completed Certificate of Quality is not available within said 24-hour period, SELLER will advise BUYER and the Independent Inspector, within said 24- hour period, 17 the final determination of API gravity, flash point, sulfur content and sediment & water representing the Tank Final Sample. BUYER shall have the right to perform laboratory analyses in order to verify the results of SELLER's laboratory analyses; provided however, that such verification analyses shall be performed in a timely manner. SELLER and BUYER will make reasonable good faith efforts to evaluate BTU Content and exchange results within three (3) working days of the completion of the Pipeline Delivery. In order to eliminate or minimize the volume of SELLER's Pipeline Fill received by BUYER in the course of a Pipeline Delivery operation, BUYER shall have the option to perform a Reverse Line Displacement whereby SELLER's Pipeline Fill is displaced to SELLER using BUYER's LSFO at the commencement of Pipeline Delivery operations. If BUYER elects not to commence Pipeline Delivery operations by displacing SELLER's Pipeline Fill with BUYER's LSFO, or if such displacement is operationally unfeasible or impractical for any other cause, SELLER and BUYER recognize that the Product received by BUYER in a Pipeline Delivery may be a Pipeline Blend which includes some amount of SELLER's Pipeline Fill. In such instance, the specification of SELLER's Pipeline Fill shall be determined by SELLER on the basis of SELLER's samples representative of the contents of the storage tank from which SELLER's Pipeline Fill was issued. SELLER agrees to provide BUYER, BUYER's representative and the Independent Inspector with a copy of its laboratory analysis of the quality of SELLER's Pipeline Fill prior to commencing the Pipeline Delivery. To provide an early warning of any quality problems with the Product Delivered via a Pipeline Blend, SELLER agrees to perform a pre-shipment computer blend simulation 18 representing the quality of SELLER's LSFO from the issuing tank(s) as indicated in the relevant Certificates of Quality or preliminary laboratory analyses of the Tank Final Samples and the quality of SELLER's Pipeline Fill as indicated in the relevant laboratory analyses. The computer blend simulation shall provide preliminary confirmation of the Pipeline Blend's conformance with the limits for API gravity, viscosity and percent by weight sulfur content specified in Article IV. SELLER agrees to provide BUYER or BUYER's representative and the Independent Inspector a copy of the computer blend simulation results prior to shipment. SELLER agrees that under no circumstances shall it make a Pipeline Delivery of Product to BUYER should the computer blend simulation or any other information available to SELLER indicate a quality problem with the Product or Pipeline Blend, without BUYER's express written permission. The quantity of Product in a Pipeline Delivery shall be determined at the time of each Pipeline Delivery by gauging SELLER's issuing tank(s) immediately before and after pumping under the supervision of the Independent Inspector. Should BUYER elect to perform a Reverse Line Displacement, the total quantity of Product Delivered to BUYER shall be reduced by reference to the rise in SELLER's tank(s) receiving SELLER's Pipeline Fill, determined by gauging such tank(s) immediately before and after pipeline displacement under the supervision of the Independent Inspector. Both BUYER and SELLER agree that if measurement of SELLER's tank(s) is, in the opinion of the Independent Inspector, considered to have been rendered inaccurate for reasons including, but not limited to, operational constraints or inadvertent transfer of Product or of SELLER's Pipeline Fill within SELLER's facilities, then 19 the quantity of Product or SELLER's Pipeline Fill may be determined by gauging BUYER's receiving tank(s) before and after pumping under the supervision of the Independent Inspector. Quantities of Product sold and Delivered by SELLER and purchased and received by BUYER hereunder shall be calculated in accordance with the current measurement standards adopted by industry, ASTM, API and other recognized standard-setting bodies as are applicable in the opinion of the Independent Inspector and shall be expressed in G.S.V., U.S. barrels @ 60 degrees F. SECTION 7.6: MARINE DELIVERY Marine Deliveries shall be made by SELLER from SELLER's vessel and may include LSFO, blending stocks or other components of Product originating at SELLERis Hawaii Refinery, through SELLERis pipelines to BUYER at BUYER's BPTF. Title to Product and the risk of loss of Product Delivered by Marine Delivery shall pass from SELLER to BUYER as per Section 7.7. SELLER agrees to provide BUYER or the Independent Inspector, prior to commencing a Marine Delivery of Product or any component thereof from SELLER's vessel, a copy of SELLER's port of loading quality document showing the quality of the Product or component thereof. All samples, measurements and determinations referenced in this Section 7.6 shall be drawn, taken and made, respectively, under the supervision of the Independent Inspector. SELLER and BUYER shall share equally the cost of independent inspections. In order to reduce the likelihood of SELLER's Marine Delivery resulting in quality problems arising in the receiving tank(s) at BUYER's BPTF, SELLER agrees to test a 20 volumetric weighted average composite of samples of the relevant marine cargo of Product, or component thereof ("Precautionary Sample"). The Precautionary Sample shall be drawn under the supervision of the Independent Inspector from SELLER's vessel's tanks in such a manner as to be representative of the relevant cargo after the arrival of the vessel at Barbers Point, but prior to commencement of the Marine Delivery. SELLER agrees that should its laboratory testing of the Precautionary Sample indicate a potential quality problem, including but not limited to, a quality as determined which materially differs from that specified on the port of loading quality document or does not conform to the quality specification limits in Article IV, the vessel operator shall not be instructed to commence Delivery of its cargo to BUYER's BPTF until such time as the loaded Product or component thereof is determined to meet the port of loading quality specifications or is otherwise in conformity with the specification limits in Article IV. The quality and BTU Content of the Product Delivered by Marine Delivery shall be determined on the basis of a volumetric weighted average composite of samples drawn by the Independent Inspector from the receiving tank(s) at BUYER's BPTF in such a manner as to be representative of the entire Marine Delivery ("Receiving Tank Final Sample"). The Receiving Tank Final Sample shall be divided into a minimum of three (3) parts as follows: 1. One part shall be provided to SELLER's laboratory for analysis to determine quality and BTU Content per barrel. 2. One part shall be provided to BUYER for the purpose of verifying SELLER's determinations. 21 3. At least one part shall be sealed and provided to the Independent Inspector to be retained for a period of not less than three (3) Months. SELLER agrees to provide BUYER and the Independent Inspector with the Certificate of Quality representing the Receiving Tank Final Sample and will make reasonable good faith efforts to provide this Certificate of Quality no later than twenty four (24) hours after SELLER's laboratory determines the Product Delivered by Marine Delivery is in conformance with the specification limits in Article IV. If the completed Certificate of Quality is not available within said 24-hour period, SELLER will advise BUYER and the Independent Inspector, within said 24-hour period, the final determination of API gravity, flash point, sulfur content and sediment & water representing the Receiving Tank Final Sample. BUYER shall have the right to perform laboratory analyses in order to verify the results of SELLER's laboratory analyses; provided however, that such verification analyses shall be performed in a timely manner. SELLER and BUYER will make reasonable good faith efforts to evaluate BTU Content and exchange results within three (3) working days of SELLER's laboratory determining the Product Delivered by Marine Delivery is in conformance with the specification limits in Article IV. Quantities of the Product Delivered via a Marine Delivery hereunder shall be determined at the time of each Marine Delivery by gauging BUYER's tank(s) immediately before and after pumping under the supervision of the Independent Inspector. Should BUYER elect to perform a Reverse Line Displacement, the total quantity of Product Delivered to BUYER shall be reduced by reference to the rise in the SELLER's tank(s) receiving SELLER's Pipeline Fill, determined 22 by gauging such tank(s) immediately before and after pipeline displacement under the supervision of the Independent Inspector. Quantities of Product sold and Delivered by SELLER and purchased and received by BUYER hereunder shall be calculated in accordance with the current measurement standards adopted by industry, ASTM, API and other recognized standard-setting bodies as are applicable in the opinion of the Independent Inspector and shall be expressed in G.S.V., U.S. barrels @ 60 degrees F. The maximum quantity of any Marine Delivery to be invoiced by SELLER to BUYER in any ten (10) Day period, shall not exceed an amount equivalent to [---] SECTION 7.7: TITLE AND RISK OF LOSS Title to Product and the risk of loss of Product Delivered by Pipeline Delivery shall pass from SELLER to BUYER at the connection between the flange of SELLER's pipeline and BUYER's pipeline at BUYER's BPTF. Title to Product Delivered by Marine Delivery shall pass from SELLER to BUYER in the tank(s) at the BPTF as soon as the quality of the Product so Delivered is determined by SELLER to meet the specification limits in Article IV, subject to BUYER's timely verification, or at BUYER's option, BUYER's verbal notice to SELLER allowing release for shipment prior to verification. 23 The [---] shall pass from [---] at the [---] provided, however, that in the event [---] SELLER shall [---] SECTION 7.8: DISPUTE The official BTU Content determination shall be as reported in SELLER's Certificate of Quality, provided that the arithmetic difference between SELLER's and BUYER's laboratory results is equal to or less than the then existing ASTM reproducibility standard (currently 0.4 MJ/kg, which the parties shall deem to be equivalent to a fixed standard of 60,000 BTU per barrel) for test D-240. If the difference between SELLER's and BUYER's determinations of BTU Content should fall outside the ASTM reproducibility standard for ASTM test D-240, the sealed sample in the possession of the Independent Inspector shall be provided to an independent laboratory for an official determination, which shall be binding upon the parties. SELLER and BUYER shall share equally the costs of independent tests and determinations. If SELLER or BUYER has reason to believe that the quality or quantity of Product stated for a specific Delivery per Section 7.5 or Section 7.6 is incorrect, that party shall within thirty (30) Days after the later of the date of the complete Certificate of Quality or the date of the final determination of BTU Content, present the other party with documents supporting such determination and the parties will confer, in good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quality and quantity, if justified, for the 24 Pipeline Delivery or Marine Delivery in question. In the event of an unresolvable difference between SELLER and BUYER, the sealed part of the representative sample in the possession of the Independent Inspector shall be provided to an independent laboratory for an official determination, which shall be final. SELLER and BUYER shall share equally the cost for such independent laboratory determination. If the quality of the Product received by BUYER fails to conform to the quality specification limits in Article IV of this Contract, both BUYER and SELLER shall attempt to minimize the impact of any quality problem on BUYER by specification waiver, if the use of the Product will not unreasonably cause harm to BUYER, or by SELLER Delivering higher quality Product in a timely manner to produce a specification quality blend in BUYER's storage tank(s) at BUYER's BPTF or at BUYER's Oahu generating plants. If all such, and similar, efforts fail to resolve the quality problem, then BUYER may return non-specification Product to SELLER, in which case SELLER shall replace the non-specification Product to BUYER in a timely manner. All costs and expenses, including BUYER's handling costs incurred in returning and replacing non-specification Product, shall be borne by SELLER. ARTICLE VIII PAYMENT ------- SECTION 8.1: INVOICES Invoices shall be prepared by SELLER and dated after a Delivery has been completed. [---]Invoices shall be accompanied by full documentation, reasonably acceptable to the BUYER, such as, but not limited to, Certificate of 25 Quality, report of the Independent Inspector and price calculation. SELLER will transmit an original of the invoice to BUYER on the [---] Day by mail to the following address or as otherwise instructed. BUYER: HAWAIIAN ELECTRIC COMPANY, INC. ATTN: DIRECTOR FUEL RESOURCES, MAIL STOP WP-2/IF P. O. BOX 2750 HONOLULU, HAWAII 96840 FACSIMILE: (808) 543-4207 Invoices, invoice documentation, laboratory analyses and other documents having to do with the quality, quantity and Delivery of Product or otherwise with the Product sold and purchased hereunder may be sent by first class mail, postage prepaid, by electronic transmission (facsimile or electronic mail) or by personal delivery. The parties may substitute other addresses upon the giving of proper notice from time to time. Correspondence and documents of a similar nature may be sent to SELLER to the following address or as otherwise instructed. SELLER: BHP PETROLEUM AMERICAS REFINING INC. ATTN: MANAGER HAWAII SUPPLY AND LOGISTICS P. O. BOX 3379 HONOLULU, HAWAII 96842 FACSIMILE: (808) 547-3048 SECTION 8.2: METHOD OF PAYMENT Payment shall be made without discount in USD [---] from the receipt of invoice by wire transfer of immediately available funds to: Citibank, New York ABA # 021000089 BHP Petroleum Americas Refining Inc. Account #40643342 Due dates are dates payments are to be received by SELLER. 26 SECTION 8.3: PAYMENTS If SELLER's final laboratory result for BTU Content is unavailable or if said laboratory result is disputed by BUYER pursuant to Section 7.8, SELLER may issue a provisional invoice calculated on the basis of the heat-content standard of 6.2 million BTU per barrel. BUYER shall make payment for such provisional invoice in accordance with Section 8.2. If an invoice incorporating an item, other than a heat rate adjustment which is disputed, has been sent to BUYER, then BUYER shall make payment in accordance with Section 8.2 for such invoice items or that portion of the invoiced Delivery which is not disputed by BUYER and in which case BUYER shall make such adjustment to taxes and other value-dependent items as are reasonable under the circumstances. The provisional invoice or invoice incorporating items in dispute shall be adjusted in accordance with the terms of Article VI by subsequent invoicing or by issuing a credit or debit with respect to the original invoice [---] of receipt of the independent laboratory determination pursuant to Section 7.8 or other resolution of the issue in dispute. BUYER shall make payment for such subsequent invoices or debits in accordance with Section 8.2. BUYER shall have the option to apply such credit against payments to be made subsequent to the receipt of the credit, or if such payments are not expected to be made [---] BUYER shall be able to receive said credit in immediately available funds within three (3) business days of SELLER's receipt of BUYER's written instructions. SECTION 8.4: INTEREST At SELLER's option and election, interest will accrue on all amounts, other than invoice items in dispute, not paid in accordance with the provisions of Sections 8.2 and 8.3 at the then 27 existing [---] ARTICLE IX NOTICES ------- Except as otherwise expressly provided herein, all notices shall be given in writing, by letter, facsimile or electronic mail to the following addresses or such other address as the parties may designate by notice, and shall be deemed to have been duly given when sent or personally delivered to the other party at the address noted below: BUYER: HAWAIIAN ELECTRIC COMPANY, INC. P. O. BOX 2750 HONOLULU, HAWAII 96840 ATTN: VICE PRESIDENT, POWER SUPPLY FACSIMILE: (808) 543-7707 SELLER: BHP PETROLEUM AMERICAS REFINING INC. P. O. BOX 3379 HONOLULU, HAWAII 96842 ATTN: VICE PRESIDENT, INTERNATIONAL SUPPLY AND MARKETING FACSIMILE: (808) 547-3796 ARTICLE X [---] It is understood and agreed that both parties entered into this Contract [---] of this Contract or any subsequent amendments hereto, [---] 28 [---] is [---] by [---] or [---] by [---] hereunder. [---] Such [---] shall be [---] after such a [---] the parties shall [---] negotiations and in the event that the parties do not agree upon a new Product Price or other [---] within [-- - -] Days after [---] the [---] Such [---] within [---] has been agreed upon, or [---] 29 ARTICLE XI FORCE MAJEURE ------------- SECTION 11.1: FORCE MAJEURE As used in this contract, an event or act of Force Majeure is defined as follows: acts of God, wars, riots, strikes, labor disputes, lockouts, blockades, insurrections, inability to secure materials or labor by reason of allocations promulgated by governmental agencies, unavailability of shipping of crude oil supplies, epidemics, landslides, lightning, earthquakes, fires, floods, tidal waves, volcanic eruptions, explosions, failure of machinery or pipelines, or any other causes not within the reasonable control of the affected party . SECTION 11.2: OBLIGATIONS SUSPENDED BUYER's obligation to purchase or receive Product, or SELLER's obligation to sell or Deliver Product, shall be suspended to the extent performance is prevented by an event or act of Force Majeure for any period in which such event or act exists as to the party claiming Force Majeure; and so long as such party is exercising its good faith efforts to overcome such Force Majeure event. However, nothing in this Article excuses BUYER from its obligation to make payments of money due SELLER for Product already Delivered to BUYER. SECTION 11.3: NOTICE OF FORCE MAJEURE The party claiming Force Majeure agrees to give the other party prompt written notice of an act or event of Force Majeure. The party claiming Force Majeure shall use due diligence to cure any act or event of Force Majeure, and shall give the other party prompt notice after the act 30 or event of Force Majeure has terminated. This Article XI shall not require any party to settle or compromise any strike or labor dispute. SECTION 11.4: NO MAKE-UP REQUIREMENT After the act or event of Force Majeure has terminated, SELLER shall not be obligated to sell and Deliver and BUYER shall not be obligated to purchase and receive the undelivered quantity of Product that normally would have been sold and Delivered during the period of Force Majeure. ARTICLE XII PRICE AND ALLOCATION CONTROLS ----------------------------- SECTION 12.1: REGULATORY PRICE SUSPENSION If SELLER is precluded by statute, or by regulation, rule, governmental interpretation or order implementing such statute from obtaining any increase in Product Price, as determined pursuant to this Contract, the increase shall be suspended until said law, regulation, rule, governmental interpretation or order permits the increase in whole or in part. In such an event, BUYER and SELLER shall confer in good faith and attempt to agree on an alternate course of action; but failing agreement within ten (10) Days, the party adversely affected may suspend performance with respect to the quantity of Product affected by the statute, regulation, rule, governmental interpretation or order. In the event the law, regulation, rule, governmental interpretation or order is terminated or is later modified to permit the increase, in whole or in part, the Product Price shall be increased for Deliveries of the Product made thereafter to the level permitted under this Contract without further action by the parties. 31 SECTION 12.2: GOVERNMENT REGULATIONS If the Delivery or supply of Product pursuant to this Contract conflicts with or is limited or prohibited by any federal, state or local regulations, statutes, rules or permits then to the extent of such conflict, limitation or prohibition, SELLER shall have no obligation to Deliver or supply BUYER with the Product under this Contract and BUYER shall have no obligation to purchase or receive the Product under this Contract. BUYER, in BUYER's discretion, may elect to complete and file any and all required Federal or state regulatory forms to permit, facilitate, or enable the supply of Product to BUYER under this Contract. SELLER shall fully cooperate with BUYER in the completion and filing of the foregoing forms. If BUYER's purchase, receipt or use of Product pursuant to this Contract conflicts with or is limited or prohibited by any Federal, State, or local regulations, statutes, rules or permits then to the extent of such conflict, limitation, or prohibition, BUYER shall have no obligation to purchase and receive the Product under this Contract. ARTICLE XIII ASSIGNMENT ---------- This Contract shall not be assigned by either party without prior written consent of the other party, which shall not be unreasonably withheld; provided, however, BUYER may assign this Contract to the Trustee under BUYER's First Mortgage Indenture dated December 1, 1938. 32 ARTICLE XIV APPLICABLE LAW -------------- This Contract shall be deemed to be a Contract made under and shall be governed by and construed in accordance with the laws of the State of Hawaii. The parties hereby consent to the personal jurisdiction of the federal and state courts in the State of Hawaii. ARTICLE XV PUBLIC UTILITIES COMMISSION --------------------------- This Contract is required to be filed with the Hawaii Public Utilities Commission ("PUC") for approval. If in the proceedings initiated as a result of the filing of this Contract, the PUC disapproves or fails to authorize the full recovery of the fuel cost incurred under this Contract through the BUYER's Energy Cost Adjustment Clause, BUYER may terminate this Contract at any time [---] by giving sixty (60) Days written notice to the SELLER. ARTICLE XVI ENTIRE AGREEMENT, WAIVER AND ILLEGALITY --------------------------------------- This Contract incorporates the entire agreement between the parties with reference to the subject matter and cancels and supersedes as of the date of execution hereof all prior oral or written understandings, or agreements, between the parties with respect to the subject matter and may only be modified by written instrument executed by duly authorized representatives of the parties. There are no other agreements which constitute any part of the consideration for, or any 33 condition to, either party's compliance with its obligations under this Contract. Failure to insist upon strict performance of any provision shall not constitute a waiver of the right to require such performance, nor shall a waiver in one case constitute a waiver with respect to a subsequent or continuing breach, whether of a similar nature or otherwise. If any term or provision of this Contract is held by any Court to be illegal or unenforceable, the remaining terms, provisions, rights and obligations shall not be affected. The headings or captions are for convenience only and have no force or effect on legal meaning in the construction or enforcement of the Contract. Time shall be of the essence in this Contract. ARTICLE XVII INDEMNITY --------- SELLER shall indemnify, defend and hold harmless BUYER, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) from and against all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses, (including attorneys' fees) and proceedings of any nature whatsoever for bodily injury, (including death) or property damage, including but not limited to BUYER's facilities, that results from Product which does not meet specifications or contaminated Product or that arises out of or is in any manner connected with the storage or transportation of Product or components thereof, including SELLER's Pipeline Fill, [---] except to the extent that such injury or damage may be attributable to the gross negligence or willful action of BUYER. BUYER shall indemnify, defend and hold harmless SELLER, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) 34 from and against all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses, (including attorneys' fees) and proceedings of any nature whatsoever for bodily injury, (including death) or property damage, including but not limited to SELLER's facilities, that results from Product which does not meet specifications or contaminated Product or that arises out of or is in any manner connected with the storage or transportation of Product or components thereof, including SELLER's Pipeline Fill, [---] except to the extent that such injury or damage may be attributable to the gross negligence or willful action of SELLER. Notwithstanding the foregoing, neither party shall be responsible for consequential damages. The provisions of this Article XVII shall survive the termination of the Contract. ARTICLE XVIII DEFAULT ------- Failure of either party to promptly perform any material obligation under this Contract shall constitute an event of default. If BUYER or SELLER considers the other party (the "Defaulting Party") to be in default of any material obligation under this Contract, such party (the "Non-Defaulting Party") shall give the Defaulting Party prompt notice thereof, describing the particulars of such event of default. The Defaulting Party shall thereafter have thirty (30) Days from the receipt of said notice in which to remedy such event of default. If the default is not cured, the Non-Defaulting Party may, without prejudice to any other rights or remedy of the Non-Defaulting Party, terminate its obligations under this Contract by written notice to the Defaulting Party, except for BUYER's obligation to pay in full in United States currency for amounts due under this Contract and except for any obligation which may accrue to BUYER or SELLER under Article XVII herein. 35 Any termination shall be without prejudice to accrued rights. All rights and remedies hereunder are independent of each other and election of one remedy shall not exclude another. ARTICLE XIX COUNTERPARTS ------------ This Contract may be executed in as many counterparts as desired by the parties, any one of which shall have the force and effect of any original but all of which together shall constitute the same instrument. _________________________________________________________________________ 36 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound thereby, have caused this Contract to be executed in duplicate originals by their duly authorized officers. BUYER HAWAIIAN ELECTRIC COMPANY, INC. By /s/ Edward Y. Hirata ------------------------------------------------- Edward Y. Hirata - ---------------------------------------------------- (Printed or Typed Name) Its Vice President, Regulatory Affairs ------------------------------------------------- By /s/ Marvin A. Hawthorne ------------------------------------------------- Marvin A. Hawthorne - ---------------------------------------------------- (Printed or Typed Name) Its Assistant Treasurer ------------------------------------------------- SELLER BHP PETROLEUM AMERICAS REFINING INC. By /s/ Faye W. Kurren ------------------------------------------------- Faye W. Kurren - ---------------------------------------------------- (Printed or Typed Name) Its Vice President, International Supply & Marketing ------------------------------------------------- 37 EXHIBIT A --------- PRODUCT SPECIFICATIONS ----------------------
LSFO Specification - Test Item Measurement Unit Limits ASTM Method - ------------------------------- ---------------- ------ ----------- GRAVITY @ 60 DEGREES F. Degrees API 12.0 Min. D-4052 24.0 Max. VISCOSITY SSU At 210 DF 100 Min. D-445, 450 Max. D-2161 HEAT VALUE, GROSS MM BTU/BBL 6.0 million D-240, Min. D-4868 FLASH POINT Degrees F. 150 Min. D-93 POUR POINT Degrees F. 125 Max. D-97, D-5949 ASH Percent, Weight 0.05 Max. D-482 SEDIMENT & WATER Percent, Weight 0.50 Max. D-1796 SULFUR Percent, Weight 0.50 Max. D-4294 NITROGEN Percent, Weight 0.50 Max. D-4629, D-5762 VANADIUM PPM, Weight 50 Max. D-5863, AES
1 EXHIBIT B --------- ILLUSTRATIVE SCHEDULE OF PRICES ------------------------------- Illustrative Product Price Calculation for October 1997 DETERMINATION OF PRODUCT PRICE UNDER ARTICLE VI. The Product Price in U.S. Dollars (USD) per barrel shall be determined Monthly based on the following price formula: [---] S1 = Simple average of the daily high and low or bid and asked market prices for Singapore or Singapore/Indonesia cracked, mixed/cracked or equivalent quality LSWR, as assessed on all dates of publication of [---] I. DETERMINATION OF [---] [---] (Price in USD per barrel)
Date Low High Average ---- --- ---- ------- [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---]
AVERAGE [---] 1 ii. DETERMINATION OF [---] [---] (Price in USD per barrel)
Date Low High Average ---- --- ---- ------- [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---]
AVERAGE [---] Average of [---] [---] [---] [---] [---] [---] = [---] [---] = [---] 2 DETERMINATION OF [---] [---] (Price in USD per barrel)
Date Low High Average ---- --- ---- ------- [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---]
AVERAGE [---] [---] = [---] F1 = A factor for quality differential of Product Delivered such as sulfur content, where F1 = [---] S2 = The simple average of the high and low prices for Los Angeles Bunker C fuel as reported by the Platt's Bunkerwire i. DETERMINATION OF MEAN OF PLATT'S BUNKERWIRE LA BUNKER C FUEL OIL Platt's Bunkerwire LA Bunker C (Price in USD per metric ton)
Date Low High Average ---- --- ---- ------- 08/21/97 $95.0000 $99.0000 $97.000 /MT 08/22/97 $101.0000 $107.0000 $104.000 /MT
3 08/25/97 $101.0000 $107.0000 $104.000 /MT 08/26/97 $107.0000 $109.0000 $108.000 /MT 08/27/97 $108.0000 $112.0000 $110.000 /MT 08/28/97 $107.0000 $112.0000 $109.500 /MT 08/29/97 $109.5000 $114.5000 $112.000 /MT 09/02/97 $110.0000 $113.0000 $111.500 /MT 09/03/97 $111.0000 $113.0000 $112.000 /MT 09/04/97 $112.0000 $115.0000 $113.500 /MT 09/05/97 $113.0000 $116.0000 $114.500 /MT 09/08/97 $111.0000 $113.0000 $112.000 /MT 09/09/97 $110.0000 $114.5000 $112.250 /MT 09/10/97 $110.0000 $115.0000 $112.500 /MT 09/11/97 $108.0000 $112.0000 $110.000 /MT 09/12/97 $108.0000 $110.0000 $109.000 /MT 09/15/97 $109.0000 $111.0000 $110.000 /MT 09/16/97 $111.0000 $112.0000 $111.500 /MT 09/17/97 $111.0000 $114.0000 $112.500 /MT 09/18/97 $108.0000 $114.0000 $111.000 /MT 09/19/97 $109.0000 $113.0000 $111.000 /MT
AVERAGE IN USD PER METRIC TON: $ 109.893 ii. CONVERSION OF MEAN OF PLATT'S BUNKERWIRE LA BUNKER C FUEL OIL FROM USD PER METRIC TON TO USD PER BARREL Expressed in USD per Bbl: = $109.893/MT / 6.368 Bbl/MT S2 = $17.257 PER BARREL [---] = [---] = [---] = [---] F1 = [---] PER BARREL F3 = A factor for tanker freight defined as: F3 = F5 + FRD1 + FRD2 F5 = The simple average of the Average Freight Rate Assessment ("AFRA") Worldscale Points for the average of Large Range 1 vessels, as published Monthly by London Tanker Brokers Panel Limited for the three Monthly publications in 4 the calendar quarter immediately preceding the calendar quarter of the Nominated Month of Delivery, multiplied by the Worldscale 100 rate for voyages between Singapore and Barbers Point, Hawaii, applicable to the Year of the quarter of the referenced AFRA data, expressed in New Worldscale rates, as published by Worldscale Associates (London Limited) in its New Worldscale Nominal Freight Scale (Worldscale). i. AFRA WORLDSCALE LARGE RANGE 1 AVERAGE Date of Publication: New Worldscale Large Range 1 "Points" (percentage of Worldscale 100 Rate) July 1997 141.5 August 1997 137.1 September 1997 129.6 AVERAGE: 136.067 ii. WORLDSCALE 100 OR "FLAT" RATE FOR A VOYAGE FROM SINGAPORE TO BARBERS PT. HAWAII New Worldscale 100 Rate between Singapore and BHP SBM Barbers Point effective January 1, 1997 is Base voyage Singapore/Barbers Pt. $10.11 per Metric Ton Variable Rate Differential for Discharge At BHPPAR SBM $0.15 per Metric Ton --------------------- $10.26 PER METRIC TON iii. COMPUTATION OF TANKER MARKET FREIGHT INDEX PER METRIC TON F5 = ($10.26/MT *(136.067/100)) = $13.96047 PER METRIC TON iv. CONVERSION OF TANKER MARKET FREIGHT INDEX FROM USD PER METRIC TON TO USD PER BARREL = ($13.96047 MT/6.75 bbls/MT) F5 = $2.068 PER BARREL FRD1 = A fixed rate differential for SBT Tankers, if and as provided by Worldscale, with respect to the Additional Insurance Premium for Basic ($500 Million) coverage of Oil Pollution Liability Insurance on vessels carrying persistent oils to and from the U.S.A., consistent with a typical vessel derived in Exhibit C attached to this Contract; plus, 5 FRD1 = $.012 PER BARREL, DERIVED AS ILLUSTRATED IN EXHIBIT C ATTACHED HERETO. FRD2 = A fixed rate differential for SBT Tankers, if and as provided by Worldscale, with respect to the Additional Insurance Premium for Excess ($200 Million) coverage of Oil Pollution Liability Insurance on vessels carrying persistent oils to and from the U.S.A., consistent with a typical vessel derived in Exhibit C attached to this Contract. FRD2 = $.008 PER BARREL, DERIVED AS ILLUSTRATED IN EXHIBIT C ATTACHED HERETO. F3 = F5 + FRD1 + FRD2 = $2.068/Bbl + $.012/Bbl + $.008/Bbl F3 = $2.088 PER BARREL F4 = $1.825 PER BARREL T = The Hawaii General Excise Tax, the Hawaii Environmental Response Tax and any other tax properly imposed on the sale of Product, including:. HGET = 4.166% of pre-HGET price Hawaii Environmental Response Tax applied after HGET = $0.05 per barrel A. PRODUCT PRICE COMPUTATION FOR DELIVERY WITH STANDARD BTU CONTENT OF 6.2 MM BTU PER BARREL [---] = [---] = [---] = [---] 6 = [---] PER BARREL B. PRODUCT PRICE COMPUTATION FOR DELIVERY WITH BTU CONTENT OTHER THAN STANDARD 6.2 MM BTU PER BARREL [---] IF F2, BTU CONTENT IS 6.275 MM BTU PER BARREL, THEN COMPUTATION IS AS FOLLOWS: = [---] = [---] = [---] = [---] PER BARREL EXPLANATION OF TAXES: - -------------------- Taxes in the LSFO price currently in effect include the Hawaii Environmental Response Tax of $0.050 per barrel. Also, Hawaii State General Excise Tax of 4.166% will be paid on all components of the Product Price, except at the execution of this Contract, the Hawaii Environmental Response Tax. 7 EXHIBIT C --------- EXAMPLE DETERMINATION OF FREIGHT COMPONENTS ------------------------------------------- PURSUANT TO ARTICLE VI ---------------------- Article VI of this Contract provides for the determination of the price per physical barrel of LSFO; which price determination includes the use of a tanker freight component which references the Worldscale 100 rate for voyages between Singapore and Barbers Point, Hawaii, expressed in New Worldscale rates, as published by Worldscale Associates (London) Limited in its New Worldwide Nominal Freight Scale ("Worldscale"). The current edition of Worldscale incorporates a Fixed Rate Differential to reflect the cost of additional insurance premiums for Oil Spill Liability Insurance on vessels carrying Persistent Oils applicable to voyages having a destination in the U.S.A. SELLER acknowledges that any vessel used to transport LSFO that is sold and purchased under this Contract, including its components and the crude oil from which the LSFO is derived, shall be required to possess oil spill liability insurance coverage in the amount of $700 million. The price formula component "F5" refers to an AFRA rate applicable to a vessel size classification of LR-1, or Large Range 1. This vessel classification references tanker vessels ranging in size from 45,000 Long Tons Deadweight to 79,999 Long Tons Deadweight. In order to derive an approximation of the relationship between Deadweight and Gross Registered Tons for a nominal vessel consistent with this vessel size classification, the average size characteristics of two vessels that have transported LSFO or crude oil to Hawaii are used as reference data. These vessels are described as follows: Name Deadweight Tons(DWT) Gross Registered Tons(GRT) ---- -------------------- -------------------------- S/T ARCO Prudhoe Bay 71,342 35,646 S/T ARCO Sag River 71,342 35,646 ------ ------ Average 71,342 35,646 The Worldscale rate data that is to be included in the computation of tanker freight price formula components "FRD1" and "FRD2," consistent with the computation of "F5," is to be derived in the same manner as the following illustrative example calculations: 1 1. Worldscale 100 rate in effect from February 20, 1997, onwards shall include Fixed Rate Differentials a. and b. below and shall be computed as follows: a. Fixed Rate Differential with respect to the additional insurance premiums for Basic $500 million coverage of Oil Pollution Liability Insurance on vessels carrying Persistent Oils to and from the U.S.A., "FRD1" is derived: FRD1 = $0.16/GT * 35,646 GRT ----------------------- 71,342 = $0.080 per Metric Ton For illustrative purposes, this rate may be expressed in U.S. dollars per barrel as follows: = $0.080/Metric Ton ----------------- 6.75 barrels/Metric Ton = $0.012/BARREL b. Fixed Rate Differential with respect to the additional insurance premiums for Excess $200 million coverage of Oil Pollution Liability Insurance on vessels carrying Persistent Oils to and from the U.S.A., "FRD2" is derived: FRD2 = .875 * $0.1205/GT * 35,646 GRT -------------------------------- 71,342 = $0.053 per Metric Ton For illustrative purposes, this rate may be expressed in U.S. dollars per barrel as follows: = $0.053/Metric Ton ----------------- 6.75 barrels/Metric Ton = $0.008/BARREL For informational purposes, the total applicable Fixed Rate Differential is equal to $0.133 per Metric Ton, or $0.020 PER BARREL. 2. The AFRA Worldscale Points and their related Worldscale 100 rate applicable for each calendar quarter are based upon an average of the three Monthly AFRA publications in 2 the calendar quarter immediately preceding the calendar quarter of the Nominated Month of delivery. Therefore the relevant Fixed Rate Differentials computed above may properly be prorated for certain quarterly periods. Such proration may be computed as follows: A. With respect to volumes of LSFO Nominated during the three (3) Months of the calendar quarter following a change in the published Worldscale rate (typically February of each Year), the relevant Fixed Rate Differentials to be included in the computation of the tanker freight price formula component shall be prorated for illustrative purposes as follows (for the first calendar quarter of a Year which is not a leap Year): 50/90 multiplied by the Fixed Rate Differential computed prior to the rate change. and 40/90 multiplied by the Fixed Rate computed using the revised rate. B. With respect to volumes of LSFO Nominated for subsequent Months, and continuing for so long as the Fixed Rate Differentials as set forth in Worldscale Circular shall be applicable, the relevant Fixed Rate Differentials to be included in the computation of the price components "FRD1" and "FRD2" shall be as derived as in part 1 above. 3 EX-10.12 13 FUEL SUPPLY CONTRACT BTWN THE COMPANIES HECO Exhibit 10.12 ------------------ INTER-ISLAND INDUSTRIAL FUEL OIL AND DIESEL FUEL SUPPLY CONTRACT by and between BHP PETROLEUM AMERICAS REFINING INC. and HAWAIIAN ELECTRIC COMPANY, INC.; MAUI ELECTRIC COMPANY, LIMITED; AND HAWAII ELECTRIC LIGHT COMPANY, INC. * * * * * * * * TABLE OF CONTENTS
ARTICLE PAGE ARTICLE I: Definitions 1 Section 1.1 1 Section 1.2: Buyer 7 ARTICLE II: Term 8 ARTICLE III: Quantity 8 Section 3.1: Minimum And Maximum Annual Quantities 8 Section 3.2: Effect of Purchase Power Agreements (PPA) 10 ARTICLE IV: Quality 11 ARTICLE V: Price, BTU Determination 12 Section 5.1: Fuel Oil Price 12 Section 5.2: Diesel Price 13 Section 5.3: Taxes, Assessments, Levies and Imposts 16 Section 5.4: Successor Publications 17 Section 5.5: Determination of BTU Content 17 ARTICLE VI: Payment 19 Section 6.1: Invoices 19 Section 6.2: Method of Payment 20 Section 6.3: Payments 21 Section 6.4: Interest 22 ARTICLE VII: Deliveries, Title and Risk of Loss 23 Section 7.1: Delivery, Title and Risk of Loss 23 Section 7.2: Delivery of Diesel and Fuel Oil to MEC and HELCO 23 Section 7.3: Forecast and Notice of Delivery 26 Section 7.4: Delivery Operations, Laytime and Demurrage 27 Section 7.5: Delivery Operations At SELLER's SPM 29 Section 7.6: Pollution Mitigation 31 Section 7.7: Oil Spill Liability And Insurance 32 ARTICLE VIII: Measurement, Sampling and Testing 33 Section 8.1: Independent Inspection 33 Section 8.2: Determination of Quantity 33 Section 8.3: Sampling And Determination of Quality 34 Section 8.4: Dispute 37 ARTICLE IX: [---] 38 ARTICLE X: Force Majeure 40 Section 10.1: Force Majeure 40 Section 10.2: Obligations Suspended 40 Section 10.3: Notice of Force Majeure 40 Section 10.4: No Make-Up Requirement 41 ARTICLE XI: Price and Allocation Controls 41 Section 11.1: Regulatory Price Suspension 41
ii Section 11.2: Government Regulations 42 ARTICLE XII: Assignment 42 ARTICLE XIII: Applicable Law 43 ARTICLE XIV: Public Utilities Commission Approval 43 ARTICLE XV: Entire Agreement, Waiver and Illegality 43 Section 15.1: Entire Agreement And Waiver 43 Section 15.2: Notices 44 ARTICLE XVI: [---] 45 ARTICLE XVII: Buyer's Use of Seller's Facilities on Maui and Hawaii 45 ARTICLE XVIII: Indemnity 46 ARTICLE XIX: Default 47 ARTICLE XX: Counterparts 48 Addendum No. 1: [---] 1-1 Section 1: Introduction 1-1 Section 2: [---] 1-2 Section 3: Safe Operation 1-3 Section 4: Maintenance 1-4 Section 5: Additions Or Modifications 1-4 Section 6: Forecast, Scheduling, Notice And Demurrage 1-5 Section 7: Determination Of Shipment Quantity 1-8 Section 8: Title And Risk Of Loss 1-8 Section 9: Line Displacement 1-8 Section 10: Throughput Fees And Other Expenses 1-9 Section 11: Invoices 1-11 Section 12: [---] 1-11 Section 13: Oil Spill Clean Up Expense 1-12 Section 14: Consequential Damages 1-12 Section 15: Vessel Requirements 1-12 Section 16: Not A Public Utility 1-12 Section 17: Assignment 1-13 Section 18: Parties' Rights 1-13 Addendum No. 2: Seller's Facilities on Maui and Hawaii 2-1 Section 1: Availability, Forecast, Option, Throughput, Quality, Delivery Size And Services 2-1 Section 2: BUYER's Advice of Shipment of Received Diesel 2-2 Section 3: Barge Received Sample 2-3 Section 4: Conditional Acceptance of Received Diesel 2-3 Section 5: Quality Problem, Dispute And Remedy Regarding Received Diesel 2-4 Section 6: Coast Guard Dock Watch Requirements 2-7 Section 7: Custody of Received Diesel And Commingled Product 2-7 Section 8: Determination of Quantity of Received Diesel 2-8 Section 9: Transfer Notification 2-8
iii Section 10: Custody of Returned Diesel 2-8 Section 11: Determination of Quantity of Returned Diesel 2-8 Section 12: Determination of BUYER's Inventory 2-9 Section 13: Returned Diesel Quantity 2-9 Section 14: Returned Diesel Sampling and Conditional Acceptance 2-9 Section 15: Quality Problem, Dispute and Remedy Regarding Returned Diesel 2-10 Section 16: Terminaling and Handling Fees 2-12 Section 17: Required Insurance 2-13 Section 18: Barge and Vehicle Standards 2-15 Section 19: Notices 2-15 Exhibit A: No. 6 Industrial Fuel Oil Specifications A-1 Exhibit B: Diesel Specifications B-1 Exhibit C: No. 6 Fuel Oil Example Price Calculation C-1 Exhibit D: Diesel Example Price Calculation D-1
iv INTER-ISLAND INDUSTRIAL FUEL OIL AND DIESEL FUEL SUPPLY CONTRACT ------------------------------- This Contract is made and entered into this 14th day of November, 1997, by and between BHP PETROLEUM AMERICAS REFINING INC., a Hawaii corporation, (hereinafter called "SELLER"), and HAWAIIAN ELECTRIC COMPANY, INC., and its wholly-owned subsidiaries MAUI ELECTRIC COMPANY, LIMITED. and HAWAII ELECTRIC LIGHT COMPANY, INC., Hawaii corporations, (hereinafter collectively called "BUYER"). NOW, THEREFORE, the parties agree as follows: ARTICLE I DEFINITIONS ----------- SECTION 1.1 - ----------- Except where otherwise indicated, the following definitions shall apply throughout this Contract: 1. "Additional Term" means any Contract term in addition to and after the Original Term, each of which is a 12-Month period, beginning January 1. 2. "API" means American Petroleum Institute, a long-established petroleum industry organization. 3. "ASTM" means the American Society for Testing and Materials, a long- established source of standard testing and evaluation methods for petroleum. 1 4. "BUYER's Barbers Point Storage Facilities" means BUYER's petroleum storage and distribution facilities, including but not limited to BPTF, located in the Barbers Point area of Oahu, in Campbell Estate Industrial Park, Kapolei, Hawaii. 5. "barrel" means 42 United States Gallons at 60 degrees Fahrenheit. 6. "BHP" means BHP Petroleum Americas Refining Inc. 7. "BPTF" means BUYER's Barbers Point Tank Farm petroleum storage and distribution facilities located in the Barbers Point area of Oahu, in Campbell Estate Industrial Park, Kapolei, Hawaii. 8. "BTU Content" means British Thermal Unit content and refers to the standard assessment of gross heat of combustion, gross heating value and gross heat content of Product determined in accordance with the test method specified in Exhibits A and B. 9. "BUYER's Nominated Barge" means a petroleum tank barge or vessel designated by BUYER to receive Product Delivered by SELLER. 10. "BUYER's Nominated Marine Terminal" means a petroleum receiving, storage and distribution facility designated by BUYER to receive Product Delivered by SELLER. 11. [---] means a [---] 12. "[---] means [---] respectively. 2 13. [---] means [---] 14. "Certificate of Quality" means the formal document recording SELLER's laboratory determination of the quality and BTU Content of a particular sample which represents a specific Delivery of Product, said laboratory determinations having been performed in accordance with the test methods specified in Exhibits A and B. 15. "Certificate of Quantity" means the formal document recording the measurements and quantity determination of a specific Delivery of Product prepared under the supervision of the Independent Inspector; said Certificate may be a part of or incorporated into the report of the Independent Inspector. 16. "Contract" means this Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract, between BHP Petroleum Americas Refining Inc. and Hawaiian Electric Co., Inc., Maui Electric Co., Ltd. and Hawaii Electric Light Co., Inc., the term of which commences January 1. 1998. 17. "Day" or "Days" means a calendar day of 24 hours. 18. "Deliver," "Delivery," "Deliveries," or "Delivered" refers to the physical movement of Product or transfer of title attendant upon the sale of Product by SELLER and its receipt and purchase by BUYER which commences at the initiation of pumping from SELLER's Refinery tank(s), SELLER's Nominated Terminal issuing tank(s) or SELLER's Nominated Barge cargo tank(s) to BUYER's Nominated Barge or BUYER's Nominated Marine Terminal and ends with the subsequent cessation of continuous pumping of the Product. 3 19. "DF" means degrees Fahrenheit. 20. "Diesel" or "Diesel Fuel" means Diesel Fuel Oil No. 2 in accordance with Article IV and Exhibit B. 21. "diesel" means Diesel, SELLER's diesel, BUYER's diesel or third-party diesel similar in quality to Diesel. 22. "diesel Preliminary Analysis" means an preliminary qualitative analysis to be performed at the option of SELLER on a sample of Received diesel, such analysis consisting of tests for API gravity, appearance and flash point. 23. "Force Majeure" means an act or event as per the provisions of Section 10.1. 24. "Fuel Oil" means Industrial Fuel Oil No. 6 in accordance with Article IV and Exhibit A. 25. "gallon" means a United States gallon of 231 cubic inches at 60 degrees Fahrenheit. 26. "GEOPS" means good engineering and operating practices with reference to generally recognized standards promulgated by professional societies, industry, materials testing and research organizations. 27. "G.S.V." means gross standard volume in U.S. barrels at 60 degrees Fahrenheit. 28. "HECO" means Hawaiian Electric Company, Inc. 29. "HELCO" means Hawaii Electric Light Company, Inc. 30. "Independent Inspector" means a qualified third-party petroleum inspection contractor acceptable to both BUYER and SELLER providing petroleum sampling, measurement, quantity determination and other such services before, during and after a Delivery of Product. 31. "IP" means the Institute of Petroleum, a long-established international source of standard testing and evaluation methods for petroleum. 4 32. [---] means [---] 33. "MECO" means Maui Electric Company, Ltd. 34. "MM" means million when used in conjunction with a unit of measure such as BTU, i.e. MM BTU means million BTU. 35. "Month" means a calendar Month. 36. "Month of Delivery" means the calendar month during which the physical Delivery is completed which is indicated by the cessation of pumping of Product and the tanking of final gauge measurements of the issuing or receiving tank(s) pursuant to determining the amount of Product Delivered. 37. "NOR" means notice of readiness. 38. "Original Term" means the first term of this Contract which commences January 1, 1998 and concludes December 31, 2004. 39. "Product" means both Fuel Oil and Diesel meeting the specifications in Exhibit A and B, respectively. 40. "Product Preliminary Analysis" means an preliminary qualitative analysis to be performed by SELLER on a sample of Diesel or Fuel Oil from SELLER's issuing tanks and delivery piping or SELLER's Nominated Barge prior to commencing Delivery operations which is representative of the intended Product Delivery, such analysis consisting of tests for API gravity, appearance, flash point and sulfur content. 5 41. "Purchase Power Agreement" means an agreement by and between a BUYER and a third party for the purchase of firm capacity output from one or more generating plants. 42. "Received diesel" means BUYER's diesel to be received into the custody of SELLER at SELLER's Neighbor Island Terminals, such diesel may be Diesel or third-party diesel of a quality similar to Diesel. 43. "Refinery" means SELLER's oil refining and related facilities located in the Barbers Point area of Oahu, in Campbell Estate Industrial Park, Kapolei, Hawaii. 44. "Returned diesel" means diesel to returned to the custody of BUYER by SELLER at the truck loading rack of SELLER's Neighbor Island Terminals, such returned diesel may be Diesel or third-party diesel of a quality similar to Diesel having been previously delivered into the custody of SELLER by BUYER at SELLER's Neighbor Island Terminals. 45. [---] means a [---] 46. "SELLER's Hilo Terminal" means SELLER's marine petroleum storage and distribution terminal facilities located in Hilo, Hawaii. 47. "SELLER's Kahului Terminal" means SELLER's marine petroleum storage and distribution terminal facilities located in Kahului, Maui. 48. "SELLER's Loading Pier" means Piers 5, 6 or any such other pier developed for or utilized for the purpose of Delivering Product to BUYER, located at the Barbers Point Deep Draft Harbor, Oahu, Hawaii, and connected by pipeline to SELLER's Refinery. 6 49. "SELLER's Neighbor Island Terminals" means collectively SELLER's Hilo Terminal and SELLER's Kahului Terminal. 50. "SELLER's Nominated Barge" means a petroleum tank barge or vessel designated by SELLER to Deliver Diesel to BUYER into BUYER's Nominated Marine Terminal. 51. "SELLER's Nominated Terminal" means a petroleum storage and distribution terminal facility designated by SELLER from which to Deliver Diesel to BUYER into BUYER's Nominated Marine Terminal. 52. "SPM" means SELLER's Single Point Mooring facility, a petroleum tank vessel loading and off-loading single-buoy type mooring facility located off shore of SELLER's Refinery at Barbers Point, Oahu, Hawaii. 53. "Third-Party Pier" means a pier or wharf or other marine facility, operated under the supervision of a third party, nominated by SELLER to be used for the purpose of Delivering Product into BUYER's Nominated Barge. 54. "USCG" means U.S. Coast Guard. 55. "USD" means currency denominated in U.S. dollars. 56. "Year" means a calendar Year. SECTION 1.2: BUYER - ------------------ As to any purchase of Product by MECO, the term "BUYER" shall exclude HELCO, and as to any purchase of Product by HELCO, the term "BUYER" shall exclude MECO. Furthermore, for purposes of this Contract (excluding any payments due from, and liabilities and indemnities attributable to, a BUYER) the term "BUYER" shall be deemed to mean MECO or 7 HELCO, as applicable, and its authorized agent(s) for this purpose, unless otherwise specified or clearly inappropriate in the context. ARTICLE II TERM ---- The Original Term of this Contract shall be from January 1, 1998 through December 31, 2004 and the Contract shall continue thereafter for Additional Terms, each a successive 12-Month period, beginning January 1, 2005, unless BUYER or SELLER gives written notice of termination at least one hundred twenty (120) Days prior to the expiration of the then current term, including the Original Term and any Additional Term. ARTICLE III QUANTITY -------- SECTION 3.1: MINIMUM AND MAXIMUM ANNUAL QUANTITIES - -------------------------------------------------- During each Year that this Contract is in effect, SELLER shall sell and Deliver to BUYER, and BUYER shall purchase and receive from SELLER, Product (in barrels) at a reasonably uniform rate of no less than the minimum nor more than the maximum annual physical quantities, except as otherwise provided herein, as set out below for each BUYER: 8 Annual Physical Barrels ----------------------- I. FUEL OIL 1998 MINIMUM MAXIMUM ---- ------- ------- HELCO [---] [---] MECO [---] [---] TOTAL [---] [---] 1999 - 2004 MINIMUM MAXIMUM ----------- ------- ------- HELCO [---] [---] MECO [---] [---] TOTAL [---] [---] II. DIESEL 1998 MINIMUM MAXIMUM ---- ------- ------- HELCO [---] [---] MECO [---] [---] TOTAL [---] [---] DIESEL 1999 - 2004 MINIMUM MAXIMUM ----------- ------- ------- HELCO [---] [---] MECO [---] [---] TOTAL [---] [---] Upon prior written notice to SELLER, HELCO and MECO may modify their individual minimum and maximum annual physical quantities of Fuel Oil and Diesel provided that the total minimum annual physical quantities of Fuel Oil and Diesel which shall be sold and Delivered by 9 SELLER and purchased and received by BUYER collectively, shall fall within the limits specified in this Section 3.1. The volumes of Fuel Oil and Diesel to be sold and Delivered by SELLER and to be purchased and received by each respective BUYER shown for 2004 shall also apply to any Additional Term, unless otherwise mutually agreed. Subject to availability, SELLER shall sell and Deliver and BUYER shall purchase and receive such additional volumes in excess of the maximum annual volumes as are mutually agreed. SECTION 3.2: EFFECT OF PURCHASE POWER AGREEMENTS (PPA) - ------------------------------------------------------ If due to the commencement of commercial operation during the term of this Contract of a generating plant or generating plants supplying firm capacity to HELCO or MECO, or an increase in firm capacity output under an existing contract, in aggregate under one or more Purchase Power Agreements ("PPA") in excess of 20 megawatts (gross basis), HELCO's or MECO's anticipated demands for Fuel Oil or Diesel results in BUYER'S total aggregate anticipated demand on an annual basis during any Year during the term of this Contract for Fuel Oil or Diesel to decline below the BUYER'S total aggregate minimum annual quantities set forth in Section 3.1 (the difference between BUYER'S total aggregate anticipated demand and BUYER'S total aggregate minimum annual quantities being the "Fuel Requirement Reduction"), then BUYER shall give written notice to SELLER of BUYER'S request that SELLER accept the Fuel Requirement Reduction. SELLER shall have fifteen (15) Days within which to accept BUYER'S Fuel Requirement Reduction or reject BUYER'S Fuel Requirement Reduction and request a renegotiation of the affected BUYER'S minimum annual quantities of Fuel Oil or Diesel in Section 3.1 and/or the price of Fuel Oil or Diesel sold and Delivered by SELLER and 10 purchased and received by the affected BUYER in Article V of this Contract. If SELLER either accepts BUYER'S Fuel Requirement Reduction or fails to give any notice of acceptance or rejection within said 15-Day period, then BUYER'S Fuel Requirement Reduction shall be deemed to have been accepted by SELLER and shall become effective upon the expiration of said 15-Day period. Should SELLER reject BUYER'S request for the Fuel Requirement Reduction then, within 60 Days following the date of any such rejection notice, if the parties are unable to renegotiate the affected BUYER's minimum annual quantities and/or the price for Fuel Oil or Diesel to be sold and Delivered by SELLER and purchased and received by the affected BUYER, in a manner mutually satisfactory to both SELLER and BUYER, then SELLER upon 30 Days written notice, may elect to terminate its obligation to sell Fuel Oil or Diesel to the affected BUYER under this Contract. Until (i) Buyers' request for a Fuel Reduction Requirement is accepted or deemed accepted by Seller, (ii) a mutually satisfactory provision for the affected BUYER's minimum annual quantities and/or price for Fuel Oil or Diesel sold and Delivered by SELLER and purchased and received by the affected BUYER, is renegotiated, or (iii) the obligation to sell Fuel Oil or Diesel to the affected BUYER under this Contract is terminated in accordance with this Section 3.2, the terms and conditions of this Contract shall be and remain in full force and effect. 11 ARTICLE IV QUALITY ------- SELLER shall sell and Deliver and each respective BUYER shall purchase and receive Fuel Oil and Diesel that shall conform to the specifications set forth in Exhibits A and B, respectively, attached hereto and incorporated herein by reference. ARTICLE V PRICE, BTU DETERMINATION ------------------------ SECTION 5.1: FUEL OIL PRICE - --------------------------- The price in USD per barrel of Fuel Oil shall be determined for each Month on the basis of the simple average of the high and low price assessments for Los Angeles Bunker C fuel as reported by the Platt's Oilgram Bunkerwire ("Platt's Bunkerwire") on all dates of publication during the period beginning the 21st Day of the second Month preceding the Month of Delivery and ending the 20th Day of the Month preceding the Month of Delivery, expressed in USD per barrel, converting to barrels from metric tons by dividing by 6.368, [---] to volumes sold and Delivered by SELLER and purchased and received by BUYER in each Year of the indicated period as set forth below: [---] [---] barrels: [---] per barrel [---] barrels: [---] per barrel 12 [---] barrels: [---] per barrel [---] [---] barrels: [---] per barrel [---] barrels: [---] per barrel [---] barrels: [---] per barrel The per barrel premium applicable to Fuel Oil sold and Delivered by SELLER and purchased and received by BUYER for 2004 shall also apply to Fuel Oil sold and Delivered by SELLER and purchased and received by BUYER during each Year of any Additional Term, unless otherwise mutually agreed. All prices, price formula, including their averages and factors, adjustments thereto and other sums payable with respect to Fuel Oil hereunder shall be stated in the nearest thousandth of a dollar unless specifically stated otherwise. Exhibit C, attached hereto and included herein by reference, contains an illustrative schedule of prices for Fuel Oil calculated pursuant to this Section 5.1. SECTION 5.2: DIESEL PRICE - ------------------------- The price in USD of Diesel shall be determined for each Month on the basis of the simple average of the high and low price assessments for West Coast Pipeline, Los Angeles California Low Sulfur No. 2 Diesel as reported by Platt's Oilgram Price Report ("Platt's Oilgram") on all dates of publication during the period beginning the 21st Day of the second Month preceding the Month of Delivery and ending the 20th Day of the Month preceding the Month of Delivery, expressed in USD per gallon, [---] applicable to volumes sold and Delivered by 13 SELLER and purchased and received by BUYER in each Year of the indicated period as set forth below: [---] [---] barrels: [---] per gallon [---] barrels: [---] per gallon [---] barrels: [---] per gallon 14 [---] [---] barrels: [---] per gallon [---] barrels: [---] per gallon [---] barrels: [---] per gallon The per gallon premium applicable to Diesel sold and Delivered by SELLER and purchased and received by BUYER for 2004 shall also apply to Diesel sold and Delivered by SELLER and purchased and received by BUYER during each Year of any Additional Term, unless otherwise mutually agreed. For Diesel sold and Delivered in bulk by SELLER via tank transfer from SELLER's Nominated Terminal facility or via SELLER's Nominated Barge, and purchased and received in bulk by BUYER at Kahului, Maui, or at Hilo or Kawaihae, Hawaii, BUYER shall pay an [---] applicable only to such Diesel, in each Year of the indicated period as noted below: [---] [---] [---] per [---] for the [---] purchased by MECO, Delivered in Kahului Maui, in $/gallon: [---] [---] [---] per [---] for the [---] purchased by HELCO, Delivered in Hilo Hawaii, in $/gallon. [---] [---] [---] per [---] for the [---] purchased by HELCO, Delivered in Kawaihae Hawaii, in $/gallon. [---] [---]
15 The [---] applicable to Diesel sold and Delivered by SELLER and purchased and received by BUYER for 2004 shall also apply to Diesel sold and Delivered by SELLER and purchased and received by BUYER during each Year of any Additional Term, unless otherwise mutually agreed. All prices, price formula, including their averages and factors, adjustments thereto and other sums payable with respect to Diesel hereunder shall be stated in the nearest ten-thousandth of a dollar unless specifically stated otherwise. Exhibit D, attached hereto and included herein by reference, contains an illustrative schedule of prices for Diesel calculated pursuant to this Section 5.2. SECTION 5.3: TAXES, ASSESSMENTS, LEVIES AND IMPOSTS - --------------------------------------------------- In addition to all other amounts payable by BUYER under this Contract, BUYER shall reimburse SELLER for all taxes, assessments, levies, and imposts of whatsoever kind or nature imposed on SELLER by any governmental or quasi- governmental body, as adjusted, modified or revised from time to time, including without limitation the Hawaii General Excise Tax, the Hawaii Environmental Response Tax, and pertaining to sales and purchases of Diesel, the Hawaii Liquid Fuel Tax, with respect to the execution or performance of this Contract or the receipt by SELLER of payments hereunder. Notwithstanding the foregoing and any illustrative price calculation, such as contained in Exhibits C and D, BUYER shall not be required to reimburse SELLER for any tax measured by or based on the net income of SELLER or for real property taxes or to duplicate any item of expense of SELLER which is recovered by SELLER under the Fuel Oil and Diesel prices provided for in Section 5.1 and Section 5.2, respectively. BUYER shall not be required to reimburse SELLER under this Article V for any item expressly 16 mentioned by Platt's Bunkerwire or Platt's Oilgram or confirmed by Platt's Bunkerwire or Platt's Oilgram in writing upon inquiry by either BUYER or SELLER, as being included in a price assessment incorporated in Article V. There shall be no modification in the calculation of any unit of measure conversion, BTU Content adjustment or similar computation of other quality components solely due to the presence or absence of any tax, assessment, levy, impost or other such similar item of expense contained in any such component. At the execution of this Contract, the taxes, assessments, levies or imposts which are currently in effect include the Hawaii General Excise Tax (4.166%), the Hawaii Environmental Response Tax ($0.05 per barrel or $0.0012 per gallon) and pertaining to Diesel, Hawaii Liquid Fuel Tax ($0.0100 per gallon). Also at the execution of this Contract, the Hawaii Environmental Response Tax and Hawaii Liquid Fuel Tax are not subject to Hawaii General Excise Tax. SECTION 5.4: SUCCESSOR PUBLICATIONS - ----------------------------------- Platt's Bunkerwire and Platt's Oilgram shall include any successor publication(s) and, in the event of discontinuance of either of these publications or the assessments of Los Angeles Bunker C Fuel Oil or West Coast Pipeline, Los Angeles California Low Sulfur No. 2 Diesel, respectively, the parties shall mutually agree upon the use of alternate reporting services or publications or similar price assessments and any resulting modification of the per barrel [---] for Fuel Oil or per gallon [---] for Diesel, as applicable, as may be reasonable under the circumstances. SECTION 5.5: DETERMINATION OF BTU CONTENT - ----------------------------------------- Should the weighted average BTU Content per barrel of the representative samples of Fuel Oil sold and Delivered by SELLER and purchased and received by each respective BUYER 17 during any calendar quarter, and drawn in accordance with the procedures set forth in Article VIII, fall within the range of [---] no price adjustment will be made. If the weighted average BTU Content per barrel [---] the price charged for the Fuel Oil sold and Delivered to that respective BUYER during the calendar quarter in question shall be adjusted by multiplying the price determined in Section 5.1, by the [---] Exhibit C contains an illustrative schedule of prices for Fuel Oil adjusted with reference to BTU Content calculated pursuant to this Section 5.5. Should the weighted average BTU Content per gallon of the representative samples of Diesel sold and Delivered by SELLER and purchased and received by each respective BUYER during any calendar quarter, and drawn in accordance with the procedures set forth in Article VIII, fall [---] If the weighted average BTU Content per gallon is [---] the price charged for the Diesel sold and Delivered to that respective BUYER during the calendar quarter in question shall be adjusted by multiplying the price determined in Section 5.2, by the [---] Exhibit D contains an illustrative schedule of prices for Diesel adjusted with reference to BTU Content calculated pursuant to this Section 5.5. The official BTU Content determination shall be based upon SELLER's laboratory results provided that the arithmetic difference between SELLER's and BUYER's laboratory results is equal to or less than the then existing ASTM reproducibility standard (currently 0.4 MJ/kg, which shall be deemed by the parties as equivalent to 60,000 BTU per barrel for an individual 18 Delivery of Fuel Oil sold and Delivered by SELLER and purchased and received by a respective BUYER, and deemed by the parties as equivalent to 1,200 BTU per gallon for any individual Delivery of Diesel sold and Delivered by SELLER and purchased and received by a respective BUYER) for test D-240. If the difference between SELLER's and BUYER's laboratory results should fall outside the ASTM reproducibility standard for ASTM test D-240, the sealed sample in the possession of the Independent Inspector will be provided to an independent laboratory for an official determination, which shall be binding upon the parties. SELLER and BUYER shall share equally the costs of independent tests and determinations. SELLER shall credit BUYER's account for overpayments and BUYER shall pay SELLER for underpayments resulting from price corrections for invoiced Deliveries made as a result of BTU Content adjustments as soon as possible after the close of each calendar quarter, but in no event later than sixty (60) Days after the close of a calendar quarter. Such adjustments to either BUYER or SELLER will be handled as separate credits or invoices and invoices issued with respect to individual Deliveries during said calendar quarter will not be corrected and reissued. ARTICLE VI PAYMENT ------- SECTION 6.1: INVOICES - --------------------- Invoices shall be prepared by SELLER and dated after a Delivery has been completed. A [---] SELLER will transmit an original of the invoice to the BUYER [---] to the address set forth in Section 6.2. 19 Original invoices shall be accompanied by full documentation, reasonably acceptable to the BUYER, such as, but not limited to, Certificate of Quality, Certificate of Quantity or report of the Independent Inspector and price calculation. Invoices which have been so prepared shall be sent to the respective BUYER at the following addresses: MECO - MAUI ELECTRIC COMPANY, LTD. P. O. BOX 398 KAHULUI, HAWAII 96732 ATTENTION: R. CUGAL/PRODUCTION DEPARTMENT FACSIMILE: 808-244-5260 HELCO - HAWAII ELECTRIC LIGHT CO., INC. P. O. BOX 1027 HILO, HAWAII 96720 ATTENTION: PRODUCTION DEPARTMENT FACSIMILE: 808-969-0435 Certificate of Quality, laboratory analyses, reports of the Independent Inspector and other documents having to do with the quantity, quality and Delivery of Diesel and Fuel Oil to BUYER, or otherwise with the Diesel and Fuel Oil sold and purchased hereunder, shall be sent to the respective BUYER and to BUYER's agent at the address in Section 15.2 of this Contract. SECTION 6.2: METHOD OF PAYMENT - ------------------------------ Payments shall be made in USD. Timing of payments of invoices sent to each respective BUYER shall be as follows: a. Payment for Deliveries and services from the first through the tenth Day of a Month for which invoices have been received by the fourteenth of that same Month is due on the twentieth Day of said Month. 20 b. Payment for Deliveries and services from the eleventh through the twentieth Day of a Month for which invoices have been received by the twenty fourth of that same Month is due on the last Day of said Month. c. Payment for Deliveries and services from the twenty-first through the last Day of a Month for which invoices have been received by the fourth of the following Month is due on the tenth Day of said following Month. For payment timing purposes in this Section 6.2, invoices shall be deemed to have been received on the date of an invoice's postmark. Due dates are dates payments are to reach SELLER. If the due date falls on a Friday, holiday or a Saturday, the payment shall be due on the preceding business day. If such date falls on a Sunday or a holiday falling other than on a Friday, payment shall be due the following business day. Payment shall be made by each BUYER by bank wire transfer of immediately available funds to: Citibank, New York ABA # 021000089 BHP Petroleum Americas Refining Inc. Account #40643342 SECTION 6.3: PAYMENTS - --------------------- If a debit memo incorporating an adjustment to a previously issued invoice has been sent to BUYER, subsequent to BUYER making payment of said original invoice, then BUYER shall make payment in accordance with the provisions of this Section 6.1. If a credit memo 21 incorporating an adjustment to a previously issued invoice has been sent to BUYER, subsequent to BUYER making payment of said original invoice, then BUYER shall have the option to apply such credit against payments to be made subsequent to the receipt of the credit, or if such payments are not expected to be made within twenty (20) Days, BUYER shall be able to receive said credit in immediately available funds within three (3) business days of SELLER's receipt of BUYER's written instructions. If an invoice incorporating an item at variance with the documentation, or is disputed, has been sent to BUYER, then BUYER shall hold said invoice without penalty until such error, variance with documentation or dispute is resolved and BUYER shall have received a corrected invoice or debit or credit issued subsequently to the original invoice. BUYER shall make payment for such subsequent invoices or debits in accordance with the provisions of this Section 6.2. SECTION 6.4: INTEREST - --------------------- At SELLER's option and election, interest will accrue on all amounts, other than invoice items or amounts in dispute, not paid in accordance with the provisions of this Article VI at the [---] 22 ARTICLE VII DELIVERIES, TITLE AND RISK OF LOSS ---------------------------------- SECTION 7.1: DELIVERY, TITLE AND RISK OF LOSS - --------------------------------------------- SELLER agrees to Deliver and BUYER agrees to receive Product into BUYER's Nominated Barge, at SELLER's Loading Pier, Third-Party Pier or at SELLER's SPM pursuant to Section 7.4. For Product Delivered by SELLER into BUYER's Nominated Barge, at SELLER's Loading Pier, SPM, Third-Party Pier or other place of loading nominated by SELLER, title, custody and risk of loss of Product so Delivered shall pass from SELLER to BUYER at the receiving flange of BUYER's Nominated Barge, for loadings at the SPM, or the flange of the receiving hoses of BUYER's Nominated Barge. On a when-available basis and when the date is mutually agreed to, SELLER may sell and Deliver and BUYER may purchase and receive Diesel in bulk into BUYER's Nominated Marine Terminal at Kahului, Maui and Hilo and Kawaihae, Hawaii, respectively. Title, custody and risk of loss of Diesel so Delivered shall pass from SELLER to BUYER at the flange of the receiving pipeline of BUYER's Nominated Marine Terminal. SECTION 7.2: DELIVERY OF DIESEL AND FUEL OIL TO MECO AND HELCO - -------------------------------------------------------------- The Delivery rate and receiving capability of BUYER's Nominated Barge for Fuel Oil shall be [---] barrels per hour minimum for a Delivered volume of Fuel Oil in excess of [---] barrels. The Delivery rate and receiving capability of BUYER's Nominated Barge for Diesel shall be [---] barrels per hour minimum for a Delivered volume of Diesel in excess of [---] barrels. SELLER agrees to make a reasonable good faith effort to load Diesel and Fuel Oil concurrently; provided, however, that BUYER's Nominated Barge is capable of receiving same. 23 Fuel Oil will be Delivered into BUYER's Nominated Barge at a temperature above [---]. The gross volume of Fuel Oil per individual Delivery to the Nominated Barge of a respective BUYER shall be limited to a minimum of [---] barrels and a maximum of [---] barrels. The gross volume of Diesel per individual Delivery to the Nominated Barge of a respective BUYER shall be limited to a minimum of [- - --] barrels and a maximum of [---] barrels. BUYER may receive a quantity in excess of said maximum Delivery volumes of Fuel Oil and Diesel as may be mutually agreed. The Delivery rate of Diesel into BUYER's Nominated Marine Terminal at Kahului, Maui and Hilo and Kawaihae, Hawaii, respectively, shall be [---] barrels per hour minimum. The respective BUYER is responsible for providing discharge facilities through an independent third party; and SELLER has no responsibility to procure discharge facilities on the islands of Maui and Hawaii for the sole purpose of making Deliveries of Diesel in bulk from SELLER's Nominated Barge or in bulk via tank transfer from SELLER's Nominated Terminal on behalf of the respective BUYER. When SELLER's Nominated Barge is used to Deliver Diesel to BUYER's Nominated Marine Terminal: a. SELLER's Nominated Barge shall comply with all applicable federal, state and local laws, rules and regulations. b. SELLER shall be responsible for scheduling dock space in Kahului, Maui, and Kawaihae and Hilo, Hawaii, for SELLER's Nominated Barge. c. Dues and other charges on SELLER's Nominated Barge (whether or not such dues or charges are based on the quantity of Product loaded or on the freight and without 24 regard from whom such dues or charges are withheld), taxes on freight and any State fee imposed for use of a pier, wharf or pipeline used during the discharge of SELLER's Nominated Barge shall be paid by SELLER. d. SELLER shall employ and also be responsible for costs of any support vessels, pilots, mooring masters, line handlers, or tankermen required all of which shall become borrowed servants of SELLER. e. BUYER shall be responsible for reasonable invoiced expenses associated with hose watch personnel and dockside operations employed to attend the Delivery of cargo to BUYER prorated on the basis of the ratio of the volume of cargo Delivered to BUYER to the total volume to cargo discharged from SELLER's Nominated Barge. f. Neither BUYER, nor any of its associated or affiliated companies, nor any of the employees, servants, representatives and agents of any of the foregoing, shall be responsible for any losses, damages, delays or liabilities resulting from any negligence, incompetence or incapacity of any tug boat, pilot, line handler, tankermen required or employed by SELLER or otherwise assisting SELLER at the express authorization of SELLER or SELLER's agent or the personnel of any tug(s) or other support vessels or arising from any unseaworthiness or any insufficiency of any tug or other support vessel employed by SELLER or otherwise assisting SELLER at the express authorization of SELLER or SELLER's agent and SELLER agrees to indemnify and hold BUYER harmless from and against any and all such losses, damages, delays or liabilities. 25 SELLER shall Deliver, and BUYER shall receive, [---] respectively, which shall be sold and Delivered by SELLER and purchased and received by BUYER collectively each calendar quarter. SECTION 7.3: FORECAST AND NOTICE OF DELIVERY - -------------------------------------------- Prior to the [---] Day of each Month, BUYER shall give SELLER a forecast of the total volume of each respective BUYER's liftings of Diesel and Fuel Oil for each of the subsequent three (3) Months. In addition, and also prior to the [---] Day of each Month, BUYER shall provide SELLER a voyage schedule of BUYER's Nominated Barge for the following Month. Such schedule shall show the expected place, date and time of the commencement of each loading operation. BUYER recognizes the importance to SELLER of reasonably accurate lifting forecasts because of SELLER's need to plan Refinery production and shipments. BUYER shall make a reasonable attempt to schedule barges to lift Product ratably through the Month and Year. BUYER shall be responsible for scheduling dock space at SELLER's Loading Pier for BUYER's Nominated Barge with the State of Hawaii Department of Transportation - Harbors Division and provide SELLER [---] hour notice of the proposed loading time. BUYER shall also provide [---] hours notice to SELLER during SELLER's regular business hours Monday through Friday (excluding holidays) of the final quantity to be loaded, subject to a plus or minus 10% loading tolerance; provided, however, that in the event of a loading on [---] BUYER shall provide SELLER notice of the final quantity to be loaded, subject to a plus or minus 10% loading tolerance, by [---] 26 SECTION 7.4: DELIVERY OPERATIONS, LAYTIME AND DEMURRAGE - ------------------------------------------------------- BUYER's Nominated Barge shall comply with all applicable federal, state and local laws, rules and regulations, and SELLER's vessel acceptance standards, such as that portion of the "BHP Transport Petroleum Tanker Inspection Checklist" as may be applicable to unmanned petroleum tank barges and shall be fit in every way to receive and carry Product. SELLER shall provide BUYER its Operations Manual, relevant portion of the BHP Transport Petroleum Tanker Inspection Checklist and any other applicable safety and operations procedures and vessel acceptance standards, and any amendments thereto, during the term of this Contract. While at SELLER's Loading Pier, BUYER's Nominated Barge shall operate in compliance with SELLER's Operations Manual as approved by the USCG. In addition, a minimum of two qualified tankermen shall be provided by BUYER's barge during all loading operations at SELLER's Loading Pier or Third-Party Pier. BUYER's Nominated Barge shall vacate SELLER's Loading Pier or Third- Party Pier as soon as loading is completed, except if such delay is caused by any event or acts beyond the reasonable control of BUYER, including but not limited to acts of God, fire, governmental acts or labor disturbances. Dues and other charges on BUYER's Nominated Barge (whether or not such dues or charges are based on the quantity of Product loaded or on the freight and without regard from whom such dues or charges are withheld) shall be paid by BUYER. Any taxes on freight shall be borne by BUYER. BUYER shall be responsible for any State fee imposed for use of SELLER's Loading Pier or Third-Party Pier in the nature of wharfage or pipeline toll. BUYER shall employ and also be responsible for costs of any support vessels, pilots, mooring masters, or 27 line handlers supplied by SELLER or otherwise required at SELLER's Loading Pier, SPM, or Third-Party Pier, all of which shall become borrowed servants of BUYER. Neither SELLER, nor any of its associated or affiliated companies, nor any of the employees, servants, representatives and agents of any of the foregoing, shall be responsible for any losses, damages, delays or liabilities resulting from any negligence, incompetence or incapacity of any pilot, line handler, mooring master required at SELLER's Loading Pier, SPM or Third-Party Pier or employed by BUYER or otherwise assisting BUYER at the express authorization of BUYER or BUYER's agent or the personnel of any tug(s) or other support vessels or arising from any unseaworthiness or any insufficiency of any tug or other support vessel employed by BUYER or otherwise assisting BUYER at the express authorization of BUYER or BUYER's agent and BUYER agrees to indemnify and hold SELLER harmless from and against any and all such losses, damages, delays or liabilities. At SELLER's Loading Pier or Third-Party Pier, laytime shall commence [---] NOR is tendered or three hours after BUYER's Nominated Barge is all secure at pier, whichever [---]. Allowable laytime shall be [---] provided, however, that in the event that a part cargo or part cargoes belonging to a third party or third parties is/are loaded onto BUYER's Nominated Barge, allowable laytime shall be prorated and BUYER's allowable laytime shall be calculated on the basis of the ratio of the bill of lading volume of BUYER's cargo to the total bill of lading volume of the entire cargo loaded onto BUYER's Nominated Barge or vessel. Laytime shall cease when the hoses are disconnected; however, in the event part cargoes are loaded for BUYER and a third party or parties, BUYER's laytime shall commence as provided above if BUYER's cargo is loaded first, or shall commence upon commencement of loading of BUYER's cargo if BUYER's 28 cargo is not the first to be loaded, and shall cease upon completion of loading of BUYER's cargo. Laytime is allotted and calculated using the barge currently named NOHO HELE (having approximately a 56,000 Bbl capacity). In the event that BUYER's Nominated Barge is a vessel other than the NOHO HELE, laytime shall be the capacity of the substitute tank vessel divided by [---] per hour; e.g., a [---] barge shall have an allowable laytime of [---]. Demurrage shall be payable at a rate equal to BUYER's actual cost of tug and tow per hour for each hour used and prorated for each portion of an hour used in excess of allowable laytime. In the event the condition of BUYER's Nominated Barge renders it incapable of receiving cargo at the minimum Delivery rate, such that the time spent loading BUYER's Nominated Barge (all cargoes) is in excess of [---] SELLER shall have the right to suspend loading operations and order BUYER's Nominated Barge to vacate SELLER's Loading Pier or Third-Party Pier. SELLER shall not be liable for demurrage to the extent that allowed laytime is exceeded due to the condition of BUYER's Nominated Barge or tug, or is due to events or acts beyond SELLER's reasonable control. SECTION 7.5: DELIVERY OPERATIONS AT SELLER'S SPM - ------------------------------------------------ While it is the intention of the parties that SELLER make Deliveries of Product on Oahu at SELLER's Loading Pier or Third-Party Pier, subject to mutual agreement, Deliveries may be made at SELLER's SPM. In addition to those provisions of this Article VII not specific to SELLER's Loading Pier or Third- Party Pier, the following additional provisions will also apply to these SPM Deliveries. 29 SELLER agrees to make a reasonable good faith effort to Deliver Fuel Oil into the BUYER's Nominated Barge at a temperature above [---]. BUYER's Nominated Barge shall operate in compliance with SELLER's Operations Manual as approved by the USCG and shall also comply with SELLER's current requirements for loading at its SPM as amended from time to time. SELLER may refuse to berth or load BUYER's Nominated Barge at SELLER's SPM for failure to comply with SELLER's Operations Manual or requirements as aforesaid and shall not be liable for any resulting delays or expenses of BUYER. An accepted Delivery Day shall be determined in respect of each SPM loading pursuant to the provisions of this section. BUYER shall provide SELLER a proposed 3-Day delivery window upon no less than seven (7) Days' notice from the first proposed Delivery Day. The notice shall also specify the amount of the Product to be Delivered, subject to a variation of plus or minus ten (10) percent at BUYER's option. The Delivery window shall be narrowed to two (2) Days upon no less than three (3) Days' notice from the first proposed Delivery Day and shall be narrowed to one (1) Day upon no less than two (2) Days' notice from the first proposed Delivery Day. A final twenty four (24) hour accepted Delivery Day will be set by mutual agreement upon receipt of the two (2) Day notice. SELLER may reject the final proposed Delivery Day upon providing BUYER twenty four (24) hours notice, with an alternate Delivery Day being set within one (1) Day of BUYER's proposed Delivery Day. Notices may be given by electronic mail, facsimile, radio or telephone. When BUYER's Nominated Barge is ready to load, the master of the barge's tug shall provide SELLER NOR, and laytime shall commence [---] or upon the barge's arrival in berth (all fast), whichever first occurs. SELLER shall be 30 allowed twenty four (24) hours laytime for loading the entire cargo requested in the 7-Days' notice. BUYER's Nominated Barge shall vacate the SPM as soon as loading is completed. BUYER shall be responsible for any actual loss or damage incurred by SELLER as a direct result of the failure of BUYER's Nominated Barge to promptly vacate the SPM except if such delay is caused by any event or acts beyond the reasonable control of BUYER, including but not limited to acts of God, fire, governmental acts or labor disturbances. In no event shall either party be responsible for prospective profits, or consequential damages allegedly caused by or based upon failure of BUYER's Nominated Barge to promptly vacate the SPM. SECTION 7.6: POLLUTION MITIGATION - --------------------------------- When an escape or discharge of oil or any polluting substance occurs in connection with or is caused by BUYER's Nominated Barge or its tow, or occurs from or is caused by loading operations, BUYER or its agents shall promptly take whatever measures are necessary or reasonable to prevent or mitigate environmental damage, without regard to whether or not said escape or discharge was caused by the gross negligence or willful misconduct of BUYER's Nominated Barge or SELLER or BUYER or others. Failing such action by BUYER or its agents, SELLER, on BUYER's behalf, may promptly take whatever measures are reasonably necessary to prevent or mitigate pollution damage and notify BUYER as soon as practicable thereafter of such actions. Each party shall keep the other advised of the nature and results of the measures taken, and if time permits, the nature of the measures intended to be taken. The cost of all such measures taken shall be borne by BUYER except to the extent such escape or discharge was caused or contributed to by SELLER, and prompt reimbursement shall 31 be made as appropriate; provided, however, that should BUYER or its agents give notice to SELLER to discontinue said measures (and to the extent government authorities allow SELLER to discontinue said measures) the continuance of SELLER's actions will no longer be deemed to have been taken pursuant to the provisions of this clause. Each party shall provide notice to the other pursuant to Section 15.2 or as otherwise provided in writing from time to time during the term of this Contract. Notwithstanding any other provision in this Contract, the foregoing provisions shall be applicable only between BUYER and SELLER and shall not affect, as between BUYER and SELLER, any liability of BUYER to any third parties, including the State of Hawaii and the U.S. Government, if BUYER shall have such liability. SECTION 7.7: OIL SPILL LIABILITY AND INSURANCE - ---------------------------------------------- Should [---] of the Hawaii Revised Statutes as a result of [---] BUYER warrants that any vessel used to load Product purchased from SELLER shall have in place Primary and Excess Full Form Protection and Indemnity insurance including cover for Oil Pollution Clean-Up Liability and Liability for Oil Pollution Damage with a combined policy limit of $700,000,000, or the maximum available, as reflected by the coverage carried by other vessels calling at SELLER's SPM. 32 ARTICLE VIII MEASUREMENT, SAMPLING AND TESTING --------------------------------- SECTION 8.1: INDEPENDENT INSPECTION - ----------------------------------- All samples, measurements and determinations samples shall be drawn, taken and made, respectively, with respect to every Delivery and any other provision of this Contract shall be under the supervision of the Independent Inspector, who shall attend every Product Delivery. Reasonable charges for services rendered by the Independent Inspector shall be borne equally by BUYER and SELLER. SECTION 8.2: DETERMINATION OF QUANTITY - -------------------------------------- Quantity determination of Product Delivered to BUYER on Oahu will be made by the Independent Inspector gauging SELLER's Product issuing tanks before and after Delivery. Quantity determination of Diesel Delivered to BUYER at BUYER's Nominated Marine Terminal at Kahului, Maui or Kawaihae or Hilo, Hawaii, shall be determined at the time of each Delivery by gauging the receiving tanks at BUYER's Nominated Marine Terminal before and after pumping. Quantities of Diesel and Fuel Oil sold and Delivered by SELLER and purchased and received by BUYER hereunder shall be determined in accordance with applicable API, ASTM and IP guidelines and shall be expressed in G.S.V., U.S. barrels @ 60 degrees Fahrenheit and U.S. gallons @ 60 degrees Fahrenheit for Diesel and shall be expressed in G.S.V., U.S. barrels @ 60 degrees Fahrenheit for Fuel Oil. The Independent Inspector shall (1) prepare and sign a Certificate of Quantity stating the quantity of Product determined according to the provisions of this Section 8.2 to have been 33 Delivered to BUYER and loaded onboard BUYER's Nominated Barge or received by BUYER's Nominated Marine Terminal; (2) furnish BUYER and SELLER each with a copy of such Certificate; and (3) advise by facsimile or electronic mail the quantity of Product Delivered to BUYER loaded onto BUYER's Nominated Barge or received by BUYER's Nominated Marine Terminal to BUYER and SELLER. The data in the Independent Inspector's Certificate of Quantity prepared as provided herein shall, absent fraud or errors and omissions, be binding and conclusive upon both parties, and shall be used for verification of the invoice and Bill of Lading. SECTION 8.3: SAMPLING AND DETERMINATION OF QUALITY - -------------------------------------------------- The Independent Inspector shall inspect the receiving barge cargo tanks immediately prior to the commencement of the Delivery to ensure that they contain no more than reasonable minimum retains of the previous cargo and shall draw composite samples of any diesel and fuel oil retain ("Barge O.B.Q. Samples") if such retain is accessible to standard sampling equipment. The Barge O.B.Q. Samples shall be sealed and held by the Independent Inspector for a period of not less than three (3) Months. Unless otherwise specifically agreed by the parties, the quality and BTU Content of the Diesel and Fuel Oil sold and Delivered by SELLER and purchased and received by BUYER into BUYER's Nominated Barge shall be determined on the basis of a volumetric weighted average composite of samples drawn from the cargo tanks at the completion of loading of the Diesel and of the Fuel Oil into BUYER's barge ("Barge Composite After Loading Samples") by the Independent Inspector in such a manner as to be representative of the total volume of the Delivery of each respective Product. 34 With respect to Diesel Delivered to BUYER's Nominated Marine Terminal, the Independent Inspector shall draw composite sample(s) representative of the diesel in the receiving tank(s) at BUYER's Nominated Marine Terminal immediately prior to the commencement of the Delivery ("Terminal Before Receipt Samples"). The Terminal Before Receipt Samples shall be sealed and retained by the Independent Inspector for a period of not less than three (3) Months. Unless otherwise specifically agreed by the parties, the quality and BTU Content of the Diesel sold and Delivered by SELLER and purchased and received by BUYER into BUYER's Nominated Marine Terminal shall be determined on the basis of a volumetric weighted average composite of samples drawn from the relevant cargo tank(s) of SELLER's Nominated Barge ("BHP's Barge Sample") or from the issuing tank(s) of SELLER's Nominated Terminal ("BHP's Terminal Sample") by the Independent Inspector in such a manner as to be representative of the total volume of the Delivery. Barge Composite After Loading Samples, BHP's Barge Sample or BHP's Terminal Sample shall be divided into three parts and dated, and are to be distributed as follows: 1. One part shall be provided to SELLER's laboratory for analysis to determine quality and BTU Content. 2. One part shall be provided to BUYER's laboratory for the purpose of verifying SELLER's determinations. 3. One part shall be sealed and retained by the Independent Inspector for a period of not less than three (3) Months. 35 To provide an early warning of any quality problems with Diesel or Fuel Oil Delivered to BUYER, SELLER agrees to perform a Product Preliminary Analysis on a volumetric weighted average composite of samples from 1) SELLER's issuing tank(s) and delivery piping so as to be approximately representative of the intended Delivery in the case of a Delivery to BUYER's Nominated Barge; or 2) the cargo tanks of SELLER's Nominated Barge approximately representative of the intended Delivery; or 3) the issuing tank(s) of SELLER's Nominated Terminal approximately representative of the intended Delivery. SELLER agrees to provide BUYER and the Independent Inspector with copies of said Product Preliminary Analysis prior to commencing Delivery. The Independent Inspector shall ensure that copies of the Product Preliminary Analyses are placed on the barge or otherwise made available to representatives of the terminal facility receiving the Product. SELLER agrees to provide BUYER and the Independent Inspector with the Certificate of Quality representing the sample(s) drawn by the Independent Inspector and will make a reasonable good faith effort to provide the Certificate of Quality no later than twenty four (24) hours after the Delivery has been completed. If the completed Certificate of Quality can not be provided to the Independent Inspector and BUYER within said 24-hour period, in lieu thereof, SELLER agrees to provide to the Independent Inspector and BUYER, no later than 24 hours after the Delivery has been completed, the final determination of API gravity, flash point, sulfur content and sediment & water which shall be reported in the completed Certificate of Quality. BUYER shall have the right to perform laboratory analyses in order to verify the results of SELLER's laboratory analyses; provided however, that such verification analyses shall be performed in a timely manner. 36 SECTION 8.4: DISPUTE - -------------------- If SELLER or BUYER has reason to believe that the quality or quantity of Product stated in a Certificate of Quality, Certificate of Quantity, Product Preliminary Analysis, report of the Independent Inspector and any other document relevant to the determination of the quantity or quality of the Diesel and Fuel Oil Delivered to BUYER, regardless of whether or not such document was prepared by the Independent Inspector, is incorrect, including a dispute as to the Product Preliminary Analysis and test results of the Barge O.B.Q. Samples, Barge Composite After Loading Samples, Terminal Before Receipt Samples, BHP's Barge Samples or BHP's Terminal Samples in the possession of SELLER or BUYER, or any other relevant samples, then that party shall within thirty (30) Days after the later of the date of the complete Certificate of Quality or the date of the final determination of BTU Content, present the other party with documents supporting such determination. The parties will thereafter confer, in good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quality and quantity, if justified, for the Delivery in question. In the event of an unresolvable difference between SELLER and BUYER, the Independent Inspector shall prepare in whole or in part from the samples in its possession, a representative sample of the disputed Delivery ("Referee Sample") which shall be provided to an independent laboratory for a final determination, which shall be binding on the parties. The Referee Sample shall include a volumetric proportion of the Barge O.B.Q. Sample, or in lieu thereof, the Barge Composite After Loading Sample from the previous cargo of BUYER's Nominated Barge, should the retains of the previous cargo of BUYER's Nominated Barge be 37 reasonably suspected as a cause of the quality problem. SELLER and BUYER shall share equally the cost for such independent laboratory determination. In the event of any quality problems occurring, both SELLER and BUYER shall attempt to minimize the impact of any such quality problems by quality specification waiver, especially if use of the Delivered Diesel or Fuel Oil will not harm BUYER, or by SELLER Delivering higher quality Diesel or Fuel Oil in a timely manner to produce a specification quality blend at BUYER's Nominated Barge or Product storage terminal. If efforts to resolve the quality problem fail, BUYER may return off-specification Delivered Product to SELLER, in which case SELLER shall replace the off-specification Product by Delivering an equal volume of Product to BUYER in a timely manner. All costs and expenses, including testing, transportation, re- refining, and handling costs incurred in returning and replacing off- specification Product shall be paid by the responsible party, as determined by the independent laboratory test results and any other applicable evidence. In no event shall either party be responsible for prospective profits, or consequential damages allegedly caused by or based upon any quality problem with the Product. ARTICLE IX [---] It is understood and agreed that both parties entered into this Contract [---] of this Contract or any subsequent amendments hereto, [---] 38 is [---] by [---] or [---] by [---] hereunder. [---] Such [---] shall be [---] after such a [---] the parties shall [---] within [---] Days after [---] the [---] Such [---] within [---] has been agreed upon, or [---] 39 ARTICLE X FORCE MAJEURE ------------- SECTION 10.1: FORCE MAJEURE - --------------------------- As used in this Contract, an event or act of "Force Majeure" is defined as follows: acts of God, wars, riots, strikes, labor disputes, lockouts, blockades, insurrections, inability to secure materials or labor by reason of allocations promulgated by governmental agencies, epidemics, landslides, lightning, earthquakes, fires, floods, tidal waves, volcanic eruptions, explosions, or any other causes not within the reasonable control of the affected party. SECTION 10.2: OBLIGATIONS SUSPENDED - ----------------------------------- BUYER's obligation to purchase or receive Product, or SELLER's obligation to sell or Deliver Product, shall be suspended to the extent performance is prevented by an event or act of Force Majeure for any period in which such event or act exists as to the party claiming Force Majeure; and so long as such party is exercising its good faith efforts to overcome such Force Majeure event. However, nothing in this Article X excuses BUYER from its obligation to make payments of money due SELLER for Product already Delivered to BUYER. SECTION 10.3: NOTICE OF FORCE MAJEURE - ------------------------------------- The party claiming Force Majeure agrees to give the other party prompt written notice of an act or event of Force Majeure. The party claiming Force Majeure shall use due diligence to cure any act or event of Force Majeure, and shall give the other party prompt notice after the act or event of Force Majeure has terminated. This Article shall not require any party to settle or compromise any strike or labor dispute. 40 SECTION 10.4: NO MAKE-UP REQUIREMENT - ------------------------------------ After the act or event of Force Majeure has terminated, SELLER shall not be obligated to sell and Deliver and BUYER shall not be obligated to purchase and receive the un-Delivered quantity of Product which normally would have been sold and Delivered during the period of Force Majeure. ARTICLE XI PRICE AND ALLOCATION CONTROLS ----------------------------- SECTION 11.1: REGULATORY PRICE SUSPENSION - ----------------------------------------- If SELLER is precluded by statute, or by regulation, rule, governmental interpretation or order implementing such statute from obtaining any increase in price of Product, as determined pursuant to this Contract, the increase shall be suspended until said law, regulation, rule, governmental interpretation or order permits the increase in whole or in part. In such an event, BUYER and SELLER shall confer in good faith and attempt to agree on an alternate course of action; but failing agreement within ten (10) Days, the party adversely affected may suspend performance with respect to the quantity of Product affected by the statute, regulation, rule, governmental interpretation or order. In the event the law, regulation, rule, governmental interpretation or order is terminated or is later modified to permit the increase, in whole or in part, the Product Price shall be increased for Deliveries of the Product made thereafter to the level permitted under this Contract without further action by the parties. 41 SECTION 11.2: GOVERNMENT REGULATIONS - ------------------------------------ If the Delivery or supply of Product pursuant to this Contract conflicts with or is limited or prohibited by any federal, state or local regulations, statutes, rules or permits then to the extent of such conflict, limitation or prohibition, SELLER shall have no obligation to Deliver or supply BUYER with the Product under this Contract and BUYER shall have no obligation to purchase or receive the Product under this Contract. BUYER, in BUYER's discretion, may elect to complete and file any and all required Federal or state regulatory forms to permit, facilitate, or enable the supply of Product to BUYER under this Contract. SELLER shall fully cooperate with BUYER in the completion and filing of the foregoing forms. If BUYER's purchase, receipt or use of Product pursuant to this Contract conflicts with or is limited or prohibited by any Federal, State, or local regulations, statutes, rules or permits then to the extent of such conflict, limitation, or prohibition, BUYER shall have no obligation to purchase and receive the Product under this Contract. ARTICLE XII ASSIGNMENT ---------- This Contract shall not be assigned by either party without prior written consent of the other party, which shall not be unreasonably withheld; provided, however, HECO, HELCO, and MECO may assign their interests in this Contract to the Trustee under their respective First Mortgage Indentures. 42 ARTICLE XIII APPLICABLE LAW -------------- This Contract shall be deemed to be a Contract made under and shall be governed by and construed in accordance with the laws of the State of Hawaii. The parties hereby consent to the personal jurisdiction of the federal and state courts in the State of Hawaii. ARTICLE XIV PUBLIC UTILITIES COMMISSION APPROVAL ------------------------------------ This Contract is required to be filed with the Hawaii Public Utilities Commission ("PUC") for approval. If in proceedings initiated as a result of the filing of this Contract, the PUC disapproves or fails to authorize the full recovery of fuel costs incurred under this Contract through the a respective BUYER's Energy Cost Adjustment Clause, the affected BUYER may terminate this Contract at any time within ninety (90) Days of disapproval by giving sixty (60) Days written notice to the SELLER. ARTICLE XV ENTIRE AGREEMENT, WAIVER AND ILLEGALITY --------------------------------------- SECTION 15.1: ENTIRE AGREEMENT AND WAIVER - ----------------------------------------- This Contract incorporates the entire agreement between the parties with reference to the subject matter and cancels and supersedes as of the date of execution hereof all prior oral or written understandings, or agreements, between the parties with respect to the subject matter and may only be modified by written instrument executed by duly authorized representatives of the 43 parties. There are no other agreements which constitute any part of the consideration for, or any condition to, either party's compliance with its obligations under this Contract. Failure to insist upon strict performance of any provision shall not constitute a waiver of the right to require such performance, nor shall a waiver in one case constitute a waiver with respect to a later breach, whether of a similar nature or otherwise. If any term or provision of this Contract is held by any Court to be illegal or unenforceable, the remaining terms, provisions, rights and obligations shall not be affected. The headings or captions are for convenience only and have no force or effect on legal meaning in the construction or enforcement of the Contract. Time shall be of the essence in this Contract. SECTION 15.2: NOTICES - --------------------- Except as otherwise expressly provided herein, all notices shall be given in writing, by letter, electronic mail, or facsimile to the following addresses, or such other addresses as the parties may designate by notice, and shall be deemed given upon receipt. SELLER: BHP PETROLEUM AMERICAS REFINING INC. 733 BISHOP STREET HONOLULU, HAWAII 96813 ATTN: VICE PRESIDENT INTERNATIONAL SUPPLY AND MARKETING FACSIMILE: (808) 547-3796 BUYER: HAWAIIAN ELECTRIC COMPANY, INC. P. O. BOX 2750 HONOLULU, HAWAII 96840 ATTN: MANAGER, POWER SUPPLY SERVICES DEPARTMENT FACSIMILE: (808) 543-4366 The Manager, Power Supply Services Department, for Hawaiian Electric Company, Inc. shall be responsible for forwarding notices to the other parties to this Contract. 44 ARTICLE XVI [---] During the period this Contract is in effect, [---] agrees to make available to [---] on a [---] Such use shall include an allowance for [---] its fuel storage and distribution facilities and pipelines located at Barbers Point in Campbell Estate Industrial Park. [---] shall be on the basis of the terms, conditions and obligations set forth in this Contract and Addendum No. 1 attached hereto and incorporated herein by reference. [---] as set forth in this Article XVI and Addendum No. 1 during any Year of this Contract shall be [---] per Article III of this Contract, respectively, during the preceding Year for the Years of this Contract during the period 1999-2004; for Contract Year 1998, the [---] ARTICLE XVII BUYER'S USE OF SELLER'S FACILITIES ON MAUI AND HAWAII ----------------------------------------------------- SELLER agrees to provide the respective BUYER on a space-available basis the non-exclusive right to use SELLER's Kahului Terminal and to provide BUYER [---] to use SELLER's Hilo Terminal. The respective BUYER's use of 45 SELLER's Neighbor Island Terminals shall be on the basis of the terms, conditions and obligations set forth in Addendum No. 2 attached hereto and incorporated herein by reference. ARTICLE XVIII INDEMNITY --------- SELLER shall indemnify, defend and hold harmless BUYER, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) from and against all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses, (including attorneys' fees) and proceedings of any nature whatsoever for bodily injury, (including death) or property damage, including but not limited to BUYER's facilities, that results from Diesel or Fuel Oil which does not meet specifications or contaminated Diesel or Fuel Oil or that arises out of or is in any manner connected with the storage or transportation of Diesel or Fuel Oil in SELLER's custody, except to the extent that such injury or damage may be attributable to the gross negligence or willful action of BUYER. BUYER shall indemnify, defend and hold harmless SELLER, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) from and against all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses, (including attorneys' fees) and proceedings of any nature whatsoever for bodily injury, (including death) or property damage, including but not limited to SELLER's facilities, that results from Diesel or Fuel Oil which does not meet specifications or contaminated Diesel or Fuel Oil or that arises out of or is in any manner connected with the storage or transportation of 46 Diesel or Fuel Oil in BUYER's custody, except to the extent that such injury or damage may be attributable to the gross negligence or willful action of SELLER. Notwithstanding the foregoing, neither party shall be responsible for consequential damages. The provisions of this Article XVIII shall survive the termination of the Contract. ARTICLE XIX DEFAULT ------- Failure of either party to promptly perform any material obligation under this Contract shall constitute default. If BUYER or SELLER considers the other party (the "Defaulting Party") to be in default of any material obligation under this Contract, such party (the "Non-Defaulting Party") shall give the Defaulting Party prompt notice thereof, describing the particulars of such default. The Defaulting Party shall thereafter have thirty (30) Days from the receipt of said notice in which to remedy such default. If the default is not cured, the Non-Defaulting Party may, without prejudice to any other rights or remedy of such party in respect of such default, terminate its obligations under this Contract by written notice to the Defaulting Party, except for BUYER's obligation to pay in full in United States currency for amounts due under this Contract and except for any obligation which may accrue to BUYER or SELLER under Article XVIII herein. Any termination shall be without prejudice to accrued rights. All rights and remedies hereunder are independent of each other and election of one remedy shall not exclude another. 47 ARTICLE XX COUNTERPARTS ------------ This Contract may be executed in as many counterparts as desired by the parties, any one of which shall have the force and effect of any original but all of which together shall constitute the same instrument. 48 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound thereby, have caused this Contract to be executed in duplicate originals by their duly authorized officers. HAWAIIAN ELECTRIC BHP PETROLEUM AMERICAS COMPANY, INC. REFINING INC. By /s/ Edward Y. Hirata By /s/ Faye W. Kurren -------------------- ------------------ Its Its SELLER By /s/ Marvin A. Hawthorne ----------------------- Its BUYER HAWAII ELECTRIC LIGHT COMPANY, INC. By /s/ Edward Y. Hirata -------------------- Its By /s/ Marvin A. Hawthorne ----------------------- Its BUYER MAUI ELECTRIC COMPANY, LTD. By /s/ Edward Y. Hirata -------------------- Its By /s/ Marvin A. Hawthorne ----------------------- Its BUYER 49 ADDENDUM NO. 1 [---] SECTION 1: INTRODUCTION - ----------------------- During the term of this Contract, [---] agrees to make available for the use of [---] on a non-exclusive basis for [---] and for the [---] provided: 1. [---] shall have the right to review the quality of [---] being transported by [---] through [---] and 2. [---] shall permit [---] its employees and agents (including but not limited to affiliates and contractors and their employees) to enter upon and inspect [---] immediately prior to, during and immediately after shipment of [---] through [---] upon reasonable advance notice to [---] and provided that such entry and inspection shall not interfere with operation of [---] 3. During any period of use by [---] shall be operated in a safe manner, in compliance with all applicable laws and regulations, and in accordance with GEOPS and in accordance with generally accepted industry practices. 1 SECTION 2: [---] - ----------- [---] need to be constructed in the location where [---] physically intersect and connect with [---] which shall be taken to be at the [---] Provided further: a. At the request of [---] shall be responsible for the design, engineering and construction of the [---] shall bear all reasonable costs arising from said design, engineering and construction of the [---] shall have the right to approve in advance, [---] designs, engineering and construction standards, provided, however, that such approval shall not be unreasonably withheld. b. [---] may, at its option, engage third-party consultants or contractors to perform the design, engineering and construction of the [---] provided that [---] selection of such consultants and contractors shall be subject to [---] approval, provided, however, that such approval shall not be unreasonably withheld. c. The design and engineering plans (the "Plans") for the [---] shall be developed in accordance with all applicable laws and regulations and GEOPS. [---] shall have thirty (30) working days following its receipt of the Plans ("30-day Period") to review the Plans and submit written comments to [---]. Should [---] fail to provide written notice to [---] of its approval, conditional approval or disapproval of the Plans prior to the end of said 30- day Period, [---] shall be deemed to have approved the Plans. d. [---] shall permit [---] to inspect the construction of the [---] at all times during normal business hours and upon reasonable advance notice. [---] or 2 [---] contractor shall perform all construction work in compliance with all applicable laws and regulations. [---] shall submit a construction time schedule for approval by [---] provided, however, that such approval shall not be unreasonably withheld. e. Following the completion of the construction of the [---] shall transfer to [---] all of [---] rights, title and interest in and to the [---] which shall then be a part of [---]. On and after such date and time of transfer, [---] shall own, operate and maintain the [---] and other components of the [--- ]shall schedule and perform such routine maintenance on the [---] as shall be required by applicable laws, regulations, general industry practices and GEOPS, providing reasonable advance notice to [---] shall reimburse [---] for its reasonable documented out of pocket costs and expenses to the extent they result from such routine maintenance. SECTION 3: SAFE OPERATION - ------------------------- During any period of use by [---] shall at all times be operated in a safe, effective and efficient manner, in compliance with all applicable laws and regulations, in a reasonable and prudent manner and in conformance with generally accepted industry practices and GEOPS. [---] shall be required to provide and pay all costs for necessary documentation, including operations manuals, personnel and equipment (hoses, valves, containment booms, etc.) to safely operate [---] except to the extent said costs result from [---] use, in which case said costs are for the account of [---]. During any period of use by [---] shall at all times be operated within the operating procedures, pressure testing requirements, emergency stop procedures, etc. established 3 by the [---] in accordance with GEOPS. These procedures and requirements may be changed from time to time upon reasonable advance notice to [---]. [---] operating standards and instructions shall be available for [---] inspection at [---]. SECTION 4: MAINTENANCE - ---------------------- Consent of [---] shall not be required for routine maintenance of the [---] or [---] provided, however, [---] shall be required to advise [---] in advance regarding the potential impact on shipments of [---] caused by any annual USCG required hydrotesting or maintenance procedures or improvements which are not routine or minor in nature and which are not urgent and necessary to maintain the [---] or [---] in good order. Such maintenance shall be performed by [---] as may be required from time to time. [---] shall maintain accurate and complete records of maintenance performed and shall provide same and any other relevant supporting information as [---] may reasonably require. SECTION 5: ADDITIONS OR MODIFICATIONS - ------------------------------------- If subsequent to January 1, 1998, additions or modifications to any part of [---] are reasonably required in the mutual opinion of [---] solely in order to accommodate [---] use, such modifications shall be designed, engineered and constructed in accordance with the provisions of Section 2 herein. All rights, title and interest in the addition or modification shall rest with [---] who shall own, operate and maintain such addition or modification in accordance with the provisions herein including but not limited to 4 Sections 2, 3 and 4. [---] shall reimburse [---] for its reasonable costs and expenses incurred pursuant to the installation and maintenance of the addition or modification upon presentation of invoices or other suitable documentation in accordance with Section 2 and Section 11 herein. SECTION 6: FORECAST, SCHEDULING, NOTICE AND DEMURRAGE - ----------------------------------------------------- [---] will mutually coordinate the shipment of [---] through [---] Shipment scheduling shall be flexible to ensure that [---] shipments are not unreasonably interrupted. To assist in the coordination of shipments: 1. [---] shall provide [---] a forecast of intended shipments, minimum of [---] barrels to a maximum of [---] barrels, of [---] through [---] ten (10) Days prior to the beginning of any month for the two (2) subsequent months. The forecast for the first subsequent month shall define on a weekly basis the nature and volume of shipments. The forecast for the second subsequent month shall specify the total volume of shipments for that month. 2. With respect to each individual shipment of [---] though [---] shall provide [---] proposed one (1) Day shipment period or window for shipments volumes up to [---] barrels, a proposed two (2) Day shipment window for shipment volumes from [---] barrels to [---] barrels, and a proposed three (3) Day shipment period or window for shipment volumes from [---] barrels to [---] barrels upon no less than twelve (12) Days' notice prior to the first Day of the proposed shipment period ("12-Day Notice"). The 12-Day Notice shall also specify the 5 amount of [---] to be shipped, subject to a variation of plus or minus twenty (20) percent with respect to the actual volume shipped. [---] may reject the proposed shipment period upon providing [---] notice, no later than two (2) business days from the receipt of [---] 12-Day Notice, of an alternate one (1) Day, two (2) Day or three (3) Day shipment period, respectively, where the first day of such alternate one (1) Day, two (2) Day or three (3) Day period is within three (3) Days of the date of [---] first proposed one (1) Day, two (2) Day or three (3) Day shipment period, respectively. Notices may be given by electronic mail, facsimile or telephone. 3. Notwithstanding the estimated duration of shipment operations, the estimated date and time of the commencement of shipment operations shall be narrowed to 12 hours by mutual consent of [---] no later than two (2) Days prior to the estimated shipment commencement time and date. [---] shall be responsible to reserve the pier, on the agreed upon dates, through the customary channel in the State of Hawaii Department of Transportation - Harbor's Division. If [---] is unable to reserve the pier during the agreed upon dates, then [---] shall not be responsible for demurrage until [---] reserves the pier in the next agreed upon shipment window. 4. When [---] is ready to load or discharge and is within the shipment window as per this Section 6, [---] shall provide [---]. Laytime shall commence [---] whichever shall first occur. If [---] tenders NOR before the first day of the agreed shipment period the NOR shall be effective 6 [---] Allowable laytime shall be equal to the total volume of the shipment in barrels, as determined by the Independent Inspector from gauging the receiving or issuing tank(s) in [---] divided by [---] barrels per hour. Laytime shall cease when the hoses are disconnected. Demurrage shall be payable at a rate equal to [---] actual invoiced demurrage cost for each hour used and prorated for each portion of an hour used in excess of allowable laytime. [---] shall not be liable for demurrage to the extent that allowed laytime is exceeded due to the condition of [---] or is due to any events or acts beyond the reasonable control of [---] including but not limited to acts of God, fire, weather, government acts, labor disturbances or other events as defined in Article X. 5. [---] shall vacate the berth at [---] upon completion of cargo operations. If the condition of [---] renders it incapable of receiving or discharging cargo at a minimum rate of [---] barrels per hour such that the time spent loading or discharging[---] is in excess of the total of allowable laytime, [---] at its sole option, may require [---] to promptly vacate the berth at [---] to accommodate [---] operations. In circumstances where the re- berthing of [---] is required to complete cargo operations, [---] shall make reasonable efforts to [---] promptly upon completion of [---] operations and all time waiting for re-berthing shall be for [---] account. [---] shall be responsible for any actual loss or damage incurred by [---] as a direct result of the failure of [---] 7 to promptly vacate the berth except if such delay is caused by any event or acts beyond the reasonable control of [---], including, but not limited, to acts of God, fire, governmental acts or labor disturbances. In no event shall either party be responsible for loss of prospective profits, or consequential damages allegedly caused by or based upon failure of [---] to promptly vacate the berth. SECTION 7: DETERMINATION OF SHIPMENT QUANTITY - --------------------------------------------- The quantity of each shipment of [---] shall be determined by an Independent Inspector in accordance with Article VIII. The Independent Inspector or [---] shall provide [---] with summary documentation of [---] shipments describing the volumes and dates of such shipments through [---]. SECTION 8: TITLE AND RISK OF LOSS - --------------------------------- Title to [---] transported through [---] for [---] account shall at all times remain with [---] shall bear the risk of loss of [---] transported in [---] except to the extent the loss was caused or contributed to by the gross negligence or willful misconduct of [---]. SECTION 9: LINE DISPLACEMENTS - ----------------------------- If for operational reasons it is necessary for [---] to deliver line displacement stock to [---], such line displacement stock shall be the least expensive grade or type available which is suitable for the purpose and the line displacement stock shall be of such quality specification that neither causes operational problems to [---] nor results in the contamination of [---] such that [---] fail to comply with the specification limits with which they would have otherwise been in compliance. If time permits, 8 [---] shall have the right to approve in advance the suitability of such pipeline displacement stock, provided that such approval shall not be unreasonably withheld. [---] shall purchase such stock from [---] in accordance with the prices set forth in Article V. The quantity of line displacement stock delivered to [---] shall be determined by the Independent Inspector in accordance with Article VIII. To the extent that small portions of [---] shipped through [---] are delivered to [---] in the course of acting as an interface between [---] in that portion of [---] not used to ship [---] shall credit [---] for such transferred [---] at the prices set forth in Article V. The quantity of such transferred [---] shall be determined by the Independent Inspector in accordance with Article VIII. SECTION 10: THROUGHPUT FEES AND OTHER EXPENSES - ----------------------------------------------- In consideration for its use of [---] and for performing line displacement operations for [---] both before and after [---] use of [---] shall pay to [---] a throughput charge ("Throughput") on [---] transferred through [---]. The Throughput shall be calculated by multiplying the transport charge per physical barrel ("Rate") by the number of physical barrels of [---] shipped through [---] as determined by the Independent Inspector. The number of physical barrels of [---] shipped shall be determined pursuant to Article VIII. 9 The base Rate shall be [---] per barrel. [---] Escalation factor A ("FA"), escalation factor B ("FB") and escalation factor C ("FC") are defined as follows: (i) A labor adjustment factor A which is defined as the arithmetic average of the hourly earnings in dollars per hour for the petroleum and coal products industry as shown in the "Employment and Earnings" publication of the U.S. Department of Labor, Bureau of Labor Statistics, for the three months of the second calendar quarter immediately preceding the calendar quarter of the month in which services are rendered, divided by 20.353. (ii) An industrial commodities adjustment factor B which is defined as the arithmetic average of the Producer Price Index for Industrial Commodities as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the three months of the second calendar quarter immediately preceding the calendar quarter of the month in which services are rendered, divided by 128.700. (iii) A fuels and power adjustment factor C which is defined as the arithmetic average of the Producer Price Index for Fuels and Power (Code 5), as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the three months of the second calendar quarter immediately preceding the calendar quarter of the month in which services are rendered, divided by 90.767. 10 [---] shall employ and also be responsible for costs of any support vessels, pilots, mooring masters, [---] or line handlers supplied by [---] or otherwise required by [---], all of which shall become borrowed servants of [---]. Dues and other charges on [---] (whether or not such dues or charges are based on the quantity of [---] loaded or discharged or on the freight and without regard from whom such dues or charges are withheld) shall be paid by [---]. Any taxes on freight shall be borne by [---] shall be responsible for any State fee imposed for its use of [---] in the nature of wharfage or pipeline toll. SECTION 11: INVOICES - -------------------- [---] shall issue invoices for [---] in the month following the month in which the services or costs and expenses are incurred. [---] will pay on these invoices in accordance with Article VI. SECTION 12: [---] - ------------ [---] 11 SECTION 13: OIL SPILL CLEAN UP EXPENSE - -------------------------------------- [---] shall expeditiously clean up any spills occurring from a leak, rupture or other incident to [---] when [---] are in use by [---] to transport [---] or line displacement; and any costs incurred by [---] for such cleanup shall be for the account of [---] and invoices for such services will be rendered by [---] in accordance with Article VI of this Contract; provided that [---] shall have no obligation to pay for such cleanup to the extent caused by the gross negligence or willful misconduct of [---], its employees and contractors. SECTION 14: CONSEQUENTIAL DAMAGES - --------------------------------- In no event shall either party be responsible for loss of prospective profits, or consequential damages arising or resulting from either party's performance or failure to perform hereunder. SECTION 15: VESSEL REQUIREMENTS - ------------------------------- [---] shall comply with all applicable provisions of Article VII of this Contract, including but not limited to compliance with regulations, compliance with [---] vessel acceptance standards, compliance with [---] Operations Manual, pollution mitigation, required insurance, liability for dues and other charges on said vessel. [---] shall be responsible for all reasonable costs of physical inspection of vessel, as required by [---]. SECTION 16: NOT A PUBLIC UTILITY - -------------------------------- Nothing herein shall be construed as a dedication of [---] to public use and, except as otherwise specifically provided herein, [---] shall retain the exclusive right to determine who shall use [---]. 12 SECTION 17: ASSIGNMENT - ---------------------- [---] shall not sell, assign, license, sublet or in any other manner transfer or dispose of all or any of its right, title, or interest hereunder to any other person, other than to a subsidiary, affiliate or parent corporation or the trustee under [---]. SECTION 18: PARTIES' RIGHTS - --------------------------- Neither [---] shall commit or suffer to be committed any act or default whereby the rights and interests of either party in and under right of entry or easements shall be jeopardized. 13 ADDENDUM NO. 2 SELLER'S FACILITIES ON MAUI AND HAWAII -------------------------------------- SECTION 1: AVAILABILITY, FORECAST, OPTION, THROUGHPUT, QUALITY, DELIVERY SIZE - ----------------------------------------------------------------------------- AND SERVICES - ------------ To provide operating flexibility to a valued customer SELLER agrees to provide the respective BUYER on [---] to use SELLER's Kahului Terminal and SELLER's Hilo Terminal for the terminaling of BUYER's diesel received in bulk ex-barge on the terms and conditions described in this Addendum No. 2. Unless expressly agreed to by SELLER and BUYER, [---] SELLER shall give BUYER a forecast of available diesel storage capacity expected to be available in each of SELLER's Neighbor Island Terminals for each of the [---] in said [---] Upon receipt of SELLER's advice, each respective BUYER shall have [---] to either commit to the use of such available space, or decline to exercise said option. BUYER's [---] it to deliver diesel for receipt by SELLER at a respective SELLER's Neighbor Island Terminal for return to BUYER at that same respective SELLER's Neighbor Island Terminal at [---] barrels per [---] unless expressly agreed otherwise by SELLER and BUYER. BUYER agrees that all diesel delivered to SELLER's Neighbor Island Terminals shall meet the specifications as described in Article IV. BUYER agrees to schedule its shipments to a respective SELLER's Neighbor Island Terminal such that they arrive at reasonably regular intervals and such that each delivery 1 shipment contains a minimum of [---] barrels of diesel to SELLER's Kahului Terminal or a minimum of [---] barrels of diesel to SELLER's Hilo Terminal, provided the respective terminal is capable of receiving same. BUYER agrees to schedule its trucks lifting Returned diesel at the respective SELLER's Neighbor Island Terminal such that each load is a minimum of [---] gallons and amounts delivered are to be lifted no later than [---] BUYER agrees that diesel loading operations at the truck loading rack at SELLER's Kahului Terminal shall [---] unless otherwise mutually agreed. BUYER agrees that diesel loading operations at the truck loading rack at SELLER's Hilo Terminal shall [---] Sunday through Saturday, unless otherwise mutually agreed. SECTION 2: BUYER'S ADVICE OF SHIPMENT OF RECEIVED DIESEL - -------------------------------------------------------- Whenever BUYER delivers a shipment of Received diesel for terminaling at SELLER's Neighbor Island Terminals, BUYER shall provide SELLER with estimated arrival and delivery times of BUYER's Nominated Barge transporting the Received diesel. BUYER or BUYER's agent shall provide radio or phone notification to SELLER's representative at each unloading location at least twenty four (24) hours prior to the diesel delivery of Received diesel. In addition, BUYER or BUYER's agent shall also provide the Captain of the Port with radio or phone notification at least twenty four (24) hours prior to any delivery. Should the estimated time of arrival or delivery change by two (2) or more hours following the 24 hour arrival report, BUYER or BUYER's agent shall promptly report the change to SELLER's representative and the Captain of the Port at the place of planned arrival. 2 SECTION 3: BARGE RECEIVED SAMPLE - -------------------------------- The Independent Inspector shall draw a volumetric weighted average composite of samples ("Barge Received Sample") from BUYER's Nominated Barge tanks so as to be representative of the entire cargo of Received diesel at the unloading location. The samples will be divided into a minimum of two (2) parts and dated. One part shall be provided to SELLER to be tested or retained, at its option. One part shall be sealed and retained by the Independent Inspector for a period of not less than three (3) Months. This sample as well as the Barge Composite After Loading Sample, Barge O.B.Q. Sample and relevant samples of diesel cargo from previous barge shipments shall be available for analysis by SELLER, BUYER or an independent laboratory should SELLER's subsequent sampling and analysis indicate a quality problem. To provide an early warning of any quality problems with the Received diesel, BUYER agrees to instruct the Independent Inspector to place onboard BUYER's Nominated Barge transporting the Received diesel or transmit by facsimile to the respective SELLER's Neighbor Island Terminal, the Product Preliminary Analysis, tank final Certificate of Quality and other documents in the possession of the Independent Inspector regarding the quality of the Received diesel which shall thereby be available to the respective SELLER's Neighbor Island Terminal's representative upon said barge's arrival. SECTION 4: CONDITIONAL ACCEPTANCE OF RECEIVED DIESEL - ---------------------------------------------------- SELLER shall review the Product Preliminary Analysis, tank final Certificate of Quality and other documents regarding to the quality of the Received diesel supplied by BUYER as a basis for conditional quality acceptance. 3 To facilitate turnaround of BUYER's Nominated Barge, SELLER shall have the option to promptly perform a diesel Preliminary Analysis on its part of the Barge Received Sample. .Received diesel will be considered conditionally acceptable if its API gravity so analyzed is within 0.3 degrees of its gravity as delivered to BUYER, appearance is bright and clear and if its Flash Point is above its 150 degree F specification. Notwithstanding the above conditional acceptance, SELLER may use the Barge Received Sample to determine all the qualities described in Article IV for the Received diesel for deciding whether to accept or reject the receipt of the Received diesel for which a quality problem is reasonably indicated. SECTION 5: QUALITY PROBLEM, DISPUTE AND REMEDY REGARDING RECEIVED DIESEL - ------------------------------------------------------------------------ If as a result of SELLER's examination of the quality documentation, or otherwise, a quality problem with the Received diesel is reasonably indicated, SELLER may at its option and election obtain and analyze a portion of the Barge Received Sample, Barge Composite After Loading Sample of the Received diesel, Barge O.B.Q. Sample, if any, or other relevant sample in the possession of BUYER or the Independent Inspector. If the Product Preliminary Analysis, BUYER's supplied laboratory test results representing the Barge Composite After Loading Sample, diesel Preliminary Analysis or quality determination of other relevant samples fails conditional acceptance or the results of SELLER's analyses of relevant samples indicate diesel quality not consistent with the qualities described in Article IV, SELLER shall promptly notify Buyer. Within thirty (30) Days after each delivery of Received diesel, SELLER shall give BUYER notice of any claim of contamination of any applicable samples in the possession of SELLER and the Independent Inspector which relate to the diesel in question including diesel in 4 the affected of SELLER's Neighbor Island Terminals which has been commingled with the Received diesel. To avoid or reduce the risk of contaminating the diesel in SELLER's Neighbor Island Terminal which will be commingled with Received diesel which is reasonably indicated to have a quality problem, BUYER or SELLER may prevent delivery or halt a shipment delivery in progress until such time as the quality problem is resolved. Should BUYER's Nominated Barge have completed delivery of the Received diesel after discovery of an indicated quality problem, then both BUYER and SELLER shall confer in good faith and attempt to minimize the impact of any quality problems on BUYER and SELLER. If BUYER and SELLER agree or the Independent Inspector determines that the quality of the Received diesel did not meet the qualities described in Article IV, and the Received diesel has contaminated the affected SELLER's Neighbor Island Terminal inventories, both BUYER and SELLER shall attempt to minimize the impact of any quality problem on BUYER by waiver of BUYER's requirement that Received diesel meet quality specifications especially if SELLER's use of the diesel will not significantly harm SELLER, or by BUYER or SELLER delivering higher quality diesel in a timely manner to produce a specification quality blend at the affected SELLER's Neighbor Island Terminal. If all such, and similar, efforts fail to resolve the quality problem, then BUYER will reimburse SELLER for the transportation, handling and re-refining costs of exchanging BUYER's and SELLER's diesel, with diesel meeting the qualities described in Article IV to the extent the contamination of the affected SELLER's Neighbor Island Terminal inventories was not caused or contributed to by SELLER. Such reimbursement shall occur within sixty (60) Days of SELLER's original claim. 5 All costs and expenses, including, but not limited to, demurrage incurred by BUYER's or SELLER's Nominated Barge, transportation, and handling costs incurred in waiting to unload, returning and replacing non-specification Received diesel and any demurrage, transportation, re-refining and handling costs incurred by SELLER in returning and replacing its contaminated diesel shall be borne by the respective BUYER, provided that the respective BUYER confirms the quality problem indicated by SELLER. If BUYER disputes SELLER's claim of quality problems with the Received diesel, objects to SELLER's refusal to accept some or all of the Received diesel in question into the affected of SELLER's Neighbor Island Terminals on the basis of SELLER's examination of the relevant quality documentation or as a result of SELLER's laboratory analyses of the Barge Tank Sample, Barge O.B.Q. Sample and any other relevant samples, or in the event that any claim made by SELLER related to the quality of Received diesel is not resolved within thirty (30) Days of the original claim, the Barge Received Sample and any other relevant samples in the possession of SELLER, BUYER or the Independent Inspector shall be submitted to a mutually agreed upon independent laboratory for testing and analysis, whose determination shall be final and binding on both parties. In the event BUYER is found to be correct, SELLER shall pay the cost of such independent inspection. In the event SELLER is found to be correct, BUYER shall pay the cost of such independent inspection. SELLER shall have the responsibility for all costs and expenses, including, but not limited to demurrage incurred by BUYER's or SELLER's Nominated Barge, transportation, and handling costs incurred in waiting to unload, returning and replacing non-specification Received diesel and any demurrage, transportation, re-refining and handling costs incurred by SELLER in 6 returning and replacing its contaminated diesel if it is determined that the qualities described in Article IV of this Contract are met by the Received diesel in question. However, in no event shall either party be responsible for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise allegedly caused by or based upon the quality of the non- specification Received diesel. SECTION 6: COAST GUARD DOCK WATCH REQUIREMENTS - ---------------------------------------------- The respective BUYER shall be responsible for meeting all USCG dock watch requirements at Hilo, Hawaii and Kahului, Maui. Charges levied by any governmental agency for the respective use of SELLER's Neighbor Island Terminals including but not limited to the State of Hawaii's wharf and pipeline fees, shall be for the respective BUYER's account. SECTION 7: CUSTODY OF RECEIVED DIESEL AND COMMINGLED PRODUCT - ------------------------------------------------------------ SELLER will take care, accept custody and control of Received diesel having conditionally acceptable quality at the flange connecting SELLER's independently owned facility pipeline at each location to the multiparty diesel pipeline at Kahului Harbor, Maui and the multiparty diesel pipeline at Hilo Harbor, Hawaii. Title and risk of loss shall remain with the respective BUYER. SELLER shall not be responsible for any type of loss of the Received diesel while it is in SELLER's custody except when loss or damage is caused by SELLER's failure to use reasonable care in receiving, handling, storing, or re-delivering such diesel. Received diesel will be commingled with SELLER's diesel in SELLER's tankage at SELLER's Neighbor Island Terminals. 7 SECTION 8: DETERMINATION OF QUANTITY OF RECEIVED DIESEL - ------------------------------------------------------- The quantity of Received diesel over which SELLER takes custody shall be determined at the time of each barge cargo unloading by gauging the receiving tank(s) at SELLER's Neighbor Island Terminal before and after pumping. Volumes delivered hereunder shall be converted to 60F in accordance with the provisions of Article VIII of this Contract. Measurements shall be taken under the supervision of the Independent Inspector. BUYER and SELLER shall share equally the cost of such independent inspections. SECTION 9: TRANSFER NOTIFICATION - -------------------------------- BUYER will provide SELLER's Neighbor Island Terminal representative, during normal working hours, at least twenty four (24) hours advance notice of any transfers scheduled from SELLER's Neighbor Island Terminals. SECTION 10: CUSTODY OF RETURNED DIESEL - -------------------------------------- BUYER shall regain care, custody and control of Returned diesel at the end of the load-rack flange connecting SELLER's load-rack piping to BUYER's nominated tank trucks. SECTION 11: DETERMINATION OF QUANTITY OF RETURNED DIESEL - -------------------------------------------------------- The quantity of Returned diesel over which SELLER returns custody shall be determined at the time of each transfer by reading SELLER's calibrated meters corrected in each instance to volume at 60F in accordance with current measurement standards adopted by industry, ASTM, API and other standard setting bodies as applicable in the opinion of the Independent Inspector. If BUYER or SELLER have reason to believe that the quantity of Returned diesel stated for a particular transfer is incorrect, that party shall within thirty (30) Days of the transfer date, present the other party with documentation supporting such determination and the parties will confer, in 8 good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quantity, if justified, for the transfers in question. SECTION 12: DETERMINATION OF BUYER'S INVENTORY - ---------------------------------------------- SELLER shall maintain records of the respective BUYER's net diesel inventories stored at SELLER's Neighbor Island Terminals, determined on the basis of the accumulated quantities of Received diesel less accumulated quantities of Returned diesel. SELLER will provide book inventory records once each week, convenient to SELLER's normal weekly inventory period. SELLER will periodically reconcile meter measurements with tank gauging. BUYER may review SELLER's reconciliation calculations. However, there will be no retroactive adjustments to the volumes of deliveries of BUYER's Received diesel or Returned diesel as a result of this procedure. SECTION 13: RETURNED DIESEL QUANTITY - ------------------------------------ SELLER shall be under no obligation to provide BUYER quantities of Returned diesel greater than BUYER's current net diesel inventory. However, SELLER will attempt to meet BUYER's unanticipated needs, after considering the needs of its other customers and its own available inventory. SECTION 14: RETURNED DIESEL SAMPLING AND CONDITIONAL ACCEPTANCE - --------------------------------------------------------------- Returned diesel transferred to BUYER by SELLER shall meet the qualities for Diesel described in Article IV. An Independent Inspector or SELLER Representative shall draw a volumetric weighted average composite sample ("Terminal Returned Sample") of the diesel in the applicable tanks in SELLER's Neighbor Island Terminals after each receipt of Received diesel, or SELLER's diesel, if it is to be commingled with BUYER's diesel, so as to be 9 representative of the entire volume of the commingled inventory of diesel. The Terminal Returned Sample is to be divided into a minimum of two (2) parts and dated. One part shall be provided to SELLER, a sufficient portion of which is to be promptly tested by SELLER for its API gravity, appearance and Flash Point. BUYER and SELLER agree that successful passage of the prompt test on this sample is sufficient evidence for SELLER to transfer Returned diesel to BUYER, without limiting BUYER's rights within Section 15 of this Addendum No. 2. One part shall be sealed and retained by the Independent Inspector for a period of not less than three (3) Months. SECTION 15: QUALITY PROBLEM, DISPUTE AND REMEDY REGARDING RETURNED DIESEL - ------------------------------------------------------------------------- Notwithstanding the above conditional acceptance of the Returned diesel, if a quality problem with the Returned diesel is reasonably indicated, BUYER may obtain and analyze a sufficient portion of the Terminal Returned Sample in the possession of the Independent Inspector or SELLER to determine all the qualities described in Article IV for the Returned diesel. If BUYER and SELLER agree or the Independent Inspector determines that the quality of the Returned diesel did not meet the qualities described in Article IV, and that the affected SELLER's Neighbor Island Terminal inventories, including BUYER's diesel stored there and the diesel at BUYER's power plant inventories are contaminated, both BUYER and SELLER shall attempt to minimize the impact of any quality problem on SELLER by waiver of SELLER's requirement to meet quality specifications, especially if BUYER's use of the diesel will not significantly harm BUYER, or by SELLER returning higher quality diesel to produce a specification quality blend at the affected SELLER's Neighbor Island Terminal inventory and 10 BUYER's plant inventories. If all such, and similar, efforts fail to resolve the quality problem, then SELLER will, at SELLER's expense, exchange BUYER's diesel and to the extent the contamination of BUYER's other similar diesel was not caused or contributed to by BUYER, any of BUYER's other similar diesel which has been downgraded by commingling with the Returned diesel, with diesel meeting the qualities described in Article IV. All costs and expenses, including, but not limited to, demurrage incurred by BUYER's or SELLER's Nominated Barge, transportation, and handling costs incurred in waiting to unload, returning and replacing BUYER's contaminated diesel and any demurrage, transportation, re-refining and handling costs incurred by SELLER in returning and replacing said contaminated diesel shall be borne by SELLER, provided that SELLER confirms the quality problem indicated by BUYER. If SELLER disputes BUYER's claim of quality problems with the Returned diesel and other similar diesel, objects to BUYER's refusal to transfer some or all of the Returned diesel in question into BUYER's nominated trucks on the basis of BUYER's examination of the relevant quality documentation or as a result of BUYER's laboratory analyses of the Terminal Returned Sample, and any other relevant samples, or in the event that any claim made by BUYER related to the quality of Returned diesel is not resolved within thirty (30) Days of the original claim, the Terminal Returned Sample, Barge Received Sample, Barge Composite After Loading Sample, Barge O.B.Q. Sample and any other relevant samples in the possession of SELLER, BUYER or the Independent Inspector shall be submitted to a mutually agreed upon independent laboratory for testing and analysis, whose determination shall be final and binding on both parties. In the event BUYER is found to be correct, SELLER shall pay the cost of such independent inspection. 11 In the event SELLER is found to be correct, BUYER shall pay the cost of such independent inspection. BUYER shall have the responsibility for all costs and expenses, including, but not limited to demurrage incurred by BUYER's or SELLER's Nominated Barge, transportation, and handling costs incurred in waiting, loading, unloading, returning and replacing BUYER's contaminated diesel and any demurrage, transportation, re-refining and handling costs incurred by BUYER in returning and replacing its contaminated diesel if it is determined that the qualities described in Article IV of this Contract are met by the Returned diesel in question. However, in no event shall either party be liable for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise allegedly caused by or based upon the quality of the Returned diesel. SECTION 16: TERMINALING AND HANDLING FEES - ----------------------------------------- SELLER will invoice BUYER and BUYER will pay SELLER in accordance with the terms of Article VI of this Contract, terminaling and handling fees based on the quantities of Received diesel determined in accordance with the provisions of Section 8 of this Addendum No. 2 at the rates listed below. i. At SELLER's Kahului Terminal, the terminaling and handling fee shall be [---] per physical barrel of Received diesel. ii. At SELLER's Hilo Terminal, the terminaling and handling fee shall be [---] per physical barrel of Received diesel. 12 iii. The terminaling and handling fees specified in the Section 16.i and Section 16.ii shall be subject to [---] beginning [---] , and for each [---] thereafter, including any in an Additional Term, on the basis of the arithmetic average of two components each weighted equally. One component is the arithmetic average of the Producer Price Index for Industrial Commodities ("PPI") as published by the U.S. Department of Labor, Bureau of Labor Statistics for the period July through September preceding every January 1 in which terminaling and handling services are rendered by SELLER hereunder, divided by 128.700. The second component is the arithmetic average of the hourly earnings in dollars per hour for the petroleum and coal products industry as reported in "Employment and Earnings" published by the U.S. Department of Labor, Bureau of Labor Statistics ("EE") for the period July through September preceding every January 1 in which terminaling and handling services are rendered by SELLER hereunder, divided by 20.353. For the purpose of invoicing, the terminaling and handling services shall be considered received by BUYER when SELLER first takes custody of BUYER's Received diesel. SECTION 17: REQUIRED INSURANCE - ------------------------------ Without in any way limiting BUYER's liability pursuant to this Contract, BUYER shall maintain and require any carrier to maintain the following insurance and all insurance that may be required under the applicable laws, ordinances, and regulations of any governmental authority: i. Workers' Compensation and Employers' Liability Insurance as prescribed by applicable law, including insurance covering liability under the 13 Longshoremen's and Harbor Workers' Act, the Jones Act and the Outer Continental Shelf Land Act, if applicable. ii. Commercial General Liability Insurance including Bodily Injury and Property Damage Insurance with a limit not less than $1,000,000 combined single limit per occurrence. Such insurance shall include the following coverages: Broad Form Contractual Liability and Personal Injury Liability. iii. Automobile Bodily Injury and Property Damage Liability Insurance on all owned, non-owned and hired vehicles used in receiving diesel from SELLER's Neighbor Island Terminals with a limit not less than $1,000,000 combined single limit per occurrence for bodily injury and property damage, and shall include an endorsement, form "CC 00 31 12 89, Changes in Business Auto and Truckers Policies - Mobile Equipment, Contractual Liability and Pollution (Hawaii)," or its equivalent, to provide pollution liability coverage. The above insurance shall include a requirement that the insurer provide SELLER with thirty (30) Days' written notice prior to the effective date of any cancellation or material change of the insurance. The insurance specified in Sections i. shall contain a waiver of subrogation against SELLER and an assignment of statutory lien, if applicable. The insurance specified in Sections ii. and iii. shall name SELLER as an additional insured provided that the insurance is primary in coverage with respect to all policies of insurance that may be applicable, and contain a standard cross-liability endorsement or severability of interest clause. Before SELLER shall be obliged to render the terminaling and handling services described herein, BUYER shall provide SELLER with certificates or other documentary evidence satisfactory to SELLER of the insurance coverages and endorsements. Without in any way limiting SELLER's liability, SELLER shall obtain from any carrier of diesel related to this Contract the insurance coverages and endorsements set forth in this Article excepting that both SELLER and BUYER be named as additional insured. The terminaling and handling fees listed in Section 14 do not include any insurance covering loss of BUYER's diesel while it is in the custody of SELLER. It is expressly understood 14 and agreed that insurance, if any is desired by BUYER, shall be carried by BUYER at its own expense. SELLER reserves the right to change insurance requirements periodically upon reasonable notice to BUYER. SECTION 18: BARGE AND VEHICLE STANDARDS - --------------------------------------- BUYER's Nominated Barge used to deliver diesel to SELLER's Neighbor Island Terminals shall be subject to the provisions of Section 7.3 herein Any truck lifting at SELLER's Neighbor Island Terminals shall be inspected and approved by the SELLER using SELLER's guidelines which shall be provided to BUYER. In addition any Driver must be approved and certified by SELLER periodically, to enter and receive Returned diesel at SELLER's Neighbor Island Terminals. SECTION 19: NOTICES - ------------------- Notices for the for forecast available storage, barge arrival or delivery timing, diesel quality notifications, or transfer notifications shall be made to the following addresses: MAUI: BHPP Terminals Terminal Supervisor 140-A Hobron Avenue Kahului, Hawaii 96732 Telephone (808) 871-0817 Facsimile (808) 871-0728 Maui Electric Company, Ltd.. Production Department P.O. Box 398 Kahului, Hawaii 96732 Telephone (808) 242-7796 Facsimile (808) 244-5260 15 HAWAII: BHPP Terminals Terminal Supervisor 700 Kalanianaole Avenue Hilo, Hawaii 96720 Telephone (808) 961-3177 Facsimile (808) 969-1085 Hawaii Electric Light Co., Inc. Production Department P.O. Box 1027 Hilo, Hawaii 96720 Telephone (808) 969-0423 Facsimile (808) 969-0425 16 EXHIBIT A NO. 6 INDUSTRIAL FUEL OIL SPECIFICATIONS -----------------------------------------
Specification - Test Item Measurement Unit Limits ASTM Method - -------------------------- ---------------- --------------- ----------- GRAVITY @ 60 DEGREES F. Degrees API 6.5 Min. D-1298, D-4052-86 FLASH POINT Degrees F. 150 Min. D-93 VISCOSITY SSF At 77 DF - - - D-445, D-2161 VISCOSITY SSF At 122 DF 179 Min. D-445, 226 Max. D-2161 POUR POINT Degrees F. 55 Max. D-97, D-5949 SULFUR Percent, Weight 2.00 Max. D-1552, D-2622, D-4294 VANADIUM PPM, Wt. 100 Max. D-5863, AES NITROGEN PPM, Wt 6500 Max. D-5762, D-4629 SEDIMENT & WATER Percent, Volume 0.50 Max. D-1796 HEAT VALUE, GROSS MM BTU/BBL 6.2 Min. D-240, D-4868 HEAT VALUE, NET MM BTU/BBL Report D-240, D-4868 LOADING TEMPERATURE Degrees F. 110 Min. n/a 170 Max
1 [---] ii. Expressed in USD per barrel, converting to barrels from metric tonnes by dividing by 6.368. = [---] [---] iii. [---] and received by BUYER in each Year of the indicated period. Assume [---] apply: [---] barrels: [---] per barrel [---] barrels: [---] per barrel [---] barrels: [---] per barrel Assume further that the [---] thus [---] HC = The actual gross heat content of each Fuel Oil Delivery pursuant to Section 5.5 expressed in MM BTU per barrel with three significant figures to the right of the decimal point. T = Taxes applicable to sale of Fuel Oil - ---------------------------------------- HGET = 4.166% of pre-HGET price Hawaii Environmental Response Tax applied after HGET = $0.05 per barrel 2 I. PRICE FOR FUEL OIL WITH A STANDARD GROSS HEAT CONTENT [---] PER BARREL) = [---] = [---] = [---] II. PRICE FOR FUEL OIL PRICE WITH AN ASSUMED GROSS HEAT CONTENT OTHER THAN STANDARD (HC = Assumed gross heat content is [---] per barrel) = [---] = [---] = [---] = [---] EXPLANATION OF TAXES: - --------------------- Taxes in the Fuel Oil price currently in effect include the Hawaii Environmental Response Tax of $0.050 per barrel. Also, Hawaii State General Excise Tax of 4.166% will be paid on all components of the Fuel Oil price, except at the execution of this Contract the Hawaii Environmental Response Tax. 3 EXHIBIT B DIESEL SPECIFICATIONS ---------------------
Specification - Test Item Measurement Unit Limits ASTM Method - -------------------------- ---------------- ------ ----------- GRAVITY @ 60 DEGREES F. Degrees API 30.0 Min. D-1298, D-4052-86 SPECIFIC GRAVITY 60/60 DEGREES F. n/a .8762 Max. D-1298, D-4052-86 VISCOSITY SSU @ 104 DF 32.3 Min. D-445, 39.4 Max. D-2161 SSU @ 100 DF 32.6 Min. 40.1 Max. FLASH POINT, PM Degrees F. 150 Min. D-93 POUR POINT Degrees F. 37.4 Max. D-97 ASH PPM, Wt. 100 Max. D-482 CETANE INDEX n/a 40 Min. D-4737 CARBON RESIDUE, 10% RESIDUUM %, Wt. .35 Max. D-524 SEDIMENT & WATER Percent, Vol. 0.05 Max. D-1796 SULFUR Percent, Wt. 0.40 Max. D-1552, 2622 D-4294 VANADIUM PPM, Wt. 0.8 Max D-3605, AES DISTILLATION, 90% RECOVERED Degrees F. 540 - 650 D-86 SODIUM+POTASSIUM PPM, Wt. 0.5 Max. D-3605 SODIUM+POTASSIUM+LITHIUM PPM, Wt. 0.6 Max. D-3605, AES
1 EXHIBIT B DIESEL SPECIFICATIONS --------------------- NITROGEN PPM, Wt. 150 Max. D-4629, D-5762 * HEAT VALUE, GROSS MM BTU/BBL 5.86 D-240, D-4868 HEAT VALUE, NET MM BTU/BBL Report D-240, D-4868
* Typical Value 2 EXHIBIT C --------- NO. 6 FUEL OIL EXAMPLE PRICE CALCULATION ---------------------------------------- Illustrative Price Calculation for [---] The price in U.S. Dollars ("USD") per barrel of No. 6 Fuel Oil shall be determined Monthly on the basis of the following price formula: [---] i. The simple average of the high and low price assessments for Los Angeles Bunker C Fuel Oil as reported by the Platt's Bunkerwire on all dates of publication during the period beginning the 21st Day of the second Month preceding the Month of Delivery and ending the 20th Day of the Month preceding the Month of Delivery. BP = Platt's Bunkerwire Los Angeles Bunker C - --------------------------------------------
Price in USD per Metric Tonne Date Low High Average ---- --- ---- ------- [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---]
1 EXHIBIT D --------- DIESEL EXAMPLE PRICE CALCULATION -------------------------------- Illustrative Price Calculation for [---] The price in U.S. Dollars ("USD") per gallon of Diesel shall be determined Monthly on the basis of the following price formula: [---] i. The simple average of the high and low price assessments for West Coast Pipeline, Los Angeles California Low Sulfur No. 2 Diesel as reported by Platt's Oilgram on all dates of publication during the period beginning the 21st Day of the second Month preceding the Month of Delivery and ending the 20th Day of the Month preceding the Month of Delivery, expressed in USD per gallon. DP = Platt's Oilgram, West Coast Pipeline, Los Angeles California LS No. 2 --------------------------------------------------------------------- Diesel Price ------------
Date of Price Price in USD per gallon Low High Average --- ---- ------- [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---] [---]
1 [---] [---] ii. [---] Assume [---] apply: [---] barrels: [---] per gallon [---] barrels: [---] per gallon [---] barrels: [---] per gallon Assume further that the [---] thus [---] HC = The actual gross heat content of each Diesel Delivery pursuant to Section 5.5 expressed in BTUs per gallon. T = Taxes applicable to sale of Diesel - -------------------------------------- HGET = 4.166% of pre-HGET price Taxes after application of Hawaii General Excise Tax (HGET): Hawaii Environmental Response Tax = $0.05 per barrel, $0.0012 per gallon Hawaii Liquid Fuel Tax = $0.01 per gallon I. PRICE FOR DIESEL DELIVERED INTO BUYER'S NOMINATED BARGE HAVING A STANDARD GROSS HEAT CONTENT [---] = [---] = [---] = [---] 2 II. PRICE FOR DIESEL DELIVERED INTO BUYER'S NOMINATED BARGE HAVING AN ASSUMED GROSS HEAT CONTENT OTHER THAN STANDARD (HC = Assumed gross heat content is [---] = [---] = [---] = [---] = [---] III. PRICE FOR DIESEL DELIVERED TO BUYER'S NOMINATED MARINE TERMINAL AT KAHULUI, MAUI, HILO, HAWAII OR KAWAIHAE HAWAII BARGE HAVING HAVING A STANDARD GROSS HEAT CONTENT [---] For Diesel sold and Delivered in bulk by SELLER and purchased and received in bulk by BUYER at Kahului, Maui, or at Hilo or Kawaihae, Hawaii, BUYER shall pay an [---] applicable only to such Diesel, in each Year of the indicated period. Assume [---] apply: [---] per [---] for the [---] purchased by MECO, received in Kahului Maui, in $/gallon: [---] [---] per [---] for the [---] purchased by HELCO, received in Hilo Hawaii, in $/gallon. [---] [---] per [---] for the [---] purchased by HELCO, received in Kawaihae Hawaii, in $/gallon. [---] a. FOR DIESEL IN BULK RECEIVED BY MECO IN KAHULUI: [---] = [---] 3 = [---] = [---] b. FOR DIESEL IN BULK RECEIVED BY HELCO IN HILO: [---] = [---] = [---] = [---] c. FOR DIESEL IN BULK RECEIVED BY HELCO IN KAWAIHAE: [---] = [---] = [---] = [---] EXPLANATION OF TAXES: - -------------------- Taxes in the Diesel price currently in effect include the Hawaii Environmental Response Tax of $0.050 per barrel ($0.0012 per gallon) and the Hawaii Liquid Fuel Tax of $0.01 per gallon. Also, the Hawaii State General Excise Tax of 4.166% will be paid on all components of the Diesel price, except at the execution of this Contract the Hawaii Environmental Response Tax and the Hawaii Liquid Fuel Tax 4 EX-10.13(A) 14 EXTENSION DATED DECEMBER 1, 1997 HECO Exhibit 10.13(a) --------------------- [ Hawaiian Electric Company, Inc. letterhead ] December 01, 1997 HAWAIIAN INTERISLAND TOWING, INC. Attention: Mr. Gordon Smith, President Pier 21, Main Office Honolulu, HI 96817 Dear Mr. Smith: SUBJECT: OPTION TO EXTEND TERM UNDER CONTRACT OF PRIVATE CARRIAGE BY AND BETWEEN HAWAIIAN INTERISLAND TOWING, INC. AND HAWAII ELECTRIC LIGHT COMPANY, INC. This letter will confirm the understanding between HAWAIIAN INTERISLAND TOWING, INC. ("HITI") and Hawaii Electric Light Company, Inc. ("HELCO") relating to the extension of the Contract Of Private Carriage by and between HELCO and HITI, dated November 10, 1993 ("Contract"). It has been mutually agreed to by HELCO and HITI that the Contract is hereby extended in accordance with Section 1.2, "Option to Extend Term," as amended by the "Sixth Amendment To Contract of Private Carriage By and Between HAWAIIAN INTERISLAND TOWING, INC. and Hawaii Electric Light Company, Inc.," dated October 1, 1997, for a period of two (2) years commencing January 1, 1998. If this letter correctly sets forth our understanding and agreement, would you please indicate your acceptance and agreement in the space below and return a signed copy for our records. HAWAIIAN ELECTRIC COMPANY, INC., AS AGENT By /s/ Jeffrey C. Aicken ----------------------- Jeffrey C. Aicken, Director, Fuel Resources 1 Accepted and agreed to this 1st day of December, 1997. HAWAIIAN INTERISLAND TOWING, INC. By /s/ Gordon Smith --------------------------------------------------- name: Gordon Smith title: President cc: T.C. Simmons S.A. Gonsalves D. Heinzen 2 EX-10.14(A) 15 EXTENSION DATED DECEMBER 1, 1997 HECO Exhibit 10.14(a) --------------------- [ Hawaiian Electric Company, Inc. letterhead ] December 01, 1997 HAWAIIAN INTERISLAND TOWING, INC. Attention: Mr. Gordon Smith, President Pier 21, Main Office Honolulu, HI 96817 Dear Mr. Smith: SUBJECT: OPTION TO EXTEND TERM UNDER CONTRACT OF PRIVATE CARRIAGE BY AND BETWEEN HAWAIIAN INTERISLAND TOWING, INC. AND MAUI ELECTRIC COMPANY, LTD. This letter will confirm the understanding between HAWAIIAN INTERISLAND TOWING, INC. ("HITI") and Maui Electric Company, Ltd. ("MECO") relating to the extension of the Contract Of Private Carriage by and between HITI and MECO, dated November 13, 1993 ("Contract"). It has been mutually agreed to by HITI and MECO that the Contract is hereby extended in accordance with Section 1.2, "Option to Extend Term," as amended by the "Sixth Amendment To Contract of Private Carriage By and Between HAWAIIAN INTERISLAND TOWING, INC. and Maui Electric Company, Ltd.," dated October 1, 1997, for a period of two (2) years commencing January 1, 1998. If this letter correctly sets forth our understanding and agreement, would you please indicate your acceptance and agreement in the space below and return a signed copy for our records. HAWAIIAN ELECTRIC COMPANY, INC., AS AGENT By /s/ Jeffrey C. Aicken --------------------------------------------- Jeffrey C. Aicken, Director, Fuel Resources 1 Accepted and agreed to this 1st day of December, 1997. HAWAIIAN INTERISLAND TOWING, INC. By /s/ Gordon Smith ------------------------------------------------- name: Gordon Smith title: President cc: T.C. Simmons S.A. Gonsalves S. Kiyonaga 2 EX-27.1 16 HEI & SUBSIDIARIES FINANCIAL DATA SCHEDULE FOR 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC INDUSTRIES, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES, INC. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 254,356 1,971,886 166,018 7,726 45,412 0 2,994,317 974,759 7,953,882 0 802,575 85,770 148,293 654,819 159,862 7,953,882 0 1,463,979 0 1,252,121 (201) 5,669 64,607 141,783 55,341 86,442 0 0 0 86,442 2.76 2.75 REPRESENTS EPS-BASIC
EX-27.1(A) 17 HEI & SUBSIDIARIES RESTATED FINANCIAL DATA SCHEDULE FOR 1996
5 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC INDUSTRIES, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES, INC. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 97,417 1,377,591 155,730 4,872 48,745 0 2,831,822 890,055 5,935,840 0 810,080 38,955 48,293 622,945 149,907 5,935,840 0 1,410,572 0 1,217,890 (11,074) 4,436 65,832 133,488 54,830 78,658 0 0 0 78,658 2.60 2.59 REPRESENTS EPS-BASIC
EX-27.1(B) 18 HEI & SUBSIDIARIES RESTATED FINANCIAL DATA SCHEDULE FOR 1995
5 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC INDUSTRIES, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES, INC. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 130,833 1,479,552 145,521 3,016 35,258 0 2,623,742 815,547 5,603,745 0 758,463 41,750 48,293 585,387 144,216 5,603,745 0 1,295,924 0 1,105,196 (8,429) 3,064 62,860 133,233 55,740 77,493 0 0 0 77,493 2.66 2.65 REPRESENTS EPS-BASIC
EX-27.2 19 HECO & SUBSIDIARIES FINANCIAL DATA SCHEDULE FOR 1997
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND CONSOLIDATED STATEMENT OF INCOME AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000046207 HAWAIIAN ELECTRIC COMPANY, INC. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 PER-BOOK 1,893,105 0 168,597 13,085 137,527 2,212,314 85,387 296,266 387,582 769,235 83,175 48,293 597,621 400 0 95,181 30,000 2,595 0 0 585,814 2,212,314 1,098,755 52,795 934,920 987,715 111,040 19,042 130,082 48,233 81,849 3,660 78,189 58,377 42,317 138,907 0 0 REPRESENTS EPS-BASIC
EX-99.1 20 HEI DIVIDEND REINVESTMENT & STOCK PURCHASE PLAN HEI Exhibit 99.1 ---------------- HAWAIIAN ELECTRIC INDUSTRIES, INC. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN --------------------------------------------- (As amended through February 2, 1998) Section 1. Name and Number of Shares - ------------------------------------- The plan shall be known as the "Dividend Reinvestment and Stock Purchase Plan" (the "Plan"). The Plan permits (i) holders of record of the Common Stock of Hawaiian Electric Industries, Inc. (the "Company"), (ii) holders of record of the preferred stock ("Preferred Stock") of any class or series of Hawaiian Electric Company, Inc., Maui Electric Company, Limited and Hawaii Electric Light Company, Inc., each of which is a direct or indirect subsidiary of the Company, and (iii) any other individual of legal age or any entity, to purchase common stock of the Company ("Common Stock"). The number of shares of Common Stock which may be issued pursuant to the Plan shall be fixed from time to time by the Board of Directors of the Company. Section 2. Administration and Costs - ------------------------------------ The administrator of the Plan (the "Administrator") shall administer the Plan for participants, keep records, send statements of accounts to participants, and perform other clerical and ministerial duties relating to the Plan. The Administrator may be one or more officers or employees of the Company or of its subsidiaries and shall be appointed from time to time by the President, the Financial Vice President or the Treasurer of the Company. If the Administrator is one or more employees of the Company, an independent trustee (the "Trustee") shall be appointed by the President, the Financial Vice President or the Treasurer of the Company, and shares under the Plan shall be registered in the name of the Trustee. The initial Administrator shall be the Shareholder Services Division of the Company. Participants in the Plan will bear the cost of brokerage fees and commissions, any service charges and applicable taxes related to shares purchased or sold on the open market. The Company may also charge each participant fees up to amounts that are reasonably related to the actual administrative costs of the Plan, the amounts, frequency and manner of payment of which shall be determined from time to time by the President, Financial Vice President and Treasurer of the Company, or any of them. Section 3. Eligibility and Enrollment - -------------------------------------- The following persons shall be eligible to participate in the Plan (the "participants") in accordance with the following enrollment procedures: (a) Each holder of record of Common Stock and/or Preferred Stock shall be eligible to participate in the Plan. In order to participate in the Plan, owners of Common Stock and/or Preferred Stock whose shares are registered in names other than their own (e.g., broker, bank nominee) must first either become holders of record by having shares of Common Stock and/or Preferred Stock, as the case may be, transferred into their own names or transfer shares of Common Stock to the name of the Administrator (or the Trustee, if there is a Trustee) for safekeeping under the Plan. In addition, an eligible stockholder must complete and sign the Company-approved authorization form ("Shareholder Authorization Form") for Common Stock and/or Preferred Stock, as the case may be, and return it to the Administrator in the manner prescribed on the Shareholder Authorization Form or in the current prospectus for the Plan. A Shareholder Authorization Form must be received by the Administrator by the dividend record date in order for the dividends for which the record is taken to be reinvested under the Plan. The execution of a Shareholder Authorization Form will result in the participation in the Plan of all Common Stock and all classes and series of Preferred Stock registered in the participant's name unless the participant indicates on the Form the number and kind of shares on which the participant wishes to receive cash dividends. If a participant does not select an option on the Shareholder Authorization Form, all dividends for all shares of Common Stock and Preferred Stock held in the participant's name, and on all shares held under the Plan for the participant, will be reinvested. A participant may change any of the designations set forth in a Shareholder Authorization Form by completing, signing and returning to the Administrator a new Shareholder Authorization Form in the manner described above, which new Form shall supersede the prior Form, or may make such changes in such other manner as may be permitted by the Administrator. (b) Any other individual of legal age or entity shall be eligible to participate in the Plan. In order to participate in the Plan, each such individual or entity must complete and sign the Company's enrollment form (the "Non-holder Enrollment Form") and return it to the Administrator along with a check or money order made payable to HEI/DRIP for an initial stock purchase of not less than $250 and not more than $120,000. The execution of Non-holder Enrollment Form will result in the reinvestment of all dividends held under the Plan for the participant, unless the 2 participant submits a Shareholder Authorization Form and selects a different investment option in that Form. (c) Each participant may, pursuant to the Shareholder Authorization Form and/or such other forms as the Administrator may from time to time prescribe, elect one of the following three investment options: (1) under the "full dividend reinvestment" option, a participant may reinvest cash dividends on all shares of Common Stock and Preferred Stock registered in the name of a participant and on all shares of Common Stock held under the Plan for the participant to purchase additional shares of Common Stock; (2) under the "partial dividend reinvestment" option, a participant may receive cash dividends on a portion of the shares of Common Stock and/or Preferred Stock registered in such participant's name and/or on a portion of the shares of Common Stock held under the Plan for the participant, and reinvest the remainder of cash dividends on such shares to purchase Common Stock; and (3) under the "optional cash investment only/no dividend reinvestment" option, a participant may receive cash dividends on all shares of Common Stock and/or Preferred Stock registered in the participant's name and on shares of Common Stock held under the Plan for the participant. Under any of the investment options, a participant may purchase additional shares of Common Stock under the Plan by making optional cash payments to the Plan as provided under Section 5. A participant may change such participant's investment option by following the procedures under Section 3(a) for changing the designations set forth in a Shareholder Authorization Form and/or such other procedures as the Administrator may from time to time prescribe. (d) Shareholder Authorization and Non-holder Enrollment Forms shall be made available by the Administrator. (e) Each participant will remain a participant in the Plan until participation is terminated pursuant to Section 12 hereof or until the Plan itself is terminated. (f) The Company reserves the right to restrict participation in the Plan if it believes that such participation may be contrary to the general intent of the Plan or in violation of applicable law. Section 4. Cash Dividend Purchases - ----------------------------------- If a participant has elected full or partial dividend reinvestment on the shares of Common Stock or Preferred Stock registered in such participant's name or on the shares of Common Stock held under the Plan for such participant, such 3 cash dividends will be credited to each participant's account under the Plan and will be automatically reinvested to purchase Common Stock on behalf of the participants during the applicable Investment Period as described in Section 7. Until participation in the Plan is terminated pursuant to Section 12 hereof, Common Stock and/or Preferred Stock participating in the Plan shall include (1) all shares of each class or series of shares of Common Stock and/or Preferred Stock, as the case may be, designated by registered holders of such shares in Shareholder Authorization Forms which have been received by the Company by the record date for the payment of a cash dividend, including all such shares purchased after receipt of said form, and all shares received as a result of a stock dividend or stock split, (2) all shares of Common Stock transferred to the Administrator (or the Trustee) for safekeeping under the Plan, and (3) all shares of Common Stock purchased under the Plan for the accounts of shareholders and non- holder investors, including all shares purchased with reinvested dividends and optional cash payments, unless said shares have been withdrawn pursuant to Section 13 hereof and are held in the name of a person who has not signed a Shareholder Authorization Form. In the case of participants whose dividends on Common Stock and/or Preferred Stock are subject to United States income tax withholding, the amount of tax to be withheld will be deducted from the amount of dividends on Common Stock and/or Preferred Stock to determine the amount of dividends to reinvest. The Administrator will credit dividends for all shares of Common Stock and/or Preferred Stock participating in the Plan (other than dividends paid on shares as to which the participant has elected to receive cash dividends) to the participants' accounts on the basis of full and fractional shares held in these accounts and will automatically reinvest such dividends (less any administration fees and any amounts required to be withheld by United States income tax law) in additional shares of Common Stock. Section 5. Cash Purchases - -------------------------- All participants, whether or not they have authorized the reinvestment of cash dividends on Common Stock or Preferred Stock, shall be eligible to make optional cash payments for purchases of additional shares of Common Stock under the Plan. Optional cash payments shall be made by check or money order in U.S. Dollars payable to HEI/DRIP (or may be made by electronic funds transfer from a bank account designated by a participant, by payroll deduction, or by such other means, in each case subject to approval by the Treasurer of the Company or the 4 Administrator) and any such payment may not be less than $25, nor may such payments exceed $120,000 in any calendar year (including for purposes of this limitation the initial payment made by a non-holder investor upon enrollment in the Plan). Optional cash payments must be received by the Administrator at least five (5) days before an Investment Date (as defined below) in order to be invested on or commencing on that Investment Date. The Administrator will send the participant a statement recording receipt and transmittal of the total optional payments received for the Investment Period. The Plan will not be required to accept any checks payable to a party other than HEI/DRIP even if endorsed for payment to the Plan. Section 6. Method of Purchase of Shares - ---------------------------------------- The Plan will satisfy its requirements for shares of Common Stock through purchases from the Company of authorized but unissued shares, through open market purchases of shares. Open market purchases under the Plan, if any, will be made through an independent agent that is a registered "broker-dealer" or "bank," as such terms are defined in Section 3(a)(6) of the Securities Exchange Act of 1934 ("Broker"). Neither the Administrator nor the Company, nor any affiliate thereof, shall exercise any direct or indirect control or influence over the times when or the prices at which the Broker may purchase the Company's Common Stock for the Plan, the amounts of shares to be purchased (other than the aggregate dollar amount acquired by the Plan), the manner in which the shares are to be purchased, or the selection by the Broker of a broker or dealer through which purchases may be executed. The Company shall not change the method of acquiring shares of Common Stock to satisfy the Plan's requirements, including any change from purchases from the Company of authorized but unissued shares of Common Stock to open market purchases, or vice versa, more than once in any three-month period. The method of acquiring shares will be determined only at the direction of the Board of Directors or the Chief Financial Officer of the Company. Any change to the method of acquiring shares must be based on a recorded determination by the Board of Directors or the Chief Financial Officer of the Company that the Company's need to raise additional capital has changed, or that there is another valid reason for such change. All dividend payments (unless invested in shares of Common Stock issued by the Company on the dividend payment date) and optional cash payments will be transmitted to a segregated escrow account or to the Broker: (1) if the funds are received before noon, by the opening of business on the next business day following the day of receipt of funds, or 5 (2) if the funds are received at or after noon, by the end of the next business day following the day of receipt of funds. Section 7. Timing of Purchases - ------------------------------- Optional cash payments and dividend payments will be invested in shares of Common Stock on or after the applicable Investment Date. The "Investment Dates" for optional cash payments shall be the 15th and 30th days of each month (except that the Investment Date for February shall be the last day of the month). The "Investment Date" for Common Stock dividends and for Preferred Stock dividends shall be on or within three business days prior to the applicable dividend payment date. If any date for investment of dividends or optional cash payments as stated above is not a business day, the "Investment Date" shall be the next succeeding business day. Interest will not be paid on optional cash payments or on reinvested dividends prior to or after their investment in Common Stock or if for any reason such payments and dividends are not invested pursuant to the Plan. Shares purchased from the Company shall be purchased on the applicable Investment Date. Shares purchased on the open market shall be purchased during the period (each, an "Investment Period") commencing on each applicable Investment Date and ending thirty (30) days thereafter; provided, however, that optional cash payments not invested within 35 days of receipt, and dividend payments not invested within 30 days of the dividend payment date, shall be promptly returned, without interest, to the participants. In addition, funds that are not invested during the applicable Investment Period will be promptly returned, without interest, to the participants. Shares of Common Stock purchased directly from the Company will be credited to participants' accounts on the date purchased, except that if any shares are purchased on the open market, all of the shares purchased during the applicable Investment Period will be credited to participants' accounts as of the day of purchase of the last share. The Broker will be instructed prior to the commencement of each Investment Period regarding the amount of funds to be used to purchase shares of Common Stock on the open market during such Investment Period. If the Broker is directed but unable to purchase sufficient shares in the open market with cash dividends and/or optional payments during any Investment Period, the Common Stock that is purchased on the open market will be allocated among participants' accounts (on a pro rata basis if necessary) according to the amount each participant had contributed in 6 cash dividends and, if there are any shares remaining, on a pro rata basis according to the amount each participant had contributed in optional cash payments. Any remaining funds will be returned to participants on a pro rata basis. If a participant has elected full or partial dividend reinvestment on the shares of Common Stock or Preferred Stock registered in such participant's name or on shares of Common Stock held under the Plan for such participant, the cash dividends to be reinvested for such participant will remain with the Company if reinvested on the dividend payment date in shares of Common Stock purchased from the Company or will be delivered by the Company to the escrow account or the Broker as described in Section 6 concurrently with payment of cash dividends to nonparticipating shareholders. Optional cash payments will be made by participants directly to the Administrator. The Administrator will deliver or cause the Company to deliver funds to the escrow account or the Broker as described in Section 6. Section 8. Purchase Price of Shares - ------------------------------------ The purchase price per share of Common Stock purchased for the accounts of participants directly from the Company will be 100% of the average of the high and low sales prices for the Common Stock on the composite tape for stocks listed on the New York Stock Exchange on the business day prior to the applicable Investment Date or such later date as such stock is purchased (or the last prior day on which the Common Stock is traded if there is no trade reported on the business day prior to the applicable Investment Date or such later date). The purchase price per share of Common Stock purchased on the open market will be the weighted average price per share (adjusted for brokerage fees and commissions, any service charges and applicable taxes) of the aggregate number of shares acquired on the open market by the Broker during the applicable Investment Period. Amounts to be invested in shares of Common Stock during any Investment Period will not be pooled with amounts to be invested during another Investment Period for purposes of computing per share prices. Amounts to be invested in any Investment Period will be invested to the extent possible before any purchases are executed for any subsequent Investment Period. Section 9. Registration of Shares - ---------------------------------- Shares of Common Stock purchased under the Plan will be registered in the name of the Administrator (or the Trustee, if there is a Trustee) as agent for the participants. Shares 7 will not be issued to participants unless requested pursuant to Section 13 hereof. For safekeeping or other purposes, holders of record of Common Stock who submit Shareholder Authorization Forms may elect to transfer their shares of Common Stock to the Administrator (or the Trustee, if there is a Trustee), without charge, to the credit of their account under the Plan, pursuant to such procedures as the Company and the Administrator shall establish. Section 10. Participants' Accounts - ----------------------------------- The Administrator shall keep an individual account for each participant recording the participant's interest in the Plan. Each participant's account will be credited with that number of shares, including fractions computed to four decimal places, equal to the total amount of cash dividends or optional cash payments to be invested, less administrative fees and amounts required to be withheld for tax purposes, divided by the applicable purchase price per share. Section 11. Reports to Participants - ------------------------------------ Participants who reinvest dividends and/or make optional cash payments will receive periodic statements of account showing amounts invested, purchase prices, shares purchased, and/or other relevant information. In addition, each participant shall receive copies of the Company's annual report to stockholders, notices of annual meetings, proxy statements, and information for income tax reporting purposes. Section 12. Termination of Participation - ----------------------------------------- A participant may terminate participation in the Plan as to all (but not less than all) Common Stock and Preferred Stock participating in the Plan at any time by written notification to the Administrator. Any notice of termination received on or after an ex-dividend record date will not be effective until dividends have been paid, credited to the participant's Plan account and reinvested in additional shares of Common Stock in accordance with the Plan. Within ten business days after the later to occur of (a) the receipt of notice of termination and (b) reinvestment of dividends as to participants whose notice of termination is received after an ex-dividend record date, certificates for whole shares of Common Stock credited to the participant's Plan account will be issued and a cash payment will be made for any fraction of a 8 share; provided, however, that if a participant's account is credited with less than five shares, the participant will receive cash in lieu of shares unless the Company otherwise elects. Cash payments for any fraction of a share or for less than five shares will be based on the market price per share (determined in the manner provided in Section 8 hereof for shares purchased directly from the Company) on the last business day prior to the date of payment to the terminating participant. In no case will certificates for fractional shares be issued. A participant must maintain at least one whole share of Common Stock in the Plan to keep an active account. If a participant does not maintain at least one whole share in the Plan, the participant's participation in the Plan may be terminated, in which case the participant will receive a cash payment based on the market price per share (determined in the manner provided in Section 8 hereof for shares purchased directly from the Company) on the business day prior to the date of payment to the terminating participant. Termination of participation in the Plan will not preclude re- enrollment, provided that the Company reserves the right to reject re- enrollment where in its sole discretion it deems there have been excessive terminations and re-enrollments. The term "ex-dividend record date" for purposes of the Plan is three (3) business days prior to the dividend record date. Section 13. Withdrawal of Shares - --------------------------------- A participant may withdraw all or a portion of shares of Common Stock from the participant's account by notifying the Administrator in writing to that effect and specifying the whole number of shares to be withdrawn. Withdrawal of shares must be in full shares only. Fractional shares will be liquidated upon termination of participation as described under Section 12. Any notice of withdrawal received on or after an ex-dividend record date will not be effective until dividends have been paid, credited to the participant's Plan account and reinvested in additional shares of Common Stock in accordance with the Plan. Within ten business days after the later to occur of (a) receipt of notice of withdrawal and (b) reinvestment of dividends as to participants whose notice of withdrawal is received on or after an ex-dividend record date, certificates for whole shares of Common Stock so withdrawn will be issued. In no case will certificates for fractional shares be issued. 9 Shares withdrawn from the Plan and registered in the participant's name will continue to participate in the Plan if the participant has so instructed the Administrator pursuant to a Shareholder Authorization Form and has not terminated participation pursuant to Section 12 hereof. Accounts are maintained in the names used by participants at the time they entered the Plan. However, a participant who wishes to withdraw shares and have the stock certificates issued in the name of another person may do so by submitting a properly completed and executed stock power, with a Medallion signature guarantee, and complying with such other procedures as the Company or Administrator shall establish. Section 14. Sale and Transfer of Shares - ---------------------------------------- Unless the participant satisfies the requirements specified in Section 13 for the issuance of certificates in the name of another person, shares of Common Stock credited to a participant's account under the Plan or otherwise registered in the Administrator's (or Trustee's) name may not be pledged, encumbered, sold or otherwise transferred by a participant. Absent satisfaction of said requirements, a participant wishing to sell, pledge, encumber or otherwise dispose of shares must have those shares registered in his name by terminating participation in the Plan pursuant to Section 12 or withdrawing the shares pursuant to Section 13. A participant who wishes to receive cash in lieu of shares of Common Stock upon termination of participation or withdrawal of shares may request the Administrator to sell such shares and to deliver the net proceeds to the participant. The net proceeds shall equal the selling price of the shares less the brokerage fees and commissions, any withholding required under applicable tax laws and a fee of $15 for the handling of each such request. Section 15. Voting of Shares - ----------------------------- Each participant will be sent a notice of meeting and proxy statement and form of proxy for each meeting of shareholders of the Company. Each participant will vote directly the shares registered in such participant's name. The Administrator (or the Trustee, as the case may be) shall be deemed instructed to vote the shares of Common Stock it holds in the Plan for a participant who has shares registered in such participant's own name in the same way that said participant votes the shares of Common Stock registered in the participant's name, unless the participant instructs that the shares held in 10 the Plan are to be voted in another way, in which event said shares shall be voted as instructed. If no shares of Common Stock are registered in a participant's name, the Administrator (or the Trustee, as the case may be) shall vote the shares it holds in the Plan for the participant in accordance with instructions of the participant given on the proxy form duly signed and returned by the participant. In the absence of any of the foregoing types of instructions, the Administrator (or the Trustee, as the case may be) will vote the shares registered in its name in the same proportion on each issue as it votes those shares as to which it has received instructions. Section 16. Limitation of Liability - ------------------------------------ Neither the Company nor the Administrator nor the Trustee nor the Broker nor any of their respective officers, directors, representatives, employees or agents shall be liable for any damages resulting from any act or omission in connection with the Plan in the absence of bad faith or gross negligence. Section 17. Common Stock Adjustment Provisions - ----------------------------------------------- If the outstanding shares of common stock of the Company are decreased or exchanged for a different number or kind of shares or other securities, or if additional shares or new or different shares or other securities are distributed with respect to such shares of common stock or other securities, through merger, consolidation, sale of all or substantially all of the property of the Company, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other distribution with respect to such shares of common stock or other securities, an appropriate and proportionate adjustment may, subject to the requirements of federal and state securities laws and regulations, be made by the Company to the maximum number and kind of shares of common stock or other securities issuable under the Plan which are subject to an effective registration statement filed with the Securities Exchange Commission pursuant to the Securities Act of 1933, as amended. Section 18. Other Matters - -------------------------- The Board of Directors, Chief Financial Officer or Treasurer of the Company shall determine the effective date of the Plan as most recently amended hereby. 11 The Company intends to continue the Plan indefinitely, but reserves the right to suspend or terminate the Plan at any time. The Company also reserves the right to make any additions or modifications to the Plan. The Treasurer of the Company may interpret the Plan and may make additions thereto which are not inconsistent with the above provisions of the Plan. In the event any stock dividends or split shares are distributed by the Company on shares of Common Stock credited to the account of a participant under the Plan, such shares will be added to the participant's account. Stock dividends or split shares distributed on any shares of Common Stock registered in the name of a participant will be distributed to the participant in the same manner as to shareholders who are not participating in the Plan. In the event that the number of shares of Common Stock to be purchased by the participants in the Plan exceeds the balance of the shares authorized by the Board of Directors to be sold pursuant to the Plan, then the Plan shall be automatically suspended with respect to future purchases until such time as the Board of Directors of the Company has authorized additional shares of Common Stock to be sold pursuant to the Plan. In the event of any such automatic suspension of the Plan, then (1) on the date of such automatic suspension of the Plan, the number of shares of Common Stock to be sold shall be prorated among the participants purchasing shares on such date, and (2) the Treasurer of the Company shall determine the date the suspension is to be lifted after the Board of Directors has authorized the sale of additional shares of Common Stock pursuant to the Plan. The Company will notify each participant of the commencement of any tender offer for securities which include the Company's Common Stock held in participants' accounts. The Company will use its best efforts to distribute to participants in a timely manner the same information that is distributed to all of the Company's shareholders in connection with the tender offer. After consulting with the Trustee, the Company will provide a means by which participants may direct the Trustee whether or not to tender the Company's Common Stock credited to their accounts. The Trustee will not tender shares held in any participant's account for which it receives no direction from the participant. A participant may, at any time prior to a tender offer withdrawal date, direct the Trustee to withdraw shares of the Company's Common Stock previously directed by the participant to be tendered. 12 The Company or the Administrator shall provide participants with prompt notice of any modification, suspension or termination of the Plan. Certificates for whole shares issued to a participant upon termination of participation in the Plan pursuant to Section 12, or upon withdrawal of shares pursuant to Section 13, or upon termination of the Plan by the Company, shall be registered in the names used by participants at the time they enrolled in the Plan, except as otherwise provided pursuant to Section 13. The Hawaiian Electric Industries Retirement Savings Plan and any other plans of the Company or its direct or indirect subsidiaries may participate in the Plan on such terms and in such manner as may be determined by the Treasurer of the Company. 13 EX-99.2 21 EIGHTH AMENDMENT TO TRUST AGREEMENT HEI Exhibit 99.2 ---------------- EIGHTH AMENDMENT TO TRUST AGREEMENT BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND HAWAIIAN ELECTRIC INDUSTRIES, INC. THIS EIGHTH AMENDMENT TO TRUST AGREEMENT, is made and entered into February 27, 1998, by and between Fidelity Management Trust Company (the "Trustee") and Hawaiian Electric Industries, Inc. (the "Sponsor"); WITNESSETH: WHEREAS, the Trustee and the Sponsor heretofore entered into a Trust Agreement dated November 28, 1988, and amended December 22, 1989, January 1, 1994, March 15, 1994, February 1, 1996, April 1, 1996, April 1, 1997 and June 13, 1997 (the "Trust Agreement") for the Hawaiian Electric Industries Retirement Savings Plan (the "Plan"); and WHEREAS, the Trustee and the Sponsor wish to further amend said Trust Agreement as provided in Section 13 thereunder; and WHEREAS, on February 27, 1998, the Sponsor wishes to add as an investment option under the Plan, the Fidelity U.S. Bond Index Fund; and WHEREAS, on July 1, 1998, the Sponsor wishes to remove as an investment option under the Plan, the Fidelity International Bond Fund; and WHEREAS, the Sponsor now desires, and hereby directs the Trustee, in accordance with Sections 4(b) and 7(c), to liquidate all participant balances held in Fidelity International Bond Fund on July 1, 1998, and to invest the proceeds in the ASB Money Market Account until such time as the affected participants direct that the proceeds be invested in other investment options offered under the Plan. The parties hereto agree that the Trustee shall have no discretionary authority with respect to this sale and transfer directed by the Sponsor. Any variation from the procedure described herein may be instituted only at the express written direction of the Sponsor; and 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" and "C" as attached. IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Eighth Amendment to be executed by their duly authorized officers effective as of the day and year first above written. HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, COMPANY INC. PENSION INVESTMENT COMMITTEE By /s/ Robert F. Mougeot 2/23/98 By /s/ Cheryl L. Gladstone 3/4/98 --------------------- ------- ----------------------- ------ Robert F. Mougeot Date Vice President Date Chairman By /s/ Constance H. Lau 2/20/98 -------------------- ------- Constance H. Lau Date Secretary and Member SCHEDULE "A" ADMINISTRATIVE SERVICES ----------------------- Administration - -------------- * Establishment and maintenance of Participant account and election percentages. * Maintenance of the following plan investment options: - Fidelity Retirement Money Market Portfolio - ASB Money Market Account - HEI Common Stock Fund - Fidelity Puritan Fund - Fidelity Magellan Fund - Fidelity Overseas Fund - Fidelity International Bond Fund (formerly known as Fidelity Global Bond Fund)(to 6/30/98) - 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 (formerly known as Fidelity U.S. Equity Index Portfolio) - MAS Value Portfolio - 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. 2 Processing - ---------- * Weekly processing of contribution data and contributions * Processing of transfers and changes of future allocations via the telephone exchange system * Daily processing of withdrawals Other - ----- * Monthly trial balance * Quarterly administrative reports * Quarterly participant statements * 1099Rs and W-2Ps * Participant Loans * Periodic meetings with Sponsor * Educational services as needed and mutually agreed upon by the Trustee and the Sponsor. HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, COMPANY INC. PENSION INVESTMENT COMMITTEE By /s/ Robert F. Mougeot 2/23/98 By /s/ Cheryl L. Gladstone 3/4/98 --------------------- ------- -------------------------- ------ Robert F. Mougeot Date Vice President Date Chairman By /s/ Constance H. Lau 2/20/98 --------------------- ------- Constance H. Lau Date Secretary and Member 3 SCHEDULE "C" INVESTMENT OPTIONS ------------------ In accordance with Section 4(b), the Named Fiduciary hereby directs the Trustee that participants' individual accounts may be invested in the following investment options: - Fidelity Retirement Money Market Portfolio - ASB Money Market Account - HEI Common Stock Fund - Fidelity Puritan Fund - Fidelity Magellan Fund - Fidelity Overseas Fund - Fidelity International Bond Fund (formerly known as Fidelity Global Bond Fund) (to 6/30/98) - 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 (formerly known as Fidelity U.S. Equity Index Portfolio) - MAS Value Portfolio - Neuberger & Berman Partners Trust - PBHG Emerging Growth Fund - Fidelity U.S. Bond Index 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/ Robert F. Mougeot 2/23/98 --------------------- ------- Robert F. Mougeot Date Chairman By /s/ Constance H. Lau 2/20/98 -------------------- ------- Constance H. Lau Date Secretary and Member 4 -----END PRIVACY-ENHANCED MESSAGE-----