-----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, FKlAjeg9/GDyI2DiON3iuzeNfCv/oPCQ9YVPFlVv/ZfMfyqK3hfqljCgVJ3XQLML jpW3Ae4PgdSjV23YE1qOGA== 0000898430-00-000954.txt : 20000329 0000898430-00-000954.hdr.sgml : 20000329 ACCESSION NUMBER: 0000898430-00-000954 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC INDUSTRIES INC CENTRAL INDEX KEY: 0000354707 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990208097 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08503 FILM NUMBER: 580794 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085435662 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC CO INC CENTRAL INDEX KEY: 0000046207 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990040500 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04955 FILM NUMBER: 580795 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085437771 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FORMER COMPANY: FORMER CONFORMED NAME: HAWAIIAN ELECTRIC CO LTD DATE OF NAME CHANGE: 19670212 10-K405 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 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 Exchange Without Par Value Hawaiian Electric Industries, Inc. Guarantee with respect to New York Stock Exchange 8.36% Trust Originated Preferred Securities/SM/(TOPrS/SM/) Hawaiian Electric Industries, Inc. Preferred Stock New York Stock Exchange Purchase Rights Hawaiian Electric Company, Inc. Guarantee with respect to 8.05% New York Stock Exchange Cumulative Quarterly Income Preferred Securities Series 1997 (QUIPS/SM/) Hawaiian Electric Company, Inc. Guarantee with respect to 7.30% New York Stock Exchange Cumulative Quarterly Income Preferred Securities Series 1998 (QUIPS/SM/)
Securities registered pursuant to Section 12(g) of the Act: Registrant Title of each class - ---------------------------------------------------------------------------- -------------------------------------------- Hawaiian Electric Industries, Inc. None Hawaiian Electric Company, Inc. Cumulative Preferred Stock
================================================================================ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] ================================================================================
=============================================================================================================== Aggregate market value of Number of shares of common the voting stock held by stock nonaffiliates of the outstanding of the registrants on registrants on March 13, 2000 March 13, 2000 ------------------------------- ------------------------------ Hawaiian Electric Industries, Inc. $906,357,000 32,297,786 (Without par value) Hawaiian Electric Company, Inc. na 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, 1999: 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 10, 2000, for the Annual Meeting of Part III Stockholders..................................................
================================================================================ This combined Form 10-K represents separate filings by Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc. Information contained herein relating to any individual registrant is filed by each registrant on its own behalf. Neither registrant makes any representations as to the information relating to the other registrant. ================================================================================ TABLE OF CONTENTS
Page Glossary of Terms.................................................................. ii Forward-looking Information........................................................ v PART I Item 1. Business............................................................ 1 Item 2. Properties.......................................................... 47 Item 3. Legal Proceedings................................................... 49 Item 4. Submission of Matters to a Vote of Security Holders................. 49 Executive Officers of the Registrant (Hawaiian Electric Industries, Inc.).......... 49 PART II Item 5. Market for Registrants' Common Equity and Related Stockholder Matters 51 Item 6. Selected Financial Data............................................. 52 Item 7. Managements' Discussion and Analysis of Financial Condition and Results of Operations......................................... 52 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 52 Item 8. Financial Statements and Supplementary Data......................... 52 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................... 52 PART III Item 10. Directors and Executive Officers of the Registrants.................. 53 Item 11. Executive Compensation............................................... 55 Item 12. Security Ownership of Certain Beneficial Owners and Management....... 59 Item 13. Certain Relationships and Related Transactions....................... 61 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 61 Independent Auditors' Report - Hawaiian Electric Industries, Inc................... 63 Independent Auditors' Report - Hawaiian Electric Company, Inc...................... 64 Index to Exhibits.................................................................. 69 Signatures......................................................................... 88
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.) ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corp., ASB Service Corporation, AdCommunications, Inc., American Savings Mortgage Co., Inc. and ASB Realty Corporation BoA Bank of America, FSB Btu British thermal unit CDUP Conservation District Use Permit CERCLA Comprehensive Environmental Response, Compensation and Liability Act Chevron Chevron Products Company, a fuel oil supplier Company Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc., Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I, HECO Capital Trust II, HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, HEI Power Corp. and its subsidiaries, Pacific Energy Conservation Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc., HEI Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III, HEI Preferred Funding, LP, The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.) and Malama Pacific Corp. and its subsidiaries Consumer Advocate Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii CT Combustion turbine DOD Department of Defense - federal DOH Department of Health of the State of Hawaii DSM Demand-side management DTCC Dual-train combined-cycle Enserch Enserch Development Corporation EPA Environmental Protection Agency - federal ERL Environmental Response Law of the State of Hawaii FDIC Federal Deposit Insurance Corporation FDICIA Federal Deposit Insurance Corporation Improvement Act of 1991 federal U.S. Government FHLB Federal Home Loan Bank FICO Financing Corporation FIRREA Financial Institutions Reform, Recovery, and Enforcement Act of 1989 Hamakua Partners Hamakua Energy Partners, L.P., formerly known as Encogen Hawaii, L.P. HCPC Hilo Coast Power Company, formerly Hilo Coast Processing Company HC&S Hawaiian Commercial & Sugar Company, a division of A&B-Hawaii, Inc.
ii GLOSSARY OF TERMS (continued)
Terms Definitions - -------- ----------- HECO Hawaiian Electric Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I and HECO Capital Trust II HECO's Hawaiian Electric Company, Inc.'s Consolidated Financial Statements, incorporated into Parts Consolidated I, II and IV of this Form 10-K by reference to pages 12 to 34 of Hawaiian Electric Company, Financial Inc.'s 1999 Annual Report to Stockholder, portions of which are filed as HECO Exhibit 13 Statements HECO's MD&A Hawaiian Electric Company, Inc.'s Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated into Parts I, II and IV of this Form 10-K by reference to pages 3 to 9 of Hawaiian Electric Company, Inc.'s 1999 Annual Report to Stockholder, portions of which are filed as HECO Exhibit 13 HEI Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., HEI Diversified, Inc., HEI Power Corp., Pacific Energy Conservation Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc., HEI Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III, The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.) and Malama Pacific Corp. HEI's Hawaiian Electric Industries, Inc.'s Consolidated Financial Statements, incorporated into Consolidated Parts I, II and IV of this Form 10-K by reference to pages 44 to 69 of Hawaiian Electric Financial Industries, Inc.'s 1999 Annual Report to Stockholders, portions of which are filed as HEI Statements Exhibit 13 HEI's MD&A Hawaiian Electric Industries, Inc.'s Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated into Parts I, II and IV of this Form 10-K by reference to pages 27 to 39 of Hawaiian Electric Industries, Inc.'s 1999 Annual Report to Stockholders, portions of which are filed 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. HEIII HEI Investments, Inc. (formerly HEI Investment Corp.), a subsidiary of HEI Power Corp. HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several subsidiaries HEIPI HEI Properties, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Company, 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 HITI Hawaiian Interisland Towing, Inc.
iii GLOSSARY OF TERMS (continued)
Terms Definitions - -------- ----------- IPP Independent power producer IRP Integrated resource plan IRR Interest rate risk Kalaeloa Kalaeloa Partners, L.P. KCP Kawaihae Cogeneration Partners KDC Keahole Defense Coalition KWH Kilowatthour LSFO Low sulfur fuel oil MBtu Million British thermal unit MD&A Management's Discussion and Analysis of Financial Condition and Results of Operations MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several real estate subsidiaries. On September 14, 1998, the HEI Board of Directors adopted a plan to exit the residential real estate development business (engaged in by Malama Pacific Corp. and its subsidiaries). MSFO Medium sulfur fuel oil MW Megawatt na Not applicable NAE North American Environmental, Inc. NOV Notice of Violation 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 PPA Power purchase agreement PSD permit Prevention of Significant Deterioration/Covered Source Permit PUC Public Utilities Commission of the State of Hawaii PURPA Public Utility Regulatory Policies Act of 1978 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 SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards SOP Statement of Position
iv GLOSSARY OF TERMS (continued)
Terms Definitions - -------- ----------- ST Steam turbine state State of Hawaii Tesoro Tesoro Hawaii Corp. dba BHP Petroleum Americas Refining Inc., a fuel oil supplier TOOTS The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp. (HTB)), a wholly owned subsidiary of Hawaiian Electric Industries, Inc. On November 10, 1999, HTB sold YB and substantially all of HTB's operating assets. UIC Underground Injection Control UST Underground storage tank YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian Tug & Barge Corp. On November 10, 1999, HTB sold YB.
Forward-looking information This report and other presentations made by HEI and its subsidiaries contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Except for historical information contained herein, the matters set forth are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include, but are not limited to, such factors as the effect of international, national and local economic conditions, including the condition of the Hawaii tourist and construction industries and the Hawaii housing market; the effects of weather and natural disasters; product demand and market acceptance risks; increasing competition in the electric utility and banking industries; capacity and supply constraints or difficulties; new technological developments; governmental and regulatory actions, including decisions in rate cases and on permitting issues; the results of financing efforts; the timing and extent of changes in interest rates and foreign currency exchange rates; the convertibility and availability of foreign currency; political and business risks inherent in doing business in developing countries; and the risks associated with the installation of new computer systems. Investors are also referred to other risks and uncertainties discussed elsewhere in this Form 10-K and in other periodic reports previously and subsequently filed by HEI and/or HECO with the Securities and Exchange Commission (SEC). v 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 and other businesses operating primarily in the State of Hawaii, and in independent power and integrated energy services 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 and HECO Capital Trust II (Delaware statutory business trusts), which were formed to effect the issuances of $50 million of 8.05% cumulative quarterly income preferred securities in March 1997 and $50 million of 7.30% cumulative quarterly income preferred securities in December 1998, respectively, for the benefit of HECO, MECO and HELCO. Besides HECO, HEI also owns directly or indirectly the following subsidiaries: HEIDI (a holding company) and its subsidiary, ASB, and the subsidiaries of ASB; HEIPC and its subsidiaries; PECS;HEI District Cooling, Inc.; ProVision Technologies, Inc.; HEI Properties, Inc.; HEI Leasing, Inc.; Hycap Management, Inc. and its subsidiary; Hawaiian Electric Industries Capital Trust I; Hawaiian Electric Industries Capital Trust II and III (inactive entities); TOOTS; and MPC and its subsidiaries (discontinued operations). ASB, acquired in 1988, was the third largest financial institution in the State of Hawaii and had 68 retail branches as of December 31, 1999. On December 6, 1997, ASB acquired substantially all of the Hawaii deposits of Bank of America, FSB (BoA), most of its Hawaii branches and certain of its Hawaii-based loans. The acquisition increased ASB's assets by $1.8 billion and its deposits by $1.7 billion. In March 1998, ASB formed a subsidiary, ASB Realty Corporation, which elects to be taxed as a real estate investment trust. HEIDI was also the parent company of HEIDI Real Estate Corp., which was formed in February 1998. In September 1999, HEIDI Real Estate Corp.'s name was changed to HEI Properties, Inc. (HEIPI), and HEIDI transferred ownership of HEIPI to HEI. HEIPI currently holds passive investments and it is expected that HEIPI will also hold real estate and related assets. HEIPC was formed in 1995 to pursue, directly or through its subsidiaries or affiliates, independent power and integrated energy services projects in Asia and the Pacific. In January 2000, HEI Investment Corp., formed in 1984, changed its name to HEI Investments, Inc. (HEIII). HEIII has been a passive investment company which primarily holds investments in leveraged leases. In February 2000, HEIII was recapitalized and all its common stock and one series of its preferred stock was contributed to HEIPC. In March 2000, HEIII registered (i.e., continued) in Nova Scotia, Canada and in the first quarter of 2000, it invested an amount sufficient for HEIPC Philippines Holding Co., Inc. (HEIPC Philippines) to acquire an effective 46% interest in East Asia Power Resources Corporation, a Philippines holding company primarily engaged in the electric generation business in Manila and Cebu through its direct and indirect subsidiaries. See "International power-HEI Power Corp." PECS was formed in August 1994 and currently is a contract services company providing limited support services in Hawaii. HEI District Cooling, Inc. was formed in August 1998 to develop, build, own, lease, operate and/or maintain, either directly or indirectly, central chilled water cooling system facilities, and other energy related products and services for commercial and residential buildings. ProVision Technologies, Inc. was formed in October 1998 to sell, install, operate and maintain on-site power generation equipment and auxiliary appliances in Hawaii and the Pacific Rim. HEI Leasing, Inc. was formed in February 2000 to own passive investments and real estate 1 subject to leases. Hycap Management, Inc., including its subsidiary HEI Preferred Funding, LP (a limited partnership in which Hycap Management, Inc. is the sole general partner), and Hawaiian Electric Industries Capital Trust I (a Delaware statutory business trust in which HEI owns all the common securities) were formed to effect the issuance of $100 million of 8.36% HEI-obligated trust preferred securities in February 1997. On November 10, 1999, HTB's name changed to The Old Oahu Tug Service, Inc. (TOOTS). HTB was acquired in 1986 and provided ship assist and charter towing services and owned YB, a regulated intrastate public carrier of waterborne freight among the Hawaiian Islands. In November 1999, HTB sold substantially all of its operating assets and YB for a nominal gain. For information about the Company's discontinued operations, see Note 17 to HEI's Consolidated Financial Statements which is incorporated herein by reference to pages 66 to 67 of HEI's 1999 Annual Report to Stockholders, portions of which are filed as HEI Exhibit 13. For financial information about the Company's industry segments, see Note 2 to HEI's Consolidated Financial Statements which is incorporated herein by reference to pages 51 to 52 of HEI's 1999 Annual Report to Stockholders, portions of which are filed as HEI Exhibit 13. For additional information about the Company, reference is made to HEI's MD&A, HEI's "Quantitative and Qualitative Disclosures About Market Risk" and HEI's Consolidated Financial Statements, incorporated herein by reference to pages 27 to 39, 40 to 43 and 44 to 69, respectively, of HEI's 1999 Annual Report to Stockholders, portions of which are filed 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) in 1891. HECO acquired MECO in 1968 and HELCO in 1970. In 1999, the electric utilities' revenues and operating income amounted to approximately 69% and 75%, respectively, of HEI's consolidated revenues and operating income. The islands of Oahu, Maui, Lanai, Molokai and Hawaii have a combined population currently 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. For additional information about HECO, see HEI's MD&A, HEI's Quantitative and Qualitative Disclosures About Market Risk and HEI's Consolidated Financial Statements, incorporated herein by reference to pages 27 to 39, 40 to 43 and 44 to 69, respectively, in HEI's 1999 Annual Report to Stockholders, and HECO's MD&A, HECO's Quantitative and Qualitative Disclosures About Market Risk and HECO's Consolidated Financial Statements incorporated by reference to pages 3 to 9, 10 to 11 and 12 to 34, respectively, of HECO's 1999 Annual Report to Stockholder, portions of which are filed as HECO Exhibit 13. 2 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, 1999, 1998 and 1997 and their electric sales revenues for each of the years then ended:
1999 1998 1997 ------------------------------------------------------------------------------------------------- Electric Electric Electric Customer sales Customer sales Customer sales (dollars in thousands) accounts revenues accounts revenues accounts revenues - ----------------------------------------------------------------------------------------------------------------------- HECO................. 275,467 $ 729,557 272,675 $ 711,561 271,801 $ 779,425 MECO................. 56,410 156,808 55,286 136,623 54,605 151,625 HELCO................ 62,478 158,962 61,228 153,249 60,220 160,332 -------------------------------------------------------------------------------------------------- 394,355 $1,045,327 389,189 $1,001,433 386,626 $1,091,382 ==================================================================================================
Revenues from the sale of electricity in 1999 were from the following types of customers in the proportions shown:
HECO MECO HELCO Total - ---------------------------------------------------------------------------------------------------------------- Residential...................................... 32% 36% 41% 34% Commercial....................................... 32 35 38 33 Large light and power............................ 35 29 21 32 Other............................................ 1 - - 1 --------------------------------------------------------------- 100% 100% 100% 100% ===============================================================
HECO and its subsidiaries derived approximately 9%, 10% and 10% of their operating revenues from the sale of electricity to various federal government agencies in 1999, 1998 and 1997, respectively. Formerly one of HECO's larger customers, the Naval Base at Barbers Point, Oahu, closed in 1999 with redevelopment of the base occurring through 2020 and this accounted for most of the decrease in sales to federal government agencies in 1999. Considering (1) that the base closure will necessitate relocation of essential flight operations and support personnel to another base on Oahu and (2) the Naval Air Station Barbers Point Community Redevelopment Plan, HECO anticipates that the closure is likely to result in an overall increase in demand for electricity over time. In 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. In 1997 and 1998, HECO also performed and completed design work for solar water heating in this federal office building and further work on this project is awaiting funding. HECO has another project to perform energy conservation measures, primarily retrofits for lighting and air conditioning, for the U.S. Postal Service, which is expected to be completed at the end of 2000. This project is currently in the construction phase. HECO also signed an umbrella Basic Ordering Agreement with the Department of Defense (DOD) in October 1996. By the end of 1999, 10 audits had been completed on U.S. Navy facilities on Oahu. These audits resulted in five implementation Energy Conservation Projects. The last of the projects is scheduled to be completed by the end of 2000. On June 3, 1999, 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 35% by the year 2010 to the extent that these measures are cost effective. The 35% reductions will be measured relative to the agency's 1985 energy use. HECO is working with various federal agencies to implement demand-side management programs which will 3 help them achieve their energy reduction objectives. 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. Selected consolidated electric utility operating statistics
1999 1998 1997 1996 1995 --------------------------------------------------------------------------- KWH sales (millions) Residential................................... 2,550.5 2,503.9 2,531.0 2,540.4 2,471.3 Commercial.................................... 2,781.5 2,674.9 2,676.8 2,662.4 2,624.7 Large light and power......................... 3,598.3 3,636.4 3,700.7 3,733.0 3,655.1 Other......................................... 54.7 54.8 54.7 55.4 55.4 --------------------------------------------------------------------------- 8,985.0 8,870.0 8,963.2 8,991.2 8,806.5 =========================================================================== Net energy generated and purchased (millions of KWH) Net generated................................. 6,115.1 5,958.0 5,885.9 5,994.3 5,850.6 Purchased..................................... 3,391.7 3,434.1 3,622.8 3,565.3 3,511.6 --------------------------------------------------------------------------- 9,506.8 9,392.1 9,508.7 9,559.6 9,362.2 =========================================================================== Losses and system uses (%).................... 5.3 5.4 5.5 5.7 5.7 Energy supply (yearend) Generating capability--MW..................... 1,651 1,664 1,634 1,636 1,637 Firm purchased capability--MW................. 472 474 474 474 469 --------------------------------------------------------------------------- 2,123 2,138 2,108 2,110 2,106 =========================================================================== Gross peak demand--MW (1)..................... 1,527 1,532 1,573 1,561 1,537 Btu per net KWH generated..................... 10,789 10,684 10,799 10,781 10,762 Average fuel oil cost per Mbtu (cents)........ 329.7 308.8 405.9 388.8 329.7 Customer accounts (yearend) Residential................................... 342,957 338,454 336,094 333,807 330,508 Commercial.................................... 49,549 48,873 48,671 49,069 48,585 Large light and power......................... 550 573 582 586 580 Other......................................... 1,299 1,289 1,279 1,252 1,488 --------------------------------------------------------------------------- 394,355 389,189 386,626 384,714 381,161 =========================================================================== Electric revenues (thousands) Residential................................... $ 356,631 $ 340,395 $ 367,432 $ 355,669 $324,923 Commercial.................................... 345,808 322,772 347,308 338,785 313,909 Large light and power......................... 336,434 331,957 369,878 362,823 329,598 Other......................................... 6,454 6,309 6,764 6,733 6,344 --------------------------------------------------------------------------- $1,045,327 $1,001,433 $1,091,382 $1,064,010 $974,774 =========================================================================== Average revenue per KWH sold (cents) Residential................................... 13.98 13.60 14.52 14.00 13.15 Commercial.................................... 12.43 12.07 12.97 12.73 11.96 Large light and power......................... 9.35 9.13 9.99 9.72 9.02 Other......................................... 11.80 11.52 12.38 12.16 11.46 Average revenue per KWH sold.................. 11.63 11.29 12.18 11.83 11.07 Residential statistics Average annual use per customer account (KWH). 7,490 7,425 7,559 7,649 7,514 Average annual revenue per customer account... $ 1,047 $ 1,009 $ 1,097 $ 1,071 $ 988 Average number of customer accounts........... 340,528 337,218 334,811 332,138 328,912 - -------------------------------------------------------------------------------------------------------------------------
(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, 1999, and for the year ended December 31, 1999. The capability available for operation at any given time may be less than the generating capability shown because of capability restrictions or temporary outages for inspection, maintenance, repairs or unforeseen circumstances.
Island of Island of Island of Island of Island of Oahu- Maui- Lanai- Molokai- Hawaii- HECO MECO MECO MECO HELCO Total - ----------------------------------------------------------------------------------------------------------------------------------- Generating and firm purchased capability (MW) at December 31, 1999 (1) Conventional oil-fired steam units 1,160.0 37.6 - - 69.6 1,267.2 Diesel............................ - 96.1 10.4 9.9 38.0 154.4 Combustion turbines (peaking units)........................... 103.0 - - - - 103.0 Combustion turbines............... - 21.2 - 2.2 45.3 68.7 Combined-cycle unit............... - 58.0 - - - 58.0 Firm contract power (3)........... 406.0 16.0 - - 50.0 472.0 ------------------------------------------------------------------------------------------- 1,669.0 228.9 10.4 12.1 202.9 2,123.3 ------------------------------------------------------------------------------------------- Gross peak demand (2)................... 1,161.0 180.1 5.0 7.0 174.1 1,527.2 Reserve margin.......................... 43.8% 27.1% 108.0% 72.9% 16.5% 39.0% Annual load factor (2).................. 75.1% 70.3% 65.7% 66.3% 68.5% 73.7% KWH net generated and purchased (millions)................. 7,356.7 1,069.0 28.3 39.1 1,013.7 9,506.8 - -----------------------------------------------------------------------------------------------------------------------------------
(1) HECO units at normal ratings; MECO and HELCO units at reserve ratings. (2) Noncoincident and nonintegrated. (3) Independent power producers--HECO: 180 MW (Kalaeloa), 180 MW (AES-BP) and 46 MW (refuse-fired plant). Nonutility generation--MECO: 16 MW (HC&S); HELCO: 28 MW (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 Public Utilities Commission of the State of Hawaii (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 established both the process and the guidelines for developing IRPs. The PUC's framework directs that each plan cover a 20-year planning horizon with a five-year program implementation schedule and states that the planning cycle will be repeated every three years. Under the framework, the PUC may approve, reject or require modifications of the utilities' IRPs. The framework also states that utilities are entitled to recover all appropriate and reasonable integrated resource planning and implementation costs, including the costs of planning and implementing demand-side management 5 (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 by the utilities 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 margins and shareholder incentives. HECO's IRP. HECO filed its second IRP with the PUC in January 1998. A stipulated prehearing order for the proceeding was approved by the PUC in October 1998, and the parties to the proceeding filed individual statements of position (SOPs) on the reasonableness of HECO's IRP plan in July 1999. HECO updated the status of its DSM and Supply Side Action Plans in its July 1999 SOP. The stipulated prehearing order provides that, following the filing of SOPs, the parties will meet informally to attempt to reach a stipulation on issues where there is agreement, and/or establish additional procedural steps, as required. Since the development and filing of its second IRP, HECO has adopted an updated fuel price forecast for planning purposes, and HECO plans to submit additional information in the proceeding regarding the impact, if any, of the later forecast on the resources included in its second IRP. As a result, the need for additional procedural steps has not yet been determined by the parties. 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 currently planned to be operated (future environmental considerations permitting) beyond the 20-year IRP planning period (1998-2017). HECO's second IRP includes the continuation of 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, minimize 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 the C&I load management DSM program will be reviewed in concept by the PUC in conjunction with HECO's second IRP. In January 2000, HECO withdrew its application for a full scale residential load control program. As indicated in its SOP, HECO plans to develop and request approval for a pilot residential load control program to gauge customer acceptance of the program, and will evaluate the results of the pilot program before making a decision to proceed with a full scale residential load control program. HECO plans to continue the planning and implementation of DSM 6 load management and energy efficiency programs that are cost effective and also minimize rate impacts to all customers over the long-term. MECO's IRP. The PUC issued its final D&O in MECO's IRP proceeding in May 1996. MECO's 20-year IRP includes the continuation of four energy efficiency DSM programs similar to those developed for HECO. The supply-side resources proposed by MECO, as updated in its July 1998 annual 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 1998-2002, and approximately 6 MW through the year 2013 on each of the islands of Lanai and Molokai. The first 20 MW increment at Maalaea was completed in December 1998. The second 20 MW increment, which is under construction, is expected to be completed in September 2000. The installation date for the final increment of 18 MW is now expected to be no earlier than 2004. 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 second IRP annual evaluation was filed with the PUC in July 1998. In May 2000, MECO will file a second IRP for the 20-year IRP planning period from 2000-2019. HELCO's IRP. HELCO filed its second IRP with the PUC in September 1998. In March 1999, HELCO filed a supplement to its second IRP to update the status of planned near-term generation additions. In June 1999, HELCO filed a revision to its supplement to its second IRP to provide the results of revised assumptions on its revenue requirements analyses. A schedule for the proceeding has been approved by the PUC, and the parties to the proceeding have completed two rounds of discovery. The next step in the proceeding is for the parties to meet informally to attempt to reach a stipulation on issues where there is agreement, and/or establish additional procedural steps, as required. The second IRP identified changes in key forecasts and assumptions since the development of HELCO's initial IRP, which was filed in October 1993, modified in June 1994 and approved by the PUC as modified in its May 1996 final D&O. Similar to HECO's second IRP, HELCO'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 HELCO's IRP objectives and the best information available at the time decisions must be made. On the supply-side, HELCO's second IRP focuses on the planning for generating unit additions after near-term additions. The near term supply-side resources proposed in HELCO's IRP plan include installing 40 MW of generation at its Keahole power plant site and proceeding with a 60 MW power purchase agreement (PPA) with Hamakua Energy Partners, L.P. (Hamakua Partners, formerly Encogen Hawaii, L.P.) (see "HELCO power situation" below). HELCO's 20-year plan also includes completing a 56 MW (net) diesel-fired dual-train combined-cycle (DTCC) unit at Keahole in 2006 (by adding an 18 MW heat recovery steam turbine generator), retiring a number of its older, smaller units after new generation has been added, adding another diesel-fired DTCC unit at a new West Hawaii site in phases in the 2009-2017 timeframe, undertaking transmission and distribution efficiency improvement projects, and conducting alternate energy and dispersed generation resource studies. HELCO's second IRP includes the continuation of four energy efficiency DSM programs similar to those developed for HECO. 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 power situation Background. In 1991, HELCO began planning for the expansion of its Keahole power - ---------- plant to meet increased electric generation demand forecasted for 1994. HELCO's plans were to install two 20 MW combustion turbines (CT-4 and CT-5), followed by an 18 MW heat steam recovery generator (ST-7), at which time these units would be converted to a 56 MW (net) dual-train combined-cycle (DTCC) unit. In January 1994, the PUC approved expenditures for CT-4, which HELCO had planned to install in late 1994. 7 The timing of the installation of HELCO's phased DTCC unit at the Keahole power plant site has been revised on several occasions due to delays, described below, in (a) obtaining approval from the Hawaii Board of Land and Natural Resources (BLNR) of a Conservation District Use Permit (CDUP) amendment and (b) obtaining from the Department of Health of the State of Hawaii (DOH) and the U.S. Environmental Protection Agency (EPA) a Prevention of Significant Deterioration/Covered Source permit (PSD permit) for the Keahole power plant site. The delays are also attributable to lawsuits, claims and petitions filed by independent power producers (IPPs) and other parties challenging these permits and objecting to the expansion, alleging among other things that (1) operation of the expanded Keahole site would not comply with land use regulations (including noise standards) and HELCO's land patent; (2) HELCO cannot operate the plant within current air quality standards; and (3) HELCO could alternatively purchase power from IPPs to meet increased electric generation demand. CDUP amendment. On July 10, 1997, the Third Circuit Court of the State of Hawaii - --------------- issued its Amended Findings of Fact, Conclusions of Law, Decision and Order addressing HELCO's appeal of an order of the BLNR, along with other consolidated civil cases relating to HELCO's application for a CDUP amendment. Because the BLNR failed to take valid agency action or render a proper decision within the 180 day statutory deadline (as calculated by the Court), the Court ruled that HELCO was automatically entitled to put its land to the uses requested in its CDUP amendment application pursuant to the default provision of Section 183-41, Hawaii Revised Statutes (HRS). This decision allows HELCO to use its Keahole property as requested in its application. An amended order to the same effect was issued on August 18, 1997. Final judgments have been entered in all of the consolidated cases. Appeals with respect to the final judgments for certain of the cases have been filed with the Hawaii Supreme Court. Motions filed with the Third Circuit Court to stay the effectiveness of the judgments pending resolution of the appeals were denied in April and July 1998 (in response to a motion for reconsideration). In August 1998, the Hawaii Supreme Court denied nonhearing motions for stay of final judgment pending resolution of the appeals. Management believes that HELCO will ultimately prevail on appeal and that the final judgments of the Third Circuit Court will be upheld. The final judgment with respect to HELCO's entitlement to automatically put its land to the uses requested in its CDUP amendment application (which is in part 1 of the final judgment, and is referred to as HELCO's "default entitlement") was entered February 11, 1998. The final judgment states that HELCO must comply with the conditions in its application (part 2 of the final judgment), and that the standard conditions in Section 13-2-21 of the Hawaii Administrative Rules (HAR), the rules of the Department of Land and Natural Resources (DLNR), do not apply to the extent the standard conditions are incompatible with HRS Section 183-41 (part 3 of the final judgment). On August 17, 1999, certain plaintiffs filed a joint motion to enforce parts 2 and 3 of the final judgment (relating to applicable conditions) and to stay part 1 of the final judgment (the default entitlement) until such time as the applicable conditions were identified and it was determined whether HELCO had or could meet the applicable conditions. At a September 23, 1999 hearing, the Third Circuit Court ruled that the BLNR must issue a written decision by November 30, 1999 on certain issues raised in the administrative petition filed by the Keahole Defense Coalition (KDC) in August 1998, including specific determinations of which conditions are not inconsistent with HELCO's ability to proceed under the default entitlement. At a BLNR meeting on October 22, 1999, the BLNR determined that all 15 standard land use conditions in HAR 13-2-21(a) applied to HELCO's default entitlement and that the conditions in HELCO's pre-existing CDUP and amendments continue to apply with respect to those existing permits. The BLNR specifically did not address at that time the question of HELCO's compliance with each of those conditions. The BLNR issued a written decision on November 19, 1999. Certain plaintiffs filed two motions in the Third Circuit Court attempting to implement their interpretation of the BLNR's ruling. On November 2, 1999, those plaintiffs filed a second joint motion to enforce part 2 and part 3 of the final judgment. In that motion, they alleged that the Keahole project cannot meet the conditions relating to compatibility with the surrounding area and improvement of the existing physical and environmental aspects of the subject area. Furthermore, they claimed that the project would be a prohibited use that cannot be placed in the conservation district, relying on zoning rules implemented by BLNR in 1994 in furtherance of Act 270, which prohibited fossil fuel fired generating units in the conservation district. However, the Third Circuit Court had earlier ruled that Act 270 does not apply to HELCO's application, which was filed prior to the effective date of Act 270. Plaintiffs asked that HELCO be enjoined from 8 placing further structures and improvements on the Keahole site and be ordered to remove all existing structures and improvements. On November 5, 1999, the same plaintiffs filed a third joint motion to enforce judgment. In this motion, they asked that the Court void HELCO's default entitlement on the basis that HELCO forfeited its default entitlement by allegedly electing, through HELCO's construction of the pre-PSD portions of the project, to build a project different from that described in its application. They also requested that HELCO be enjoined from continuing construction activity at the site and ordered to restore the Keahole site to its pre-August 1992 condition. These motions were heard on December 13, 1999 and were denied by the Court. The Court also ruled that any complaints received by the BLNR or DLNR regarding the Keahole project were to be addressed in writing within 32 days of mailing of the complaint. An Order to this effect was issued on February 22, 2000. For further developments regarding these issues, see "BLNR petitions." PSD permit. In 1997, the EPA approved a revised draft permit and the DOH issued - ---------- a final PSD permit for HELCO's DTCC unit. Nine appeals of the issuance of the permit were filed with the EPA's Environmental Appeals Board (EAB) in December 1997. On November 25, 1998, the EAB issued an Order Denying Review in Part and Remanding in Part. The EAB denied appeals of the permit that were based on challenges to (1) the DOH's use of a netting analysis (with respect to nitrogen oxide (NOx) emissions), (2) the DOH's determination of Best Available Control Technology (BACT) for control of sulfur dioxide emissions, and (3) certain aspects of the DOH's ambient air and source impact analysis. However, the EAB concluded that the DOH had not adequately responded to comments that had been made during the public comment period that data relating to certain ambient air concentrations were outdated or were measured at unrepresentative locations. The EAB remanded the proceedings and directed the DOH to reopen the permit for the limited purpose of (1) providing an updated air quality impact report incorporating current data on sulfur dioxide and particulate matter ambient concentrations and (2) providing a sufficient explanation of why the carbon monoxide and ozone data used to support the permit are reasonably representative, or performing a new air quality analysis based on data shown to be representative of the air quality in the area to be affected by the project. The EAB directed the DOH to accept and respond to public comments on the DOH's decisions with respect to these issues and ruled that any further appeals of its decision would be limited to the issues addressed on remand. On March 3, 1999, the EAB issued an Order denying motions for reconsideration which had been filed by HELCO, KDC and Kawaihae Cogeneration Partners (KCP). HELCO, working closely with the DOH and EPA, planned its response to the EAB remand and, in January 1999, commenced collection of several months of additional data at a new site. As part of the remand process, the DOH held a public hearing on the draft permit on October 7, 1999, limited to the issues remanded by the EAB. After considering issues raised at the public hearing, the EPA and DOH changed their positions and required HELCO to complete a full 12 months of data collection at the new site (which collection began in January 1999) and also required that two months of data be collected at a more representative elevation to corroborate the data collected at the new site. As a result of these actions, there have been further delays in HELCO's construction of CT-4 and CT-5. The actual length of the delays are uncertain. HELCO continues to work with the DOH and EPA with the objective of having the final permit reissued by the end of 2000 and of reaching a final resolution of any appeals to the EAB as expeditiously as possible thereafter. HELCO believes that the PSD permit will eventually be obtained. Since there are no stays on the project, installation of CT-4 and CT-5 is expected to begin when the PSD permit is obtained and any EAB appeals from its issuance are resolved. KDC declaratory judgment action. In February 1997, KDC and three individuals - ------------------------------- (Plaintiffs) filed a lawsuit in the Third Circuit Court of the State of Hawaii against HELCO, the director of the DOH, and the BLNR, seeking declaratory rulings with regard to five counts alleging that, with regard to the Keahole project, one or more of the defendants had violated, or could not allow the plant to operate without violating, the State Clean Air Act, the State Noise Pollution Act, conditions of HELCO's conditional use permit, covenants of HELCO's land patent and Hawaii administrative rules regarding standard conditions applicable to land permits. The Complaint was amended in March 1998 to add a sixth count, claiming that an amendment to a provision of the land patent (relating to the 9 conditions under which the State could repurchase the land) is void and that the original provision should be reinstated. On April 12, 1999, the Court ruled that, because there were no remaining issues of fact in the case, a May 1999 trial date was vacated, no further discovery was authorized, and proceedings before the Court were suspended pending any further administrative action by the DOH and BLNR. The Court's rulings to date on the six counts in the KDC complaint are as follows: 1. Count I (State Clean Air Act): At a hearing on April 5, 1999, the Court ruled that the DOH was within its discretionary authority in granting HELCO's requests for additional extensions of time to file its Title V air permit applications. 2. Count II (State Noise Pollution Act): At a hearing relating to Count II on February 16, 1999, the DOH notified the Court and the parties of a change in its interpretation of the noise rules promulgated under the State Noise Pollution Act. The change in interpretation would apply to the Keahole plant the noise standard applicable to the emitter property (which the DOH claims to be a 55 dBA daytime and 45 dBA nighttime standard) rather than the previously-applied noise standard of the receptor properties in the surrounding agricultural park (a 70 dBA standard). In response to the new position announced by the DOH, on February 23, 1999 HELCO filed a declaratory judgment action against the DOH, alleging that the noise rules were invalid on constitutional grounds. At a hearing on March 31, 1999, the Court granted KDC's motion to dismiss HELCO's complaint and Plaintiffs' motion for reconsideration on Count II and ruled that the applicable noise standard was 55 dBA daytime and 45 dBA nighttime. The Court specifically reserved ruling on HELCO's claims or potential claims based on estoppel and on the constitutionality of the noise rules "as applied" to HELCO's Keahole plant. On March 31, 1999, the Third Circuit Court also granted in part and denied in part HELCO's motion for leave to file a cross-claim and a third-party complaint, stating that HELCO may file such motions on the "as applied" and "estoppel" claims once the DOH actually applies the 55/45 dBA noise standard to the Keahole plant. On May 12, 1999, the Order dismissing HELCO's declaratory judgment complaint was issued and final judgment was entered. The DOH objected to the entry of final judgment before all issues in the lawsuit were resolved, but an Order denying that motion was issued on July 26, 1999. HELCO filed a notice of appeal on August 25, 1999 and KDC filed a notice of cross-appeal on September 3, 1999. Opening briefs were filed with the Hawaii Supreme Court in January 2000 and answering briefs were filed in February 2000. The DOH has not issued any formal enforcement action applying the 55/45 dBA standard to the Keahole plant. Meanwhile, HELCO has installed noise mitigation measures on the existing diesel units at Keahole, has applied to the DLNR for administrative approval to install an additional silencer on CT-2 and is exploring possible noise mitigation measures, which can be implemented if necessary, for CT-4 and CT-5. 3. Count III (violation of CDUP): At a hearing on April 12, 1999, the Court granted HELCO's motion for summary judgment and suspended proceedings on this Count pending referral of this matter to the BLNR. (Should the DOH find HELCO in violation of the noise rules (see Count II), the BLNR would be called to act on the impact of such violation, if any, on the CDUP.) 4. Count IV (violations of HELCO's land patent): At a hearing on April 12, 1999, the Court granted HELCO's motion for summary judgment and suspended proceedings on this Count pending referral of this matter to the BLNR. (Should the DOH find HELCO in violation of the noise rules (see Count II), the BLNR would be called to act on the impact of such violation, if any, on the land patent.) 5. Count V (HELCO's ability to comply with land use regulations): At a hearing on April 12, 1999, the Court granted HELCO's motion for summary judgment and suspended proceedings on this Count pending 10 referral of this matter to the BLNR for resolution of the administrative proceeding which had been pending before it. (See "BLNR petitions" herein.) 6. Count VI (amendment of HELCO's land patent): At the March 31, 1999 hearing, the Court granted Plaintiffs' motion for summary judgment, finding that a 1984 amendment to HELCO's land patent was invalid because the BLNR had failed to comply with the statutory procedure relating to amendments. The amendment was intended to correct an error in the original land patent with regard to the repurchase clause in the patent and to conform the language to the applicable statute, under which the State would have the right to repurchase the site (as opposed to an automatic reversion) if it were no longer used for utility purposes. This matter was heard by the BLNR at its hearing on February 25, 2000. (See "BLNR petitions" herein.) If and when the DOH and BLNR/DLNR act on all issues relating to Counts II through VI, and depending upon their rulings, the KDC lawsuit may be moot. Orders were entered on April 16, 1999 with regard to Count I, May 18, 1999 with regard to Count VI, and June 3, 1999 with regard to Counts II through V. On April 30, 1999, KDC filed a motion to determine prevailing party and to tax attorney fees and costs and a motion for discovery sanctions. After hearing, the Court ruled that Plaintiffs were the prevailing party as to Counts II and V and were entitled to fees and costs with regard to those counts, denied Plaintiffs' motion for fees as the prevailing party with regard to Count VI, denied HELCO's motion for fees as the prevailing party with regard to Count I and granted Plaintiffs' request for discovery sanctions against HELCO for late supplementation of responses to discovery requests. HELCO filed motions to alter or amend the orders regarding attorneys' fees and costs, and orders granting those motions were issued on September 22, 1999. HELCO appealed the amended orders to the Hawaii Supreme Court, which dismissed the appeal on January 20, 2000, on the grounds that the appeal was premature. HELCO intends to continue to vigorously defend against the claims raised in this case and in related administrative actions. BLNR petitions. On August 5, 1998, KDC filed with the BLNR a Petition for - --------------- Declaratory Ruling under HRS Section 91-8. The petition alleged that the standard conditions in HAR Section 13-2-21 apply to HELCO's default entitlement to use its Keahole site, that the letter issued to HELCO by the DLNR in January 1998 was erroneous because it failed to incorporate all conditions applicable to the existing permits, and that the DOH issued three separate Notices of Violation (NOVs) to HELCO in 1992 and 1998 for violation of clean air rules, which NOVs are alleged to constitute violations under the existing permits and render such permits null and void. The petition requested that the BLNR commence a contested case on the petition; that the BLNR determine that HELCO has violated the terms of its existing conditional use permits, causing such permits to be null and void; and that the BLNR determine that HELCO has violated the conditions applicable to its default entitlement, such that HELCO should be enjoined from using the Keahole property under such default entitlement. Pursuant to a ruling from the Third Circuit Court that the BLNR decide certain issues raised in this petition by November 30, 1999 (see "CDUP amendment" herein), these issues were discussed at an October 22, 1999 BLNR meeting. The BLNR determined that none of the standard land use conditions were inconsistent with HELCO's ability to proceed under its default entitlement and, therefore, each of the standard land use conditions applied to the expansion. BLNR did not, at that time, determine whether HELCO has complied with the applicable conditions. The BLNR also determined that specific conditions imposed by the BLNR on HELCO's original CDUP and amendments thereto continue to apply to the existing plant but not to the expansion under the default entitlement. On February 7, 2000, KDC and an individual plaintiff filed with BLNR a Request to Nullify "Default Entitlement" by Declaring "Default Entitlement" Void and Forfeited. In the request, it is alleged that HELCO's default entitlement is void because HELCO cannot satisfy all conditions and laws, that HELCO forfeited its default entitlement because it redesigned certain facilities it has already constructed to support existing CT-2 rather than CT-4 and CT-5, and that the BLNR should exercise its right to repurchase clause in HELCO's land patent. At its hearing on February 25, 2000, the BLNR denied KDC's request. The BLNR stated that it has the power to consider whether 11 conditions have been met and to enforce those conditions if they are not met, but not to enforce conditions in a way which violates either HRS Section 183-41 or the order of the Third Circuit Court which recognized HELCO's ability to proceed with the Keahole project under a default entitlement. As to the third claim, the BLNR authorized the issuance of a land patent with a corrected repurchase provision at its hearing on February 25, 2000, after which time the repurchase issue should become moot since HELCO continues to use the land for public utility purposes. (See "KDC declaratory judgment action," relating to Count VI.) IPP complaints filed with the PUC. Three IPPs-KCP, Enserch Development - --------------------------------- Corporation (Enserch) and Hilo Coast Power Company (HCPC)-filed separate complaints against HELCO with the PUC in 1993, 1994, and 1997, respectively, alleging that they are entitled to PPAs to provide HELCO with additional capacity. KCP and Enserch each claimed that they would be a substitute for HELCO's planned 56 MW (net) DTCC unit at Keahole. Two of the complaints have been resolved, as described below. In September 1995, the PUC allowed HELCO to continue to pursue construction of and commit expenditures for the second combustion turbine (CT-5) and the steam recovery generator (ST-7) for its planned DTCC unit, but stated in its order that "no part of the project may be included in HELCO's rate base unless and until the project is in fact installed, and is used and useful for utility purposes." The PUC also ordered HELCO to continue negotiating with the IPPs and held that the facility to be built (i.e., either HELCO's or one of the IPP's) should be the one that can be most expeditiously put into service at "allowable cost." The current status of the IPPs' PUC complaints is as follows: Enserch complaint. On January 16, 1998, HELCO filed with the PUC an ----------------- application for approval of a PPA for a 60 MW (net) facility and an interconnection agreement with Encogen Hawaii, L.P. (Encogen), an Enserch affiliate, both dated October 22, 1997. The PUC issued a decision and order approving the agreements on July 14, 1999. The decision was amended at HELCO's request on July 21, 1999 and became final and nonappealable on August 23, 1999. Enserch sold its interest in the partnership, now called Hamakua Energy Partners L.P. (Hamakua Partners) in November 1999. According to Hamakua Partners, its first phase of 22 MW is expected to be in-service by August 2000 and the remainder of its 60 MW facility is expected to be in-service by December 2000. This PPA was necessary to ensure reliable service to customers on the island of Hawaii and, in the opinion of management, does not supplant the need for CT-4 and CT-5. KCP complaint. In January 1996, the PUC ordered HELCO to continue in good ------------- faith to negotiate a PPA with KCP. In May 1997, KCP filed a motion for unspecified "sanctions" against HELCO for allegedly failing to negotiate in good faith. In June 1997, KCP filed a motion asking the PUC to designate KCP's facility as the next generating unit on the HELCO system and to determine the "allowable cost" which would be payable by HELCO to KCP. HELCO filed memoranda in opposition to KCP's motions. The PUC held an evidentiary hearing in August 1997. KCP filed two other motions, which HELCO opposed, to supplement the record. The PUC issued an Order in June 1998 which denied all of KCP's pending motions; provided rulings and/or guidance on certain avoided cost and contract issues; directed HELCO to prepare an updated avoided cost calculation that includes the Encogen agreement; and directed HELCO and KCP to resume contract negotiations. HELCO filed a motion for partial reconsideration with respect to one avoided cost issue. The PUC granted HELCO's motion and modified its order in July 1998. HELCO resumed negotiations with KCP in 1998 in compliance with the Order, but no agreement has been reached. On November 20, 1998, KCP filed a motion asking the PUC to appoint a hearings officer to make a recommendation to the PUC regarding the terms and conditions of a PPA and the calculation of avoided cost. HELCO filed a memorandum in opposition to KCP's motion on December 2, 1998. On July 9, 1999, KCP filed an additional motion, asking the PUC to reopen its complaint docket and to enforce the Public Utility Regulatory Policies Act of 1978 by calculating the utility's avoided cost. HELCO filed a memorandum in opposition to KCP's motion on July 16, 1999, KCP filed a reply on July 22, 1999 and the Consumer Advocate filed a SOP on August 2, 1999. No decision has been issued on KCP's two most recent motions. 12 On October 29, 1999, the Third Circuit Court ruled that the lease between Waimana and the Department of Hawaiian Home Lands for the site on which KCP's plant was proposed to be built was invalid. In addition, KCP's air permit is under scrutiny by the DOH, as it may have expired on January 31, 2000. In light of these and other issues, management believes that KCP's proposal is not viable and, therefore, should not impact installation of CT-4 and CT-5. HCPC complaint. In December 1999, the PUC approved an amended and restated -------------- PPA between HELCO and HCPC. The term of the agreement, which is for the continuing provision of 22 MW, is for five years (through December 31, 2004) and may continue beyond that time unless either party provides notice of termination to the other party by May 30 in the year of termination. HELCO has the right to terminate the contract as of the end of 2002, 2003 or 2004 for an early termination amount of $0.5 million for each of the remaining years in the five-year term. Like the PPA with Hamakua Partners, this restated and amended PPA with HCPC was necessary to ensure reliable service to customers. However, because the short term of the PPA was intended to ensure reliability until the Keahole project was constructed, in the opinion of management, it does not supplant the need for CT-4 and CT-5. Pre-PSD work and notices of violation. The costs for the CT-4 project (and, to a - ------------------------------------- lesser extent, the CT-5 project) include the costs of certain facilities that benefit the existing Keahole power plant, but were originally scheduled to be installed at the same time as the new generating units. HELCO proceeded with the construction of the facilities that could be constructed prior to receipt of the PSD permits for CT-4 and CT-5 (pre-PSD facilities) after receipt of the CDUP amendment (as a result of the Third Circuit Court orders). (See "CDUP amendment" herein.) Pre-PSD facilities. The pre-PSD facilities include a shop/warehouse/ ------------------ administration building (completed in 1998), fire protection system upgrades (completed in September 1999), and a new water treatment system (completed in December 1999, which supplies the demineralized water needs of the existing CT at Keahole). DOH notice of violation (NOV). In July 1998, the DOH issued an NOV to HELCO ------------------------------ for items allegedly constituting unauthorized construction activity at the Keahole Generating Station prior to receipt of an effective PSD permit for CT-4 and CT-5. The NOV required HELCO to immediately halt construction activities on pipe rack foundations, a retaining wall and an oil/water separator, and imposed a fine of $48,800. HELCO complied with the stop work order on the designated items and paid the fine. EPA NOV. In September 1998, the EPA issued an NOV to HELCO stating that ------- HELCO violated the Hawaii State Implementation Plan by commencing construction activities at the Keahole generating station without first obtaining a final air permit. By law, 30 days after the NOV, the EPA may issue an order requiring compliance with applicable laws, assessing penalties and/or commencing a civil action seeking an injunction; however, no order has yet been issued. In 1999, HELCO put the EPA on notice that certain construction activities not affected by the NOV would continue, and received approval to proceed with certain construction activities. However, HELCO has halted work on other construction activities at Keahole until further notice is provided or approval is obtained from the EPA, or until the final air permit is received. Contingency planning. In June 1995, HELCO filed with the PUC its generation - --------------------- resource contingency plan detailing alternatives and mitigation measures to address the delays that have occurred in adding new generation. Actions under the plan (such as deferring the retirements of older, smaller units) have helped HELCO maintain its reserve margin and reduce the risk of near-term capacity shortages. In January 1996, the PUC opened a proceeding to evaluate HELCO's contingency resource plan and HELCO's efforts to insure system reliability. HELCO has filed reports with the PUC from time to time updating the contingency plan and the status of implementing the plan. The last update was filed on March 1, 1999 and another update is expected to be filed soon. The first increment of new generation to be available to HELCO is now expected to be added by August 2000 (Hamakua Partners' 22 MW CT). Despite delays in adding new generation, HELCO's mitigation measures (including the extension of power purchases from HCPC) should provide HELCO with sufficient generation reserve 13 margin to cover its projected monthly system peaks with units on scheduled maintenance until new generation is added in 2000 and 2002, and should provide HELCO with a reserve cushion in the event of further delays in adding new generation. Additional increments of new firm capacity after Hamakua Partners' first CT are expected to be added by December 2000 (the remaining 38 MW of Hamakua Partners' 60 MW DTCC unit), and in early 2002 (CT-4 and CT-5). As new generation is added, HELCO will retire its older, smaller generating units. Costs incurred. If it becomes probable that CT-4 and/or CT-5 will not be - -------------- installed, HELCO may be required to write-off a material portion of the costs incurred in its efforts to put these units into service. As of December 31, 1999, HELCO's costs incurred in its efforts to put CT-4 and CT-5 into service and to support existing units amounted to approximately $79.8 million, including $32.3 million for equipment and material purchases, $25.9 million for planning, engineering, permitting, site development and other costs and $21.6 million for AFUDC. As of December 31, 1999, approximately $23.1 million of the $79.8 million was transferred from construction in progress to plant-in-service as such costs represent completed facilities which relate to the existing units in service as well as CT-4 and CT-5. Although management believes it has acted prudently with respect to the Keahole project, effective December 1, 1998, HELCO decided to discontinue the accrual of AFUDC on CT-4 and CT-5 (which would have been approximately $0.5 million after tax per month). The length of the delays to date and potential further delays were factors considered by management in its decision to discontinue the accrual of AFUDC. HELCO has also deferred plans for ST-7 to approximately 2006 or 2007, unless the Hamakua Partners facility is not placed in service as planned. Since ST-7 is not needed in the near future, no costs for ST-7 are included in construction in progress. Management believes that the issues surrounding the amendment to the land use permit, the air permit, the IPP complaints and related matters will be satisfactorily resolved and will not prevent HELCO from ultimately constructing CT-4 and CT-5. The recovery of costs relating to CT-4 and CT-5 are subject to the rate-making process governed by the PUC. Management believes no adjustment to costs incurred to put CT-4 and CT-5 into service is required as of December 31, 1999. 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) and coal. Other nonoil projects include purchased power arrangements with two IPPs, one operating a generating unit burning municipal waste and the other a fluidized bed unit burning coal. HECO PPAs. HECO currently has three major PPAs. In March 1988, HECO entered into a PPA 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). In October 1988, HECO entered into an agreement with Kalaeloa Partners, L.P. (Kalaeloa), a limited partnership whose sole general partner was an indirect, wholly owned subsidiary of ASEA Brown Boveri, Inc. (ABB), which has guaranteed certain of Kalaeloa's obligations and, through affiliates, 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 in May 1991. The Kalaeloa facility, which was completed in the second quarter of 1991, is a combined-cycle operation, consisting of two oil-fired combustion turbines burning low sulfur fuel oil (LFSO) and a steam turbine which utilizes waste heat from the combustion turbines. The facility is designed 14 to sell sufficient steam to be a "Qualifying Facility" under PURPA. As of February 28, 1997, the ownership of Kalaeloa was restructured so 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 PSEG Hawaiian Management, Inc. and PSEG Hawaiian Investment, Inc. (nonregulated affiliates of Public Service Enterprise Group Incorporated) and Harbert Power Corporation. On October 1, 1999, HECO entered into Amendment No. 4 to the PPA with Kalaeloa, and consented (subject to PUC approval) to the transfer of the general partner partnership interest from the ABB subsidiary to an entity affiliated with the owners of KIP. On January 7, 2000, HECO filed an application with the PUC requesting approval of the consent and Amendment No. 4 to the PPA. HECO also entered into a PPA in March 1986 and a firm capacity amendment in April 1991 with the City and County of Honolulu, which 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 PPAs 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, 1999. MECO and HELCO power purchase agreements. As of December 31, 1999, MECO and HELCO had PPAs for 16 MW and 52 MW of currently available firm capacity, respectively. As of December 31, 1999, HELCO also had a PPA with Hamakua Partners for 60 MW of firm capacity beginning in late 2000. MECO has a PPA with Hawaiian Commercial & Sugar Company (HC&S) for 16 MW of firm capacity. On March 2, 1998, an HC&S unit failed and HC&S lost 10 MW of generating capacity. HC&S is currently in negotiations to replace the unit, but the unit is not expected to be in operation until the second quarter of 2000. HC&S, however, is still able to meet its contractual obligations to MECO. On December 27, 1999, MECO provided written notice to HC&S of termination of the PPA effective at the end of the day on December 31, 2001. MECO intends to negotiate a new PPA which would be effective on January 1, 2002. HELCO has a 35-year PPA with PGV for 30 MW of firm capacity expiring on December 31, 2027. On February 21, 1996, HELCO and PGV executed, and the PUC approved, an amendment to the PPA for 5 MW of firm capacity in addition to the 25 MW then being supplied. In mid-1998, PGV's output began to decline from 30 MW to approximately 24 MW. By late 1999, PGV completed the addition of a new resource well and restoration of two reinjection wells. Work on the wells was completed in December 1999 at which time PGV began delivering 27 MW to 28 MW of firm capacity. In January 2000, PGV began delivering 30 MW of firm capacity using a temporary well connection. PGV made the installation permanent, and returned to providing 30 MW of firm capacity in February 2000. In December 1994, at a time when the 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 PPA with HCPC for 22 MW of firm capacity and the dismissal of HCPC from bankruptcy. That agreement terminated on December 31, 1999. On October 4, 1999, HELCO entered into a PPA with HCPC effective January 1, 2000 through December 31, 2004, subject to early termination by HELCO after two years, whereby HELCO continues to purchase 22 MW of firm capacity from HCPC. The PPA was amended by Amendment No. 1 dated November 5, 1999. The PUC approved the PPA, as amended, on December 7, 1999. See the "HELCO Power Situation" section above. In October 1997, HELCO entered into an agreement with Encogen, a limited partnership whose general partners are wholly owned special-purpose subsidiaries of Enserch and Jones Capital Corporation. Enserch Corporation and J.A. Jones, Inc., the parent companies of Enserch and Jones Capital Corporation, respectively, have guaranteed certain of Encogen's obligations, and a contract will be entered into with an affiliate of Enserch to operate and maintain the facility. The agreement provides that HELCO will purchase 60 MW (net) 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 15 from the combustion turbines. The facility will be designed to sell sufficient steam to be a "Qualifying Facility" under PURPA. HELCO submitted the agreement to the PUC for approval in January 1998 and the PUC approved it on July 14, 1999. On November 8, 1999, HELCO entered into a PPA Novation with Encogen and Hamakua Partners, which recognizes the transfer of the obligations of Encogen under the PPA to Hamakua Partners. Hamakua Partners was formed as result of the sale of the general partner and limited partner partnership interests of Enserch to entities affiliated with TECO Energy Inc., which is a Florida-based energy company and parent company of Tampa Electric Company, a regulated electric utility. TECO Energy Inc. has replaced the guarantee of Enserch Corporation of certain of Hamakua Partners' obligations. Hamakua Partners is currently constructing its facility and expects to begin power production in July 2000. See the "HELCO Power Situation" section above. On August 17, 1999, HELCO entered into a PPA with Kahua Power Partners LLC (KPP) for the purchase of as-available energy from KPP's proposed 10 MW windfarm. An amendment to that contract is anticipated to be negotiated in 2000, after which the contract will be submitted to the PUC for approval. HELCO expects to purchase energy from KPP by early 2001. Fuel oil usage and supply All rate schedules of the Company's electric utility subsidiaries contain energy cost adjustment (ECA) 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&O's 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 ECA clauses will be the subject of investigation in a generic docket or in a future rate case. In MECO's 1999 general rate increase proceeding, MECO stated that it believed that its ECA clause continues to be necessary, no issue was raised by the Consumer Advocate regarding the discontinuance of the ECA clause, and the ECA clause was continued in the amended final D&O for MECO's 1999 test year rate increase application. In HELCO's rate increase application using a 2000 test year, HELCO stated that it believed that its ECA clause continues to be necessary. See discussion below under "Rates" and the "Energy cost adjustment (ECA) clauses" section in HECO's MD&A. HECO's steam power plants burn 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 contracts for the purchase of LSFO and the use of certain fuel distribution facilities with Chevron Products Company (Chevron) and Tesoro Hawaii Corp. dba BHP Petroleum Americas Refining Inc. (Tesoro). These fuel supply and facilities operations contracts have a term of seven years commencing January 1, 1998. The PUC approved the contracts and permits the inclusion of costs incurred under these contracts in HECO's ECA clauses. HECO pays market-related prices for fuel supplies purchased under these agreements. HECO, MECO and HELCO executed joint fuel supply contracts with Chevron and Tesoro for the purchase of diesel and MSFO supplies and for the use of certain petroleum distribution facilities for a period of seven years commencing January 1, 1998. The PUC approved these contracts and permits the electric utilities to include fuel costs incurred under these contracts in their respective ECA clauses. The electric utilities pay market-related prices for diesel and MSFO supplied under these agreements. Agreements providing for the assignment of HTB's interest in the joint fuel supply contract with Chevron and the early termination of HTB's and YB's interest were executed in October 1999 in connection with the sale by HTB of substantially all of its operating assets and the stock of YB. 16 The diesel supplies acquired by the Lanai Division of MECO are purchased under a contract with a local petroleum wholesaler, Lanai Oil Co., Inc. On March 1, 2000, the PUC approved the extension of the amended supply agreement with Lanai Oil Co., Inc. through December 31, 2001 and further extensions subject to the mutual consent of the parties. See the fuel oil commitments information set forth in the "Fuel contracts" section in Note 11 to HECO's Consolidated Financial Statements. The following table sets forth the average cost of fuel oil used to generate electricity in the years 1999, 1998 and 1997:
HECO MECO HELCO Consolidated ------------------------------------------------------------------------------------------------ $/Barrel c/MBtu $/Barrel c/MBtu $/Barrel c/MBtu $/Barrel c/MBtu - ------------------------------------------------------------------------------------------------------------ 1999........ 18.68 297.4 25.65 430.2 22.97 373.7 20.46 329.7 1998........ 17.71 282.8 23.69 396.4 20.83 338.7 19.14 308.8 1997........ 23.88 380.9 30.13 503.9 25.76 418.1 25.19 405.9
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 1999, over 99% of HECO's generation fuel consumption consisted of LSFO. The balance of HECO's fuel consumption was diesel. Diesel made up approximately 77% of MECO's and 35% 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, diesel is the most expensive fuel and the price of LSFO falls between the two on a per-barrel basis. The prices of LSFO, MSFO and diesel increased during the final three quarters of 1999 and averaged approximately 15% above the respective price levels prevailing in 1998; they remained, however, well below the prices prevailing during 1996 and 1997. In June 1999, HELCO and MECO exercised an option to extend for two years commencing January 1, 2000 their existing contracts with Hawaiian Interisland Towing, Inc. (HITI) for the shipment of MSFO and diesel supplies from their fuel supplier's facilities on Oahu to storage locations on the islands of Hawaii and Maui, respectively. The PUC had approved these contracts and issued a final order in June 1994 that permitted HELCO and MECO to include the fuel transportation and related costs incurred under the original contracts in their respective ECA clauses. Freight rates charged under the contracts are related to published indices for industrial commodities prices and labor costs. These contracts each include options for one additional two-year extension. HELCO and MECO own the fuel oil and diesel fuel when it is purchased from Chevron or Tesoro. HITI never takes title for the fuel oil or diesel fuel, but does have custody and control while the fuel is in transit from Oahu. If there were an oil spill in transit, HITI is contractually obligated to indemnify HELCO and/or MECO. HITI has $700 million of insurance coverage for oil spills. State law provides a cap of $700 million on liability for releases of heavy fuel oil transported interisland by tank barge. HELCO and/or MECO may be liable for any clean-up and/or fines that HITI or its insurance carrier does not cover. The Company estimates that 77% of the net energy generated and purchased by HECO and its subsidiaries in 2000 will be generated from the burning of oil. Increases in fuel oil prices are passed on to customers through the electric utility subsidiaries' ECA clauses. Failure by the Company's oil suppliers to provide fuel pursuant to the supply contracts and/or substantial increases in fuel prices could adversely affect consolidated HECO's and the Company's financial condition, results of operations and/or liquidity. HECO, however, maintains an inventory of fuel oil in excess of one month's supply. HELCO and MECO maintain approximately a one month's supply of fuel oil. Rates HECO, MECO and HELCO are subject to the regulatory jurisdiction of the PUC with respect to rates, issuance of securities, accounting and certain other matters. See "Regulation and other matters--Electric utility regulation." All rate schedules of HECO and its subsidiaries contain ECA clauses as described previously. Under current law and practices, specific and separate PUC approval is not required for each rate change pursuant to automatic rate 17 adjustment clauses previously approved by the PUC. Rate increases, other than pursuant to such automatic adjustment clauses, require the prior approval of the PUC after public and contested case hearings. PURPA requires the PUC to periodically review the ECA clauses of electric and gas utilities in the state, and such clauses, as well as the rates charged by the utilities generally, are subject to change. See the "Regulation of electric utility rates," "Recent rate requests" and "Energy cost adjustment (ECA) clauses" sections in HECO's MD&A. Recent rate requests Hawaiian Electric Company, Inc. - ------------------------------- . In December 1993, HECO filed a request to increase rates based on a 1995 test year. HECO requested a 4.1% increase (as revised), or $28.2 million in annual revenues, based on a 13.25% return on average common equity (ROACE). In December 1995, HECO received a final D&O authorizing a 1.3%, or $9.1 million, increase in annual revenues, based on a 1995 test year and an 11.4% ROACE. The final D&O required a refund to customers because HECO had previously received interim increases totaling $18.9 million on an annualized basis, or $9.8 million more than the amount that was finally approved. Hawaii Electric Light Company, Inc. - ----------------------------------- . In March 1995, HELCO filed a request to increase rates based on a 1996 test year. In February 1996, HELCO revised its requested increase to 6.2%, or $8.9 million in annual revenues, based on a 12.5% ROACE. In March 1996, HELCO received an interim D&O authorizing a 4.8%, or $6.8 million, increase in annual revenues, based on an 11.65% ROACE. In April 1997, HELCO received a final D&O which made the interim increase final. . In March 1998, HELCO filed a request to increase rates 11.5%, or $17.3 million in annual revenues, based on a 1999 test year and a 12.5% ROACE, primarily to recover costs relating to (1) an agreement to buy power from the 60 MW plant of Hamakua Partners, formerly known as Encogen Hawaii, L.P., and (2) adding two combustion turbines (CT-4 and CT-5) at HELCO's Keahole power plant. Due to the EAB's denial of HELCO's motion for reconsideration of the EAB's November 25, 1998 decision (see "HELCO power situation--PSD permits" above), HELCO's test year 1999 rate increase application was withdrawn in March 1999. . In October 1999, HELCO filed a request to increase rates by 9.6%, or $15.5 million in annual revenues, based on a 2000 test year, primarily to recover (1) costs relating to the agreement to buy power from the 60 MW plant of Hamakua Partners, and (2) depreciation of and a return on additional investments in plant and equipment since the last rate case, including pre-air permit facilities placed in service at the Keahole power plant. In its application, HELCO presented evidence to justify an ROACE of 13.5% for the 2000 test year. Maui Electric Company, Limited - ------------------------------ . In February 1995, MECO filed a request to increase rates based on a 1996 test year. MECO's final requested increase was 3.8%, or $5.0 million in annual revenues, based on an 11.5% ROACE. In January 1996, MECO received an interim D&O authorizing an increase of 2.8%, or $3.7 million in annual revenues, based on an 11.5% ROACE, effective February 1, 1996. In April 1997, MECO received a final D&O authorizing a 2.9%, or $3.9 million increase in annual revenues, $0.2 million more annually than the interim increase and based on an 11.5% ROACE. . In May 1996, MECO filed a request to increase rates 13%, or $18.9 million in annual revenues, based on a 1997 test year and a 12.9% ROACE, primarily to recover the costs related to the anticipated 1997 addition of new generating unit M17. In November 1996, MECO filed a motion with the PUC to approve a stipulation between MECO and the Consumer Advocate which would provide MECO with an increase in annual revenues of $1.5 million, based on an 11.65% ROACE. In May 1997, the stipulated increase was revised to $1.3 million after considering the final decision in the 1996 test year case. The primary reason for the stipulation was a delay in the expected in-service date for MECO's generating unit M17 until late 1998, because of delays in obtaining the necessary PSD permit from the DOH/EPA. In December 1997, MECO received a final D&O authorizing no additional increase in annual revenues, based on an 11.12% ROACE. 18 . In January 1998, MECO filed a request with the PUC to increase rates by 15.3%, or $22.4 million in annual revenues, based on a 12.75% ROACE and a 1999 test year, primarily to recover the costs related to the addition of generating unit M17 in late 1998. In November 1998, MECO revised its requested increase to 11.9%, or $16.4 million, in annual revenues, based on a 12.75% ROACE. In December 1998, MECO received an interim D&O from the PUC, effective January 1, 1999, authorizing an 8.5%, or $11.7 million, increase in annual revenues (subject to refund with interest, pending the final outcome of the case), based on a ROACE of 11.12%, which was the ROACE authorized in MECO's prior rate case. In April 1999, MECO received an amended final D&O from the PUC which authorized an 8.2%, or $11.3 million, increase in annual revenues, based on a 1999 test year and a 10.94% ROACE. The amended final D&O required a refund to customers because MECO had previously received under the interim D&O an interim increase of $11.7 million in annual revenues, or $0.4 million annually in excess of the amount that was finally approved. MECO refunded with interest the excess amounts collected since January 1, 1999, which amounted to approximately $0.1 million. . In March 1999, the PUC issued a D&O denying MECO's request to include $0.8 million in its rate base for exhaust flow enhancers, which were provided as part of a settlement for a warranty claim. MECO wrote-off the $0.8 million in the first quarter of 1999. . MECO expects to file a rate increase request, based on a 2001 test year, primarily to recover costs relating to the addition to plant of generating unit M19 in September 2000. Competition Legislation has been introduced in Congress that would restructure the electric utility industry with a view toward increasing competition by, for example, allowing customers to choose their generation supplier. In addition, the PUC instituted a proceeding in December 1996 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 and Note 11 in HECO's Consolidated Financial Statements. Management cannot predict what changes, if any, may result from these efforts or what impact, if any, they may have on the Company's or consolidated HECO's financial condition, results of operations or liquidity. The PUC proceeding seeks to identify and examine the issues surrounding electric competition and to determine the impact of competition on the electric utility infrastructure in Hawaii. In its order, the PUC recognized that Hawaii's stand- alone island energy systems are different from the interconnected systems of the contiguous states, but also recognized the need to determine how to respond in Hawaii to changes occurring in the industry. The PUC set forth a preliminary enumeration of the issues, including feasible forms of competition, the regulatory compact, public interest benefits, long-term integrated resource planning, appropriate treatment of potential stranded costs and the identification of the objectives and the establishment of a time frame for the introduction of competition in the electric industry. There are 19 parties in the proceeding including the Consumer Advocate, HECO, HELCO, MECO, the Department of Business, Economic Development, and Tourism of the State of Hawaii (DBEDT), the Counties of Maui, Hawaii and Kauai, the Department of Defense (the DOD, HECO's largest customer), various IPPs and others. Following a number of meetings, and the submission and presentation to the collaborative group of preliminary SOPs, the parties individually submitted final SOPs that were compiled and sent to the PUC in October 1998. The position of HECO and its subsidiaries is that retail competition is not feasible in Hawaii. The conditions making electric industry restructuring feasible elsewhere generally are not present in Hawaii. Among other considerations, none of the island electric systems are interconnected, the island electricity markets are relatively small and there are barriers to entry by new generation suppliers. HECO and its subsidiaries propose to achieve some of the benefits of competition through proposals for (1) competitive bidding for new generation, (2) performance-based ratemaking (PBR), which would include an index-based price cap, an earnings sharing mechanism, and a benchmark incentive plan and (3) innovative pricing provisions (including rate restructuring, expanded time-of-use rates, customer migration rates such as standby charges, flexible pricing to encourage economic development and to compete with customer generation options, new service options and two-part rates incorporating real- time 19 pricing). HECO suggests in its SOP that these proposals be implemented through applications for PUC approval in a series of separate proceedings to be initiated by HECO in 1999 and 2000. While the other parties' SOPs generally support competitive bidding for new generation, there is no consensus as to whether or as to the extent Hawaii's electricity markets should be restructured to introduce further competition. For example, the Consumer Advocate agrees that full scale retail generation competition is not now feasible in Hawaii, but proposes immediate rate unbundling and customer education, followed by rulemaking proceedings (1) to open transmission and distribution access on a limited basis (such as when new generation is needed) and determine the degree of any stranded cost recovery through nonbypassable access charges, (2) to permit conservation and energy management services to be provided to retail customers on a competitive basis, and (3) to implement competition for other customer services (metering and billing), as determined to be appropriate. The DOD also recognizes that retail generation competition is not now feasible, and proposes rate unbundling, the establishment of cost-based rates, the offering of additional rate options, PBR, and investigation of the unbundling and separate pricing of customer services. DBEDT proposes (1) rate unbundling, (2) competition for customer services and energy efficiency services, and (3) if additional analysis by the PUC confirms the feasibility of retail generation competition on Oahu, open transmission and distribution access for generators, divestiture of generation and customer service functions by utilities, and the formation of independent system operators (all targeted for 2002). It is also possible that parties may seek legislative action on their proposals. In May 1999, the PUC approved HECO's standard form contract for customer retention that allows HECO to provide a rate option for customers who would otherwise reduce their energy use from HECO's system by using energy from a nonutility generator. Based on HECO's current rates, the standard form contract provides a 2.77% and an 11.27% discount on base energy rates for "Large Power" and "General Service Demand" customers, respectively. In March 2000, the PUC approved a similar standard form contract which, based on HELCO's current rates, provides a 10.00% discount on base energy rates for "Large Power" and "General Service Demand" customers. In December 1999, HECO, HELCO and MECO filed an application with the PUC seeking permission to implement PBR in future rate cases. The proposed PBR would allow adjustments in HECO and its subsidiaries' rates (for up to five years after a rate case) based on an index-based price cap, an earnings sharing mechanism and a service quality mechanism. The PUC recently submitted a status report on its investigation to the Legislature, at the Legislature's request. In the report, the PUC stated that competitive bidding for new power supplies (i.e., wholesale generation competition) is a logical first step to encourage competition in the state's electric industry and that it plans to proceed with an examination of the feasibility of competitive bidding. The PUC also plans to review specific policies to encourage renewable energy resources in the power generation mix. The report states that "further steps" by the PUC "will involve the development of specific policies to encourage wholesale competition and the continuing examination of other areas suitable for the development of competition." Electric and magnetic fields Research about the potential adverse health effects from exposure to electric and magnetic fields (EMF) is ongoing. To date, no definite relationship between EMF and health risks has been clearly demonstrated. The National Academy of Sciences examined more than 500 studies and found that "the current body of evidence does not show that exposure to EMFs presents a human-health hazard." Further, an extensive study released in 1997 by the National Cancer Institute and the Children's Cancer Group found no evidence of increased risk for childhood leukemia from EMF. HECO and its subsidiaries continue to participate in utility industry funded studies on EMF and, where technically feasible and economically reasonable, reduce EMF in the design and installation of new transmission and distribution facilities. Management cannot predict the impact the EMF issue may have on HECO, HELCO and MECO in the future. 20 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, 1999, ASB was the third largest financial institution in the State of Hawaii with total assets of $5.8 billion and deposits of $3.5 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, 1999, 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/asset-backed securities and investments) and the interest expense incurred on interest-bearing liabilities (deposit liabilities and borrowings, including borrowings from the Federal Home Loan Bank (FHLB) of Seattle). The Deposit Insurance Funds Act of 1996 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, HEI's Quantitative and Qualitative Disclosures About Market Risk and Note 4 to HEI's Consolidated Financial Statements.
The following table sets forth selected data for ASB for the years indicated: Years ended December 31, -------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Common equity to assets ratio Average common equity divided by average total assets (1)............. 6.09% 5.88% 6.09% Return on assets Net income for common stock divided by average total assets (1)(2).... 0.62 0.54 0.67 (3) Return on common equity Net income for common stock divided by average common equity (1)(2)... 10.2 9.2 11.0 (3) Efficiency ratio Total general and administrative expenses divided by net interest income and other income................................ 62 65 57
(1) 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) Net income includes amortization of goodwill and core deposit intangibles. (3) 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. 21 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) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Assets Investment securities..................................... $ 218,628 $ 238,694 $ 114,981 Mortgage/asset-backed securities.......................... 1,894,953 1,872,304 1,449,570 Loans receivable, net..................................... 3,191,847 3,075,870 2,143,106 Other..................................................... 414,153 432,647 213,124 -------------------------------------------------- $5,719,581 $5,619,515 $3,920,781 ================================================== Liabilities and stockholder's equity Deposit liabilities....................................... $3,706,750 $3,860,546 $2,324,426 Other borrowings.......................................... 1,505,109 1,265,686 1,261,511 Other..................................................... 84,540 87,609 90,300 Stockholder's equity...................................... 423,182 405,674 244,544 -------------------------------------------------- $5,719,581 $5,619,515 $3,920,781 ==================================================
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. As of December 31, 1999, the gap in the near term (0-6 months) was a negative 0.29% of total assets as compared to a cumulative one-year negative gap position of 5.44% of total assets. The difference between the near-term and one-year negative gap positions is primarily due to increased 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, 1999: 22
Cumulative amounts at December 31, 1999 subject to repricing within -------------------------------------------------------------------------------- 6 months greater than 6 months greater than 1-5 Over (dollars in millions) or less to 1 year years 5 years Total (1) - --------------------------------------------------------------------------------------------------------------------------- Interest-earning assets - ----------------------- Real estate loans and mortgage/asset- backed securities Balloon and adjustable rate............. $ 1,254 $ 479 $ 148 $ 4 $1,885 Fixed rate 1-4 unit residential......... 203 184 1,099 1,320 2,806 Other................................... 30 12 33 81 156 Consumer and other loans................... 199 2 9 25 235 Commercial loans........................... 59 10 24 10 103 Other interest-earning assets.............. 170 43 - - 213 -------------------------------------------------------------------------- Total interest-earning assets.............. 1,915 730 1,313 1,440 5,398 -------------------------------------------------------------------------- Interest-bearing liabilities - ---------------------------- Certificate accounts....................... 706 538 194 34 1,472 Money market accounts...................... 51 43 197 30 321 Negotiable Order of Withdrawal accounts.... 66 59 335 169 629 Passbook accounts.......................... 168 63 404 435 1,070 FHLB advances.............................. 512 96 455 126 1,189 Other borrowings........................... 429 232 - - 661 -------------------------------------------------------------------------- Total interest-bearing liabilities......... 1,932 1,031 1,585 794 5,342 -------------------------------------------------------------------------- Interest rate sensitivity gap (2).......... $ (17) $ (301) $ (272) $ 646 $ 56 ========================================================================== Cumulative interest rate sensitivity gap... $ (17) $ (318) $ (590) $ 56 ========================================================== Cumulative interest rate sensitivity gap over total assets..................... (0.29)% (5.44)% (10.09)% 0.96% - ---------------------------------------------------------------------------------------------------------------------------
(1) The table does not include $450 million of noninterest-earning assets and $70 million of noninterest-bearing liabilities. (2) The difference between the total interest-earning assets and the total interest-bearing liabilities. Management has developed and is beginning to implement a plan to improve ASB's interest rate risk position. The plan includes obtaining additional capital and making changes to improve the matching of asset and liability durations, such as lengthening the term of costing liabilities and selling a portion of ASB's long- term fixed rate loans. 23 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) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Loans Average balances................................... $3,191,847 $3,075,870 $2,143,106 Interest income.................................... $ 244,566 $ 246,299 $ 174,489 Weighted-average yield............................. 7.66% 8.01% 8.14% Mortgage/asset-backed securities Average balances................................... $1,894,953 $1,872,304 $1,449,570 Interest income.................................... $ 122,281 $ 120,608 $ 95,990 Weighted-average yield............................. 6.45% 6.44% 6.62% Investments (1) Average balances................................... $ 218,628 $ 238,694 $ 114,981 Interest and dividend income....................... $ 13,132 $ 13,754 $ 7,139 Weighted-average yield............................. 6.01% 5.76% 6.21% Total interest-earning assets Average balances................................... $5,305,428 $5,186,868 $3,707,657 Interest and dividend income....................... $ 379,979 $ 380,661 $ 277,618 Weighted-average yield............................. 7.16% 7.34% 7.49% Deposits Average balances................................... $3,706,750 $3,860,546 $2,324,426 Interest expense................................... $ 120,338 $ 142,069 $ 89,099 Weighted-average rate.............................. 3.25% 3.68% 3.83% Borrowings Average balances................................... $1,505,109 $1,265,686 $1,261,511 Interest expense................................... $ 86,830 $ 74,925 $ 75,563 Weighted-average rate.............................. 5.77% 5.92% 5.99% Total interest-bearing liabilities Average balances................................... $5,211,859 $5,126,232 $3,585,937 Interest expense................................... $ 207,168 $ 216,994 $ 164,662 Weighted-average rate.............................. 3.97% 4.23% 4.59% Net balance, net interest income and interest rate spread Net balance....................................... $ 93,569 $ 60,636 $ 121,720 Net interest income............................... $ 172,811 $ 163,667 $ 112,956 Interest rate spread.............................. 3.19% 3.11% 2.90%
(1) Investments include stock in the Federal Home Loan Bank of Seattle. 24 The following table shows the effect on net interest income of (1) changes in interest rates (change in weighted-average interest rate multiplied by prior year average portfolio balance) and (2) changes in volume (change in average portfolio balance multiplied by prior period rate). Any remaining change is allocated to the above two categories on a pro rata basis.
Increase (decrease) due to -------------------------------------------------------- (in thousands) Rate Volume Total - ------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1999 vs. 1998 - ------------------------------------- Income from interest-earning assets Loan portfolio....................................................... $(10,902) $ 9,169 $ (1,733) Mortgage/asset-backed securities..................................... 190 1,483 1,673 Investments.......................................................... 576 (1,198) (622) -------------------------------------------------- (10,136) 9,454 (682) -------------------------------------------------- Expense from interest-bearing liabilities Deposits............................................................. (16,206) (5,525) (21,731) FHLB advances and other borrowings................................... (1,943) 13,848 11,905 -------------------------------------------------- (18,149) 8,323 (9,826) -------------------------------------------------- Net interest income................................................... $ 8,013 $ 1,131 $ 9,144 ================================================== Year ended December 31, 1998 vs. 1997 - ------------------------------------- Income from interest-earning assets Loan portfolio....................................................... $(2,833) $ 74,643 $ 71,810 Mortgage/asset-backed securities..................................... (2,674) 27,292 24,618 Investments.......................................................... (552) 7,167 6,615 ------------------------------------------------- (6,059) 109,102 103,043 ------------------------------------------------- Expense from interest-bearing liabilities Deposits............................................................. (3,620) 56,590 52,970 FHLB advances and other borrowings................................... (887) 249 (638) ------------------------------------------------- (4,507) 56,839 52,332 ------------------------------------------------- Net interest income................................................... $(1,552) $ 52,263 $ 50,711 =================================================
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 $29.9 million in 1999, $29.2 million in 1998 and $16.5 million in 1997. The increase in other income during 1998 was primarily due to an increase in fee income from deposits and other branch services due to the BoA acquisition. Lending activities General. Loans and mortgage/asset-backed securities of $5.2 billion represented 88.7% of total assets at December 31, 1999, compared to $4.9 billion, or 86.7%, and $4.9 billion, or 88.3%, at December 31, 1998 and 1997, respectively. ASB's loan portfolio consists primarily of conventional residential mortgage loans which are not insured by the Federal Housing Administration nor guaranteed by the Veterans Administration. 25 The following tables set forth the composition of ASB's loan and mortgage/asset- backed securities portfolio:
December 31, ------------------------------------------------------------------------------------------ 1999 1998 1997 ------------------------------------------------------------------------------------------ (dollars in thousands) Balance % of total Balance % of total Balance % of total - ------------------------------------------------------------------------------------------------------------------------------ Real estate loans (1) Conventional................... $2,896,058 55.85 $2,852,938 57.82% $2,714,680 55.39% Construction and development... 43,706 0.84 35,274 0.72 32,569 0.67 ------------------------------------------------------------------------------------------ 2,939,764 56.69 2,888,212 58.54 2,747,249 56.06 Less Deferred fees and discounts.. (24,083) (0.46) (21,229) (0.43) (16,055) (0.33) Undisbursed loan funds....... (19,368) (0.37) (14,685) (0.30) (13,724) (0.28) Allowance for loan losses.... (22,319) (0.43) (27,944) (0.57) (20,450) (0.42) ------------------------------------------------------------------------------------------ Total real estate loans, net... 2,873,994 55.43 2,824,354 57.24 2,697,020 55.03 ------------------------------------------------------------------------------------------ Other loans Loans on deposits.............. 14,496 0.28 16,836 0.34 17,473 0.36 Consumer and other loans....... 230,437 4.44 236,396 4.79 258,764 5.28 Commercial loans............... 106,098 2.05 94,045 1.91 88,315 1.80 ------------------------------------------------------------------------------------------ 351,031 6.77 347,277 7.04 364,552 7.44 Less Deferred fees and discounts.. - (0.00) (7) (0.00) (14) (0.00) Undisbursed loan funds....... (118) (0.00) (16,592) (0.34) (16,211) (0.33) Allowance for loan losses.... (13,029) (0.25) (11,835) (0.24) (9,500) (0.19) ------------------------------------------------------------------------------------------ Total other loans, net......... 337,884 6.52 318,843 6.46 338,827 6.92 ------------------------------------------------------------------------------------------ Mortgage/asset-backed securities, net of discounts.. 1,973,146 38.05 1,791,353 36.30 1,865,027 38.05 ------------------------------------------------------------------------------------------ Total loans and mortgage/asset-backed securities, net.............. $5,185,024 100.00% $4,934,550 100.00% $4,900,874 100.00% ==========================================================================================
(1) Includes renegotiated loans. 26
December 31, -------------------------------------------------------------- 1996 1995 -------------------------------------------------------------- (dollars in thousands) Balance % of total Balance % of total - ---------------------------------------------------------------------------------------------------------------------- Real estate loans (1) Conventional......................................... $1,825,673 54.63% $1,520,255 48.53% Construction and development......................... 29,964 0.89 29,650 0.95 ---------------------------------------------------------------- 1,855,637 55.52 1,549,905 49.48 Less Deferred fees and discounts......................... (17,759) (0.53) (15,244) (0.49) Undisbursed loan funds.............................. (14,532) (0.43) (10,422) (0.33) Allowance for loan losses........................... (15,792) (0.47) (10,837) (0.34) ---------------------------------------------------------------- Total real estate loans, net......................... 1,807,554 54.09 1,513,402 48.32 ---------------------------------------------------------------- Other loans Loans on deposits.................................... 15,441 0.46 15,688 0.50 Consumer and other loans............................. 167,007 5.00 146,443 4.67 Commercial loans..................................... 18,548 0.55 20,560 0.66 ---------------------------------------------------------------- 200,996 6.01 182,691 5.83 Less Deferred fees and discounts......................... (23) (0.00) (38) (0.00) Undisbursed loan funds.............................. (3,086) (0.09) (6,175) (0.20) Allowance for loan losses........................... (3,413) (0.10) (2,079) (0.07) ---------------------------------------------------------------- Total other loans, net............................... 194,474 5.82 174,399 5.56 ---------------------------------------------------------------- Mortgage/asset-backed securities, net of discounts... 1,340,073 40.09 1,444,832 46.12 ---------------------------------------------------------------- Total loans and mortgage/asset-backed securities, net.................................. $3,342,101 100.00% $3,132,633 100.00% ================================================================
(1) Includes renegotiated loans. ASB's net loan and mortgage/asset-backed securities portfolio increase in 1997 was primarily due to the purchase of $0.9 billion of Hawaii-based BoA loans and the purchase of $0.8 billion in mortgage/asset-backed securities, primarily in anticipation of the BoA acquisition. 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, 1999, approximately $60.8 million of loans purchased from other lenders were secured by properties located in the continental United States. For additional information, including information concerning the geographic distribution of ASB's mortgage/asset-backed securities portfolio and the geographic concentration of credit risk, see Note 16 to HEI's Consolidated Financial Statements. The amount of loans originated during 1999, 1998, 1997, 1996 and 1995 were $627 million, $631 million, $327 million, $498 million and $382 million, respectively. The demand for loans is primarily dependent on the Hawaii real estate market and loan refinancing activity. The increases in loans originated in 1998 from 1997 and in 1996 from 1995 were due primarily to higher refinancings. The decreases in loans originated in 1999 from 1998 and in 1997 from 1996 were due in part to a rise in interest rates and a slow Hawaii real estate market. Residential mortgage lending. ASB is permitted to lend up to 100% of the appraised value of the real property securing a loan. Its general policy is to require private mortgage insurance when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase price at origination. For nonowner-occupied residential properties, the loan-to-value ratio may not exceed 90% of the lower of the appraised value or purchase price at origination. 27 Construction and development lending. ASB provides both fixed and adjustable rate loans for the construction of one-to-four residential unit and commercial properties. Construction and development financing generally involves a higher degree of credit risk than long-term financing on improved, occupied real estate. Accordingly, all construction and development loans are priced higher than loans secured by completed structures. ASB's underwriting, monitoring and disbursement practices with respect to construction and development financing are designed to ensure sufficient funds are available to complete construction projects. As of December 31, 1999, 1998 and 1997, construction and development loans represented 1.3%, 1.1% and 1.0%, respectively, of ASB's gross loan portfolio. See "Loan portfolio risk elements." Multifamily residential and commercial real estate lending. Permanent loans secured by multifamily properties (generally apartment buildings), as well as commercial and industrial properties (including office buildings, shopping centers and warehouses), are originated by ASB for its own portfolio as well as for participation with other lenders. In 1999, 1998 and 1997, loans on these types of properties accounted for approximately 1.1%, 2.8% and 2.7%, 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. Recently, however, ASB has de-emphasized the production of these types of loans. Consumer lending. ASB offers a variety of secured and unsecured consumer loans. Loans secured by deposits are limited to 90% of the available account balance. ASB also offers VISA cards, automobile loans, general purpose consumer loans, home equity lines of credit, checking account overdraft protection and unsecured lines of credit. In 1999, 1998 and 1997, loans of these types accounted for approximately 5.2%, 0.2% and 7.7%, respectively, of ASB's total loan originations. In 1998, consumer loan originations decreased primarily due to the increased amount of first mortgage refinancings which reduced demand for home equity lines of credit. 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 in 1997 and has developed a larger corporate banking department. As of December 31, 1999, 1998 and 1997, corporate banking loans represented 3.6%, 2.8% and 2.8%, respectively, of ASB's total net loan portfolio. Loan origination fee and servicing income. In addition to interest earned on loans, ASB receives income from servicing loans, for late payments and from other related services. Servicing fees are received on loans originated and subsequently sold by ASB through a securitization process and also on loans for which ASB acts as collection agent on behalf of third-party purchasers. ASB acquired the servicing rights for approximately $305 million of residential loans from BoA in 1997. 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 0.08%, 0.10% and 0.07% of total assets at December 31, 1999, 1998 and 1997, respectively. In addition to delinquent loans, other significant lending risk elements include: (1) loans which accrue interest and 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 had no loans which were over 90 days past due on which interest was being accrued as of the dates 28 presented in the table below. The level of nonaccrual and renegotiated loans represented 2.3%, 3.1%, 2.4%, 2.5% and 1.7%, of ASB's total net loans outstanding at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. The following table sets forth certain information with respect to nonaccrual and renegotiated loans as of the dates indicated:
December 31, ---------------------------------------------------------------------- (in thousands) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Nonaccrual loans-- Real estate 1-4 unit residential......................... $43,750 $47,565 $36,812 $23,700 $11,555 Income property.............................. 18,747 29,456 29,955 19,832 13,820 ----------------------------------------------------------------- Total real estate............................. 62,497 77,021 66,767 43,532 25,375 Commercial.................................... 2,192 2,030 776 937 11 Consumer...................................... 3,777 6,454 4,266 2,586 1,680 ----------------------------------------------------------------- Total nonaccrual loans........................ $68,446 $85,505 $71,809 $47,055 $27,066 ================================================================= Renegotiated loans not included above-- Real estate 1-4 unit residential......................... $ 876 $ 1,705 $ 2,264 $ 3,211 $ 1,053 Income property.............................. 5,154 10,559 - - - Commercial................................... - - - - - ----------------------------------------------------------------- Total renegotiated loans...................... $ 6,030 $12,264 $ 2,264 $ 3,211 $ 1,053 =================================================================
ASB's policy generally is to place mortgage loans on a nonaccrual status (i.e., interest accrual is suspended) when the loan becomes 90 days past due or on an earlier basis when there is a reasonable doubt as to its collectability. Loans on nonaccrual status amounted to $68.4 million (2.1% of total loans), $85.5 million (2.6% of total loans), $71.8 million (2.3% of total loans), $47.1 million (2.3% of total loans) and $27.1 million (1.6% of total loans) at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. From 1995 through 1998, the increases in nonaccrual loans were a result of Hawaii's weak economy. In 1996, the $20.0 million increase in nonaccrual loans was attributable 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 $24.8 million increase in nonaccrual loans included a $13.1 million increase in nonaccruing, smaller balance residential loans and a $10.1 million increase in nonaccruing, income property real estate loans. In 1998, the $13.7 million increase in nonaccrual loans was primarily due to a $10.3 million increase in nonaccruing, smaller balance residential loans. In 1999, the $17.0 million decrease in nonaccrual loans was primarily due to increased charge-offs and lower delinquencies. In 1998, ASB renegotiated two income property loans which are currently making timely monthly payments of principal and interest. 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. 29 The following table presents the changes in the allowance for loan losses for the years indicated.
Years ended December 31, --------------------------------------------------------------------------- (dollars in thousands) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses, beginning of year...... $39,779 $29,950 $19,205 $12,916 $ 8,793 Additions to provisions for losses................ 16,500 13,802 6,934 7,631 4,887 Allowance for losses on loans acquired from BoA... - - 6,445 - - Net charge-offs Real estate loans................................. 15,215 1,549 992 390 69 Other loans....................................... 5,716 2,424 1,642 952 695 ---------------------------------------------------------------------- Total net charge-offs............................. 20,931 3,973 2,634 1,342 764 ---------------------------------------------------------------------- Allowance for loan losses, end of year............ $35,348 $39,779 $29,950 $19,205 $12,916 ====================================================================== Ratio of net charge-offs during the year to average loans outstanding.................. 0.66% 0.13% 0.12% 0.07% 0.04% ======================================================================
ASB's ratio of provisions for loan losses during the year to average loans outstanding was 0.52%, 0.45%, 0.32%, 0.41% and 0.28% for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, 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 1999, ASB decreased its loss reserve by $4.4 million due to higher charge-offs and lower delinquencies. In 1999, management disposed of nonperforming loans at a loss, which resulted in higher charge-offs. In 1998, 1997 and 1996, 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 $9.8 million, $4.3 million and $6.3 million, respectively. Investment activities In recent years, ASB's investment portfolio consisted primarily of stock of the FHLB of Seattle, federal agency obligations and mortgage/asset-backed securities. In response to the then increasing interest rate environment, management decided to liquidate ASB's portfolio of securities held for trading in 1994. ASB recognized a one-time gain on sale of trading account securities in 1995 in accordance with implementation guidance provided in a Financial Accounting Standards Board special report. ASB did not maintain a portfolio of securities held for trading during 1997, 1998 or 1999. ASB's investment portfolio, excluding mortgage/asset-backed securities to be held-to-maturity, consisted of a $73.8 million investment in FHLB stock of Seattle, a $71.5 million investment in collateralized debt obligations and a $41.5 million investment in federal agency obligations as of December 31, 1999. Investment in federal agency obligations amounted to $43.0 million and investment in FHLB stock amounted to $68.6 million as of December 31, 1998. Investment in U.S. Treasury securities amounted to $42.1 million and investment in FHLB stock amounted to $63.5 million as of December 31, 1997. The weighted- average rate on investments during 1999, 1998 and 1997 was 6.81%, 6.23% and 7.57%, respectively. The amount that ASB is required to invest 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 the receipt of interest and principal on outstanding loans receivable and mortgage/asset-backed securities, borrowings from the FHLB of Seattle, securities sold under agreements to repurchase and other sources. ASB borrows on a short-term basis to compensate for seasonal or other reductions in deposit flows. ASB also may borrow on a longer-term basis to 30 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 1999, ASB had average deposits of $3.7 billion, with a net savings outflow of $478.5 million, excluding interest credited to deposit accounts, compared to a net savings outflow in 1998 of $174.1 million. In 1997, ASB had a net savings inflow of $21.9 million, excluding $1.7 billion in deposits assumed from BoA. The net savings outflows in 1999 and 1998 were partly due to competition from the equity market and management's decision not to pursue high-priced certificates of deposit. In addition, during 1999, $235.2 million of collateralized deposits were reclassified to securities sold under agreements to repurchase. In the three years ended December 31, 1999, 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, ------------------------------------------------------------------------------------------------------------ 1999 1998 1997 ------------------------------------------------------------------------------------------------------------ % 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....... $1,120,545 30.2% 2.31% $1,152,048 29.8% 2.87% $ 899,368 38.7% 2.98% Negotiable Order of Withdrawal accounts.... 621,140 16.8 0.83 616,612 16.0 0.93 305,626 13.2 1.19 Money market account.... 333,190 9.0 3.28 329,128 8.5 3.94 93,425 4.0 3.76 Certificate accounts.... 1,631,875 44.0 4.80 1,762,758 45.7 5.13 1,026,007 44.1 5.38 ------------------------------------------------------------------------------------------------------- Total deposits.......... $3,706,750 100.0% 3.25% $3,860,546 100.0% 3.68% $2,324,426 100.0% 3.83% =======================================================================================================
At December 31, 1999, ASB had $404 million in certificate accounts of $100,000 or more, maturing as follows:
(in thousands) Amount - ------------------------------------------------------------------------------------------------------- Three months or less................................................................. $144,537 Greater than three months through six months......................................... 79,485 Greater than six months through twelve months........................................ 147,120 Greater than twelve months........................................................... 32,810 ------------------ $403,952 ==================
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/asset-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, 1999, 1998 and 1997, advances from the FHLB amounted to $1.2 billion, $806 million and $736 million, respectively. The weighted-average rates on the advances from the FHLB outstanding at December 31, 1999, 1998 and 1997 were 6.25%, 6.17% and 6.26%, respectively. The maximum amount outstanding at any month-end during 1999, 1998 and 1997 was $1.2 billion, $831 million and $941 million, respectively. Advances from the FHLB averaged $965 million, $779 million and $701 million during 1999, 1998 and 1997, respectively, and the approximate weighted-average rate thereon was 6.07%, 6.25% and 6.32%, respectively. During 1999 and 1998, increased advances were needed to support loan originations and purchases of mortgage/asset-backed securities. During 1997, increased advances from the FHLB were needed to support 31 investment activities. In anticipation of the BoA acquisition in 1997, ASB acquired approximately $0.8 billion in mortgage/asset-backed securities which were temporarily funded in part by advances from the FHLB. Securities sold under agreements to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as liabilities in the consolidated statements of financial condition. The securities underlying the agreements to repurchase continue to be reflected in the asset accounts. At December 31, 1999, 1998 and 1997, the entire outstanding amounts under these agreements of $661 million (including accrued interest of $3.0 million), $524 million (including accrued interest of $1.5 million) and $387 million (including accrued interest of $0.9 million), respectively, were to purchase identical securities. The weighted-average rates on securities sold under agreements to repurchase outstanding at December 31, 1999, 1998 and 1997 were 5.58%, 5.33% and 5.66%, respectively. The maximum amount outstanding at any month-end during 1999, 1998 and 1997 was $661 million, $652 million and $765 million, respectively. Securities sold under agreements to repurchase averaged $540 million, $487 million and $561 million during 1999, 1998 and 1997, respectively, and the approximate weighted-average interest rate thereon was 5.24%, 5.39% and 5.58%, respectively. The following table sets forth information concerning ASB's advances from FHLB and other borrowings at the dates indicated:
December 31, -------------------------------------------------------- (dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Advances from FHLB........................................ $1,189,081 $ 805,581 $ 736,474 Securities sold under agreements to repurchase............ 661,215 523,800 386,692 -------------------------------------------------------- Total borrowings.......................................... $1,850,296 $1,329,381 $1,123,166 ======================================================== Weighted-average rate..................................... 6.01% 5.84% 6.06% ========================================================
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, 11 FDIC-insured banks and 107 credit unions at September 30, 1999. Additional competition for deposits comes from various types of corporate and government borrowers, including insurance companies. To meet competition, ASB offers a variety of savings and checking accounts at competitive rates, convenient business hours, convenient branch locations with interbranch deposit and withdrawal privileges at each branch and approximately 140 convenient automated teller machines. ASB also conducts advertising and promotional campaigns. The primary factors in competing for first mortgage and other loans are interest rates, loan origination fees and the quality and range of lending services offered. Competition for origination of first mortgage loans comes primarily from other savings institutions, mortgage banking firms, commercial banks, insurance companies and real estate investment trusts. ASB believes that it is able to compete for such loans primarily through the interest rates and loan fees it charges, the type of mortgage loan programs it offers and the efficiency and quality of the services it provides its borrowers and the real estate business community. In recent years, there has been significant bank and thrift merger activity in Hawaii. Management cannot predict the impact, if any, of these mergers on the Company's future competitive position, results of operations, financial condition or liquidity. Credit Union Developments. The 1934 Federal Credit Union Act states that credit union membership "shall be limited to groups having a common bond of occupation or association" or to groups in a well-defined geographical area. In 1982, the National Credit Union Administration expanded its definition of "common bond" to allow "multiple common bonds"--i.e., small businesses that lacked enough workers to form their own credit unions were allowed to 32 join existing credit unions, so long as each group of employees had its own "bond." Government officials estimate that rule allowed credit unions to add approximately 15 million people to their membership rolls. In February 1998, the Supreme Court decided that this expanded definition of "common bond" was impermissible, holding that the 1934 law required all members of a credit union to share a single common bond. In August 1998, the Credit Union Membership Access Act became law, which, among other things, amended the 1934 law to retroactively authorize credit union membership based on multiple common bonds, as long as each of the relevant groups has (with some exceptions) fewer than 3,000 members. The Credit Union Membership Access Act also facilitates the ability of insured credit unions to convert to mutual savings banks or savings associations, and requires that insured credit unions meet capital standards similar to those enacted for banks and thrifts in 1991. In December 1998, the National Credit Union Administration voted to adopt final rules to implement the Credit Union Membership Access Act. The new rules appear to favor the creation of larger credit unions by facilitating the merger of credit unions with fewer than 3,000 members. Several members of the House Banking Committee criticized the new rules as disregarding Congressional intent and indicated further legislation is possible. The American Bankers Association has also filed a suit challenging the new rules. A motion filed by the American Bankers Association in the suit for a preliminary injunction was denied, but the suit has not been finally resolved. It is too early to evaluate whether these developments will result in increased competition for ASB by credit unions. International power--HEI Power Corp. - ------------------------------------ HEIPC was formed in March 1995 and its subsidiaries (collectively, the HEIPC Group) have been and will be formed from time to time to pursue independent power and integrated energy services projects in Asia and the Pacific. The success of any project undertaken by the HEIPC Group in foreign countries will be dependent on many factors, including the economic, political, technological, regulatory and logistical circumstances surrounding each project, the nature of and parties to purchased power agreements, currency exchange rate fluctuations and the location of the project. Due to political or regulatory actions or other circumstances, projects may be delayed or even prohibited. There is no assurance that any project undertaken by the HEIPC Group will be successfully completed or that the HEIPC Group's investment in any such project will not be lost, in whole or in part. HEI Investments, Inc. In January 2000, HEI Investment Corp. (HEIIC), incorporated in May 1984 primarily to make passive investments in corporate securities and other long- term investments, changed its name to HEI Investments, Inc. (HEIII). HEIII is not an "investment company" under the Investment Company Act of 1940 and has no direct employees. In February 2000, HEIII became a subsidiary of HEIPC and part of the HEIPC Group. HEIII's long-term investments currently consist primarily of investments in leveraged leases and an investment in the Philippines. HEIII 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 (now HEIII) 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 five supermarkets leased to The Kroger Co. in various states. On March 6, 2000, a subsidiary of HEIII acquired a 50% interest in El Paso Philippines Holding Company, Inc. (EPHC), which is an indirect subsidiary of El Paso Energy Corporation, for $87 million plus up to an additional $6 million of payments that are contingent upon future performance. EPHC owns approximately 91.7% of the common shares of East Asia Power Resources Corporation, a publicly traded Philippine holding company primarily engaged in the electric generation business in Manila and Cebu through its direct and indirect subsidiaries, using land and barge-based generating facilities, fired by bunker fuel oil, with total installed capacity of approximately 390 MW. For a further discussion of the HEIPC Group, its operating losses, projects, investments and commitments, see the "International power" section in HEI's MD&A and Note 5 to HEI's Consolidated Financial Statements. 33 Other - ----- HEI Properties, Inc. - -------------------- HEIDI Real Estate Corp. was formed in February 1998. In September 1999, its name was changed to HEI Properties, Inc. (HEIPI) and HEIDI transferred ownership of HEIPI to HEI. HEIPI currently holds an investment in Utech Venture Capital Corporation and an investment in HMS Hawaii, a Hawaii limited partnership. It is expected that HEIPI will also hold real estate and related assets. HEI Leasing, Inc. - ------------------ HEI Leasing, Inc. was formed in February 2000 to own passive investments and real estate subject to leases. The Old Oahu Tug Service, Inc. - ------------------------------ On November 10, 1999, Hawaiian Tug & Barge Corp. changed its name to The Old Oahu Tug Service, Inc. (TOOTS). Prior to that date, HTB was the parent of Young Brothers, Limited. In November 1999, HTB sold substantially all of its operating assets and YB. HTB and its wholly owned subsidiary, YB, had been acquired by HEI in 1986. HTB had provided marine transportation services in Hawaii and the Pacific area, including charter tug and barge and harbor tug operations. YB, which is a regulated interisland cargo carrier, transports general freight and containerized cargo by barge on a regular schedule between all major ports in Hawaii. Discontinued operations - ----------------------- For information concerning the Company's discontinued residential real estate development business conducted by MPC and its subsidiaries and its discontinued property and casualty insurance operations formerly conducted by HIG, see Note 17 to HEI's Consolidated Financial Statements. 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 SEC under the 1935 Act except for Section 9(a)(2) (relating to the acquisition of securities of other public utility companies) through compliance with certain annual filing requirements under the 1935 Act for holding companies which own utility businesses that are intrastate in character. The exemption afforded HEI and HECO may be revoked if the SEC finds that such exemption "may be detrimental to the public interest or the interest of investors or consumers." HEI and HECO may own or have interests in foreign utility operations without adversely affecting this exemption so long as the requirements of other exemptions under the 1935 Act are satisfied. HEI has obtained the PUC certification which is a prerequisite to obtaining an exemption for foreign utility operations and to the Company's maintenance of its exemption under the 1935 Act if it acquires such ownership interests. In 1996, HEI filed with the SEC a Form U-57, "Notification of Foreign Utility Company Status," on behalf of HEI Power Corp. Guam (for the HEIPC Group's Guam project). In 1998, HEI filed two Forms U-57 on behalf of Baotou Tianjiao Power Co., Ltd. (for the HEIPC Group's China project) and on behalf of Cagayan Electric Power & Light Co., Inc. (for the HEIPC Group's investment in that entity). In March 2000, HEI filed a Form U-57 on behalf of East Asia Power Resources Corporation (for the HEIPC Group's investment in that entity). Legislation has been introduced in Congress in the past that would repeal the 1935 Act leaving the regulation of utility holding companies to be governed by other federal and state laws. Management cannot predict if 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 34 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 dividends, limit affiliate transactions or otherwise restrict activities as a result of losses suffered by HEI, HEIDI or their other subsidiaries, and thus conceivably may be an indirect means of limiting affiliations between ASB and affiliates engaged in nonfinancial activities. See "Restrictions on dividends and other distributions." OTS regulations also generally prohibit savings and loan holding companies and their nonthrift subsidiaries from engaging in activities other than those which are specifically enumerated in the regulations. Such restrictions, if applicable to HEI and HEIDI, would significantly limit the kinds of activities in which HEI and HEIDI and their subsidiaries may engage. However, the OTS regulations provide for an exemption which is available to HEI and HEIDI if ASB satisfies the qualified thrift lender (QTL) test discussed below. See "Savings bank regulation--Qualified thrift lender test." ASB must continue to meet the qualified thrift lender test in order to avoid restrictions on the activities of HEI and HEIDI and their subsidiaries which could result in a need to divest ASB. ASB met the QTL test at all times during 1999. HEI and HEIDI are prohibited, directly or indirectly, or through one or more subsidiaries, from (i) acquiring control of, or acquiring by merger or purchase of assets, another insured institution or holding company thereof, without prior written OTS approval; (ii) acquiring more than 5% of the voting shares of another savings association or savings and loan holding company which is not a subsidiary; or (iii) acquiring or retaining control of a savings association not insured by the FDIC. No director or officer of HEI or HEIDI, or person beneficially owning more than 25% of such holding company's voting shares, may, except with the prior approval of the OTS, (a) also serve as director, officer, or employee of any insured institution or (b) acquire control of any savings association not a subsidiary of such holding company. ASB received the requisite OTS approval for its assumption of substantially all of the Hawaii deposit liabilities of BoA and the acquisition of most of BoA's Hawaii branches and certain of its Hawaii-based loans, which transactions were 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 abilities of certain of HEI's subsidiaries to pay dividends or make other distributions to HEI are subject to contractual and regulatory restrictions. Under the PUC Agreement, in the event that the consolidated common stock equity of the electric utility subsidiaries falls below 35% of total electric utility capitalization, the electric utility subsidiaries would be restricted, unless they obtained PUC approval, in their payment of cash dividends to 80% of the earnings available for the payment of dividends in the current fiscal year and preceding five years, less the amount of dividends paid during that period. The PUC Agreement also provides that the foregoing dividend 35 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 51% of their total capitalization (including the current maturities of long-term debt, but excluding short-term borrowings) as of December 31, 1999. As of December 31, 1999, HECO and its subsidiaries had net assets of $806 million, of which approximately $420 million were not available for transfer to HEI without regulatory approval. The ability of ASB to make capital distributions to HEI and other affiliates is restricted under federal law. Subject to a limited exception for stock redemptions that do not result in any decrease in ASB's capital and would improve ASB's financial condition, ASB is prohibited from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, ASB would be deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized. See "Savings bank regulation--Prompt corrective action." As a Tier-1 institution (one that meets its capital requirements and has not been notified by the OTS that it is in need of more than normal supervision), ASB may make capital distributions in amounts up to one-half of ASB's surplus capital (the amount of its capital in excess of its capital requirement) at the beginning of a calendar year, plus its year-to-date net income for that calendar year. ASB, as a Tier-1 institution, may exceed the foregoing limits if ASB provides a thirty-day advance notice to the OTS and receives no objection within thirty days. However, even in the case of distributions within the permissible limits, a thirty day advance notice to the OTS is required. HEI and its subsidiaries are also subject to debt covenants, preferred stock resolutions and the terms of guarantees that could limit their respective abilities to pay dividends. The Company does not expect that the regulatory and contractual restrictions applicable to HEI or its direct and indirect subsidiaries will significantly affect the operations of HEI or its ability to pay dividends on its common stock. Electric utility regulation The PUC regulates the rates, issuance of securities, accounting and certain other aspects of the operations of HECO and its electric utility subsidiaries. See the previous 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." 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." 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 electric public utility subsidiaries (HECO, MECO and HELCO) and HEI and affiliated interests, are subject to regulation by the PUC. All contracts (including summaries of unwritten agreements), made on or after July 1, 1988 of $300,000 or more in a calendar year for management, supervisory, construction, engineering, accounting, legal, financial and similar services and for the sale, lease or transfer of property between a public utility and affiliated interests must be filed with the PUC to be effective, and the PUC may issue cease and desist orders if such contracts are not filed. All such affiliated contracts for capital expenditures (except for real property) must be accompanied by comparative price quotations from two nonaffiliates, unless the quotations cannot be obtained without substantial expense. Moreover, all transfers of $300,000 or more of real property between a public utility and affiliated interests require the prior approval of the PUC and proof that the transfer is in the best interest of the public utility and its customers. If the PUC, in its discretion, determines that an affiliated contract is unreasonable or otherwise contrary to the public interest, the utility must either revise the 36 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 contract of $300,000 or more by clear and convincing evidence. An "affiliated interest" is defined by statute and includes officers and directors of a public utility, every person owning or holding, directly or indirectly, 10% or more of the voting securities of a public utility, and corporations which have in common with a public utility more than one-third of the directors of that public utility. In January 1993, to address community concerns expressed at the time, HECO proposed that the PUC initiate a review of the relationship between HEI and HECO and the effects of that relationship on the operations of HECO. The PUC opened a docket and initiated such a review to determine whether the HEI-HECO relationship, HEI's diversified activities, and HEI's policies, operations and practices had resulted in or were having any negative effects on HECO, its electric utility subsidiaries and ratepayers. In May 1994, the PUC selected a consultant, Dennis Thomas and Associates, to perform the review. In early 1995, Dennis Thomas and Associates issued its report (the Thomas report) to the PUC. The Thomas report concluded that "on balance, diversification has not hurt electric ratepayers." Other major findings were that (1) no utility assets have been used to fund HEI's nonutility investments or operations, (2) management processes within the electric utilities operate without interference from HEI and (3) HECO's access to capital did not suffer as a result of HEI's involvement in nonutility activities and that diversification did not permanently raise or lower the cost of capital incorporated into the rates paid by HECO's utility customers. The Thomas report also included a number of recommendations, most of which the Company has implemented. In December 1996, the PUC issued an order that adopted the Thomas report in its entirety, ordered HECO to continue to provide the PUC with status reports on its compliance with the PUC agreement (pursuant to which HEI became the holding company of HECO) and closed the investigation and proceeding. The PUC has not required that the Company implement all of the recommendations in the Thomas report. In the order, the PUC also stated that it adopted the recommendation of the DOD that HECO, MECO and HELCO present a comprehensive analysis of the impact that the holding company structure and investments in nonutility subsidiaries have on a case-by-case basis on the cost of capital to each utility in future rate cases and remove such effects from the cost of capital. In its rate increase application filed in the first quarter of 1998, MECO provided an affidavit of a consultant retained by Dennis Thomas and Associates for the review. The consultant stated that "the methodology used to establish the allowed rate of return for electric utility operations inherently avoids any bias which might be introduced by HEI's diversified activities," and further stated that the findings of the comprehensive review conducted for the Thomas report with respect to the availability and cost of capital to HEI and its utility subsidiaries would not be expected to be materially different from those adopted by the PUC in December 1996. A similar affidavit was provided with HELCO's rate increase application filed in October 1999. See also "Holding company regulation." HECO and its subsidiaries are not subject to regulation by the Federal Energy Regulatory Commission under the Federal Power Act, except under Sections 210 through 212 (added by Title II of PURPA and amended by the Energy Policy Act of 1992), which permit the Federal Energy Regulatory Commission to order electric utilities to interconnect with qualifying cogenerators and small power producers, and to wheel power to other electric utilities. Title I of PURPA, which relates to retail regulatory policies for electric utilities, 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. 37 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 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. Deposit insurance coverage. The Federal Deposit Insurance Act, as amended by Federal Deposit Insurance Corporation Insurance Act of 1991 (FDICIA), and regulations promulgated by the FDIC, govern insurance coverage of deposit amounts. Generally, the deposits maintained by a depositor in an insured institution are insured to $100,000, with the amount of all deposits held by a depositor in the same capacity (even if held in separate accounts) aggregated for purposes of applying the $100,000 limit. For example, all deposits held in a depositor's individual capacity are aggregated with each other but not with deposits maintained by such depositor and his or her spouse in a qualifying joint account, these latter joint deposits being separately insured to an aggregate of $100,000. An individual's interest in deposits at the same institution in any combination of certain retirement accounts and employee benefit plans will be added together and insured up to $100,000 in the aggregate. Institutions that are "well capitalized" under the FDIC's prompt corrective action regulations are generally able to provide "pass-through" insurance coverage (i.e., insurance coverage that passes through to each owner/beneficiary of the applicable deposit) for the deposits of most employee benefit plans (i.e., $100,000 per individual participating, not $100,000 per plan). Consequently, the FDIC deposit insurance regulations require financial institutions to provide employee benefit plan depositors information, not otherwise available, on the institution's capital category and whether "pass- through" deposit insurance is available. As of December 31, 1999, ASB was "well capitalized." Federal thrift charter. In November 1999, Congress passed the Gramm-Leach-Bliley Act (the Act). The Act repeals the Depression Era Glass-Steagall Act so that banks, insurance companies and investment firms can compete directly against each other, thereby allowing "one-stop shopping" for an array of financial services. Although the Act does further restrict the creation of so-called "unitary savings and loan holding companies" (i.e., companies such as HEI whose subsidiaries include one or more savings associations and one or more nonfinancial subsidiaries), the unitary savings and loan holding company relationship among HEI, HEIDI and ASB is "grandfathered" under the Act so that HEI and its subsidiaries will be able to continue to engage in their current activities. It is too early to assess the net effect of the Act on ASB's competitive position. On the one hand, the availability of "one-stop shopping" for financial services might increase competitive pressures on ASB. On the other hand, the restriction on the creation of new unitary savings and loan association holding companies may decrease competitive pressure by reducing the incentive to create new thrifts. Under the Act, any proposed acquisition of ASB would have to satisfy applicable statutory and regulatory requirements and potential acquirers of ASB would most likely be limited to companies that are already qualified as, or capable of qualifying as, either a traditional savings and loan association holding company or a bank holding company, or as one of the newly authorized financial holding companies permitted under the Act. In addition to its effects upon competition, the Act might result in increased costs for ASB. For example, the Act imposes on financial institutions an obligation to protect the security and confidentiality of its customers' nonpublic personal information, and directs, among others, the FDIC and the OTS to establish "appropriate standards" to protect such information and the use thereof. Proposed rules establishing such standards have been published by the regulatory agencies. The period for public comment on the proposed rules expires on March 31, 2000. ASB currently has in place a policy concerning customer privacy and believes that any additional compliance costs would not be significant. By law, the Financing Corporation's assessment rate on deposits insured by the Bank Insurance Fund had to be one-fifth the rate on deposits insured by the Savings Association Insurance Fund until January 1, 2000. Currently, the FICO interest obligations for both banks and thrifts are identical, at a rate of 2.12 cents per $100 of deposits. See "Deposit-insurance premiums and regulatory developments" in Note 4 to HEI's Consolidated Financial Statements and page 39 of HEI's MD&A. 38 Capital requirements. Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), the OTS has set three capital standards for thrifts, each of which must be no less stringent than those applicable to national banks. As of December 31, 1999, ASB was in compliance with all of the minimum standards with a core capital ratio of 5.7% (compared to a 3% requirement), a tangible capital ratio of 5.7% (compared to a 1.5% requirement) and risk-based capital ratio of 11.0% (based on risk-based capital of $345.3 million, $93.6 million in excess of the 8% requirement). Effective April 1, 1999, the OTS revised its risk-based capital standards as part of the effort by the OTS, FDIC, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency to implement the provisions of the Riegle Community Development and Regulatory Improvement Act of 1994, which requires these agencies to work together to make uniform their respective regulations and guidelines implementing common statutory or supervisory policies. These OTS revisions affect the risk-based capital treatment of: (1) construction loans on presold residential properties; (2) junior liens on 1- to 4-family residential properties; (3) investments in mutual funds; and (4) the core capital leverage ratio for institutions which do not have a composite rating of "1" under the Uniform Financial Institution Rating System (i.e., the CAMELS rating system). Under the new rules, an institution with a composite rating of "1" under the CAMELS rating system must maintain core capital in an amount equal to at least 3% of adjusted total assets. All other institutions must maintain a minimum core capital of 4% of adjusted total assets, and higher capital ratios may be required if warranted by particular circumstances. As of December 31, 1999, ASB met the minimum core capital requirement of 4% of adjusted total assets. Affiliate transactions. Significant restrictions apply to certain transactions between ASB and its affiliates, including HEI and its direct and indirect subsidiaries. FIRREA significantly altered both the scope and substance of such limitations on transactions with affiliates and provided for thrift affiliate rules similar to, but more restrictive than, those applicable to banks. For example, ASB is prohibited from making any loan or other extension of credit to an entity affiliated with ASB unless the affiliate is engaged exclusively in activities which the Federal Reserve Board has determined to be permissible for bank holding companies. There are also various other restrictions which apply to certain transactions between ASB and certain executive officers, directors and insiders of ASB. ASB is also barred from making a purchase of or any investment in securities issued by an affiliate, other than with respect to shares of a subsidiary of ASB. Financial Derivatives and Interest Rate Risk. In 1996, the Board of Governors of the Federal Reserve System, the FDIC and the Office of the Comptroller of the Currency issued a joint agency policy statement to bankers to provide guidance on sound practices for managing IRR. However, the OTS has elected not to pursue a standardized policy towards interest rate risk and investment and derivatives activities with the other federal banking regulators. On December 1, 1998, the OTS issued final rules on financial derivatives, effective January 1, 1999. The OTS views these final rules as consistent with, although more detailed than, the 1996 joint policy statement. The purpose of these rules is to update the OTS rules on financial derivatives, which had remained virtually unchanged for over 15 years. Most significantly, the new rules address interest rate swaps, a derivative instrument commonly used by thrifts to manage interest rate risk which was not addressed in the prior OTS rules. Currently ASB does not use interest rate swaps to manage interest rate risk. Generally speaking, the new rules permit thrifts to engage in transactions involving financial derivatives to the extent these transactions are otherwise authorized under applicable law and are safe and sound. The new rules have required ASB to revise its internal procedures for handling financial derivative transactions, including increased involvement of the ASB board of directors in authorizing and monitoring such transactions. Concurrently with the issuance of the new rules of financial derivative transactions, the OTS also adopted on December 1, 1998 Thrift Bulletin 13a (TB 13a) for purpose of providing guidance on the management of interest rate risks, investment securities and derivatives activities. TB 13a also describes the guidelines OTS examiners will use in assigning the "Sensitivity to Market Risk" component rating under the Uniform Financial Institutions Rating System (i.e., the CAMELS rating system). TB 13a became effective on December 1, 1998, and replaces several previous Thrift Bulletins dealing with interest rate risk and securities activities. 39 TB 13a updates the OTS's minimum standards for thrift institutions' interest rate risk management practices with regard to board-approved risk limits and interest rate risk measurement systems, and makes several significant changes. First, under TB 13a, institutions no longer set board-approved limits or provide measurements for the plus and minus 400 basis point interest rate scenarios prescribed by the original TB 13. TB 13a also changes the form in which those limits should be expressed. Second, TB 13a provides guidance on how the OTS will assess the prudence of an institution's risk limits. Third, TB 13a raises the size threshold above which institutions should calculate their own estimates of the interest rate sensitivity of Net Portfolio Value (NPV) from $500 million to $1 billion in assets. Fourth, TB 13a specifies a set of desirable features that an institution's risk measurement methodology should utilize. Finally, TB 13a provides an extensive discussion of "sound practices" for interest rate risk management. TB 13a also contains guidance on thrifts' investment and derivatives activities by describing the types of analysis institutions should perform prior to purchasing securities or financial derivatives. TB13a also provides guidelines on the use of certain types of securities and financial derivatives for purposes other than reducing portfolio risk. Finally, TB 13a provides detailed guidelines for implementing part of the Notice announcing the revision of the CAMELS rating system, published by the Federal Financial Institutions Examination Council. That publication announced revised interagency policies that, among other things, established the Sensitivity to Market Risk component rating (the "S" rating). TB 13a provides quantitative guidelines for an initial assessment of an institution's level of interest rate risk. Examiners have broad discretion in implementing those guidelines. It also provides guidelines concerning the factors examiners consider in assessing the quality of an institution's risk management systems and procedures. Supervision. The adoption of FDICIA in 1991 subjected the banking and thrift industries to heightened regulation and supervision. FDICIA made a number of reforms addressing the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions and improvement of accounting standards. FDICIA also limited deposit insurance coverage, implemented changes in consumer protection laws and called for least-cost resolution and prompt corrective action with regard to troubled institutions. Pursuant to FDICIA, the federal banking agencies promulgated regulations which may affect the operations of ASB and its holding companies. Such regulations address, for example, standards for safety and soundness, real estate lending, accounting and reporting, transactions with affiliates, and loans to insiders. Prompt corrective action. FDICIA establishes a statutory framework that is triggered by the capital level of a savings association and subjects it to progressively more stringent restrictions and supervision as capital levels decline. The OTS rules implement the system of prompt corrective action. In particular, the rules define the relevant capital measures for the categories of "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized." A savings association that is undercapitalized or significantly undercapitalized is subject to additional mandatory supervisory actions and a number of discretionary actions if the OTS determines that any of the actions is necessary to resolve the problems of the association at the least possible long-term cost to the SAIF. A savings association that is critically undercapitalized must be placed in conservatorship or receivership within 90 days, unless the OTS and the FDIC concur that other action would be more appropriate. Interest rates. FDIC regulations restrict the ability of financial institutions that are not "well capitalized" to offer interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of December 31, 1999, ASB was "well capitalized" and thus not subject to these interest rate restrictions. Qualified thrift lender test. FDICIA amended the QTL test provisions of FIRREA by reducing the percentage of assets thrifts must maintain in "qualified thrift investments" from 70% to 65%, and changing the computation period to require that the percentage be reached on a monthly average basis in nine out of the previous 12 months. The 1997 Omnibus Appropriations Act expanded the types of loans that constitute "qualified thrift investments" from the traditional category of housing-related loans to include small business loans, education loans, loans made through credit card accounts, as well as a basket of other consumer loans and certain other types of assets not to exceed 40 20% of total assets. Savings associations that fail to satisfy the QTL test by not holding the required percentage of "qualified thrift investments" are subject to various penalties, including limitations on their activities. Failure to satisfy the QTL test would also bring into operation restrictions on the activities that may be engaged in by HEI, HEIDI and their other subsidiaries and could effectively result in the required divestiture of ASB. At all times during 1999, 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. Historically, the FHLBs have served the central liquidity facilities for savings associations and sources of long-term funds for financing housing. As a consequence of the recent Gramm-Leach-Bliley Act, the requirement that FHLB members have at least 10% of their assets in residential mortgage loans has been eliminated for so-called community financial institutions (i.e., financial institutions with assets of less than $500 million), and FHLBs have been authorized to act as sources of long-term funds for such community financial institutions for loans to small businesses, small farms and small agri-businesses. Because ASB is not a community financial institution, long-term advances to ASB may only be made for the purpose of providing funds for financing residential housing. At such time as an advance is made to ASB or renewed, it must be secured by collateral from one of the following categories: (1) fully disbursed, whole first mortgages on improved residential property, or securities representing a whole interest in such mortgages; (2) securities issued, insured or guaranteed by the U.S. Government or any 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. As a result of the Gramm-Leach-Bliley Act, many smaller financial institutions are expected to join the FHLB System, and the Federal Housing Finance Board is required to formulate new regulations prescribing uniform capital standards applicable to each of the 12 regional FHLBs. These new regulations will include risk-based capital standards requiring each FHLB to maintain permanent capital in an amount that is sufficient to meet credit risk and market risk. As of the end of February 2000, these new regulations had not yet been published. Once these new regulations have been published, the boards of each of the regional FHLBs are required to formulate and submit for Federal Housing Finance Board approval a plan to meet the minimum capital standards included in the regulations. Because of the uncertainty resulting from prospective admission to the FHLB System of community financial institutions and the new purposes for which these community financial institutions are permitted to obtain advances from FHLB regional banks, as well as because the Federal Housing Finance Board has not yet published its new regulations, it cannot be known at this time what impact the ultimate plan formulated by the FHLB of Seattle might have on ASB. Community Reinvestment. In 1977, Congress enacted the Community Reinvestment Act (CRA) to ensure that banks and thrifts help meet the credit needs of their communities, including low- and moderate-income areas, consistent with safe and sound lending practices. The OTS will consider ASB's CRA record in evaluating an application for a new deposit facility, including the establishment of a branch, the relocation of a branch or office, or the acquisition of an interest in another bank or thrift. ASB received a CRA rating of "outstanding" from the OTS in December 1997 and such rating had not changed as of March 13, 2000. The recently enacted Gramm-Leach-Bliley Act included a so-called "sunshine amendment" to the CRA which requires, among other things, the disclosure of loans and other payments made after November 12, 1999 to community groups by financial institutions to satisfy the CRA. After May 12, 2000, the financial institution must report how community groups use the proceeds of such loans and other payments. The Act directs the regulatory agencies, including the FDIC and the OTS, to prescribe procedures designed to ensure and monitor compliance with the "sunshine amendment." As of the end of February 2000, proposed rules had not been published, and it 41 cannot be known at this time whether the rules eventually adopted by the regulatory authorities might impose additional compliance costs on ASB. Other laws. ASB is subject to federal and state consumer protection laws which affect lending activities, such as the Truth-in-Lending Law, the Truth in Savings Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and several federal and state financial privacy acts. These laws may provide for substantial penalties in the event of noncompliance. Management of ASB believes that its lending activities are in compliance with these laws and regulations. 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 repealed 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. As of December 31, 1996, ASB had a deferred tax liability of approximately $4.8 million for its post-1987 reserve. Environmental regulation HEI and its subsidiaries are subject to federal and state statutes and governmental regulations pertaining to water quality, air quality and other environmental factors. Water quality controls. As part of the process of generating electricity, water used for condenser cooling of the electric utility subsidiaries' steam electric generating stations is discharged into ocean waters or into underground injection wells. The subsidiaries are periodically required to obtain permits from the DOH in order to be allowed to discharge the water, including obtaining permit renewals for existing facilities and new permits for new facilities. The electric utility subsidiaries must obtain National Pollutant Discharge Elimination System 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. Under the terms of the agreement for the sale of YB, HEI and TOOTS have certain indemnity obligations, including obligations with respect to the Honolulu Harbor investigation (see Note 3 to HEI's Consolidated Financial Statements) and certain environmental obligations arising from conditions existing prior to the sale of YB. 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 facility's 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 January 1998, the DOH issued an NOV imposing a civil penalty fine on HELCO of $36,000, which HELCO paid. The DOH then closed this case. In January 1999, however, oil was re-discovered in the dry well and the DOH was notified. The reappearance of oil in the well is believed to be related to seepage of residual subsurface oil into the well due to heavy rainfall. The well was cleaned out and is being monitored. A status report was submitted to the DOH in February 1999 and no further action had been taken on the matter by the DOH as of March 13, 2000. 42 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 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). On November 26, 1993, the DOH adopted implementing regulations which required submission of permit applications during 1994 for existing sources. All applications were filed in 1994 as required and supplementary information was filed for certain applications during 1995-1999. Title V permits have been issued for Honolulu, Maalaea, Lanai City, Miki Basin, Hill-Kanoelehua, Kahului and Palaau Power Plants. Several other Title V permits are still pending. Initial source tests in December 1989 and subsequent retesting for HELCO's CT-2 generating unit indicated particulate emissions above permitted levels. Following analysis, HECO (on behalf of HELCO) proposed in November 1990 that the permitted particulate limit be increased. By letter dated April 13, 1992, the EPA concurred that revision is warranted. The DOH issued an NOV on August 17, 1992 for the noncomplying emissions. HECO and HELCO worked with the DOH, the manufacturer and a consultant to determine an appropriate new emission limit for particulates as well as oxides of nitrogen. In accordance with discussions with the DOH, CT-2 continues to operate pending issuance of a revised permit. On January 20, 1998, the DOH issued an NOV to HELCO for noncomplying emissions from March 16, 1993 through December 20, 1994 and from March 22, 1996 through November 6, 1997. HELCO paid fines totaling $22,100 in the settlement of both the 1992 and 1998 NOVs. Unit CT-2 is currently operating within all permit limits by virtue of its having passed its November 1997, November 1998 and July 1999 source tests. The DOH has prepared a draft permit for CT-2 with revised limits for emissions of particulates and nitrogen oxides and will be scheduling a public hearing. For other air permit issues relating to HELCO, see the previous discussion under "HELCO power situation--PSD permit." On July 16, 1997, the EPA adopted national ambient air quality standards for certain particulate matter and ozone. The new standards were remanded back to the EPA in May 1999 by a Federal Appeals Court decision. The EPA's request for a rehearing was denied by the Court in October 1999. In January 2000, the EPA filed an appeal to the U.S. Supreme Court. The eventual impact of these new standards on the Company is not known at this time. Hazardous waste and toxic substances controls. The operations of the electric utility and former freight transportation subsidiaries are subject to regulations promulgated by the EPA to implement the provisions of the Resource Conservation and Recovery Act (RCRA), the Superfund Amendments and Reauthorization Act and the Toxic Substances Control Act. 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. 43 On September 30, 1999, HECO received two NOVs from EPA Region IX for alleged improper storage of lead paint chips, waste paints, thinners, and resins at the Kahe and Waiau power plants. Although the quantity of waste was low, penalties were assessed for multiple days of storage beyond allowable RCRA time limits. Monetary penalties in the amounts of $54,725 for Kahe and $61,325 for Waiau were agreed to in Consent Agreement/Final Orders (CA/FO) and paid by HECO in December 1999. By letter dated September 30, 1999, HECO received a NOV from the DOH for alleged storage of hazardous waste in the sludge drying bed at Kahe power plant without a permit. Previously, in March of 1999, HECO had voluntarily notified the EPA and the DOH upon discovering unusually high levels of selenium in the drying bed. The source of the selenium was unexplained, as all sludge had been tested and documented as nonhazardous prior to being placed into the drying bed. Following notification of the EPA and the DOH, HECO initiated an investigation to characterize the site and to determine the source of the contamination, and submitted a proposed corrective action plan to the DOH in April 1999. The source of the selenium remains unknown. The NOV identified the DOH's desired revisions to the corrective action plan. Revisions were completed and submitted to the DOH in October 1999, and in November 1999, HECO received written approval from the DOH to implement the corrective action plan. Cleanup of the drying bed was completed on January 14, 2000. Although no monetary penalty was imposed, cleanup costs are estimated to be approximately $75,000. HECO is also preparing a sludge management plan to minimize any recurrence. 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. UST regulations required that all UST systems comply with new tank standards by December 22, 1998 or be closed. All HECO, HELCO and MECO USTs currently meet these standards and continue in operation. The DOH conducted UST inspections at HELCO's Kona and Kanoelehua operations centers (May 1998); MECO's Kahului T&D baseyard (June 1998); and HECO's Waiau power plant (August 1998), Koolau Baseyard (August 1998) and Kahe power plant (September 1998). Both HELCO facilities were found to be operating in compliance with UST regulations. The DOH subsequently issued NOVs for alleged deficiencies in compliance with UST requirements for MECO's and HECO's facilities. MECO received an NOV in July 1998 for the Kahului baseyard. MECO completed corrective measures and submitted its verification of compliance status to the DOH in March 1999. The DOH issued NOVs to HECO for the Koolau and Kahe facilities in December 1998, and for the Waiau facility in January 1999. Corrective measures were completed and certifications of compliance status were submitted to the DOH for Koolau and Kahe in January 1999, and Waiau in February 1999. Additional enforcement actions by the DOH are not anticipated at this time. In removing an existing UST system during a tank replacement project in October 1999, petroleum contamination was found beneath the fuel dispenser system at HELCO's Kanoelehua Baseyard. A release notification letter was submitted to the DOH on October 20, 1999. Approximately 350 cubic yards of clean soil and 83 cubic yards of impacted soil were excavated and disposed of at the West Hawaii Sanitary Landfill. A UST closure report was submitted to the DOH on January 14, 2000. There remains some subsurface contamination. The DOH subsequently issued a letter in January 2000 requiring the further delineation of contaminated soils and determination of the need for a ground water monitoring well. A Short Term Release Report is also being finalized for submittal to the DOH. To date, contamination-related cleanup costs are estimated at $250,000. The Emergency Planning and Community Right-to-Know Act under Superfund Amendments and Reauthorization Act Title III requires HECO, MECO and HELCO to report potentially hazardous chemicals present in their facilities in order to provide the public with information on these chemicals so that emergency procedures can be established to protect the public in the event of hazardous chemical releases. All HECO, MECO and HELCO facilities are in compliance with applicable annual reporting requirements to the State Emergency Planning Commission, the Local Emergency Planning Committee and local fire departments. In September 1995, the EPA published a notice of proposed rule making to expand the types of industries required to file annual Toxics Release Inventory reports (i.e., to report facility releases of toxic chemicals). The final rule, issued on May 1, 1997, includes the steam electric 44 category (effective January 1, 1998), which previously was exempt from Toxics Release Inventory reporting requirements. Facilities are implementing actions to comply with reporting requirements. Release reports for 1998 were filed with the EPA before the July 1, 1999 deadline. The Toxic Substances Control Act regulations specify procedures for the handling and disposal of polychlorinated biphenyls (PCB), a compound found in transformer and capacitor dielectric fluids. HECO and its subsidiaries 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 1997, the EPA published the final rule on the PCB disposal amendments. The rule provides flexibility in selecting disposal technologies for PCB wastes and expands the list of available decontamination procedures; provides less burdensome mechanisms for obtaining EPA approval for a variety of activities; clarifies and/or modifies certain provisions where implementation questions have arisen; modifies the requirements regarding the use and disposal of PCB equipment; and addresses outstanding issues associated with the notification and manifesting of PCB wastes and changes in the operation of commercial storage facilities. This rule streamlines procedures and focuses on self-implementing requirements and the elimination of duplication. Some activities currently requiring PCB disposal approvals will no longer require those approvals. The EPA believes that this rule will result in substantial cost savings to the regulated community while protecting against unreasonable risk of injury to health and the environment from exposure to PCBs. The ERL, as amended, governs releases of hazardous substances, including oil, in areas within the state's jurisdiction. Responsible parties under the ERL are jointly, severally and strictly liable for a release of a hazardous substance into the environment. Responsible parties include owners or operators of a facility where a hazardous substance comes to be located and any person who at the time of disposal of the hazardous substance owned or operated any facility at which such hazardous substance was disposed. The DOH issued final rules (or State Contingency Plan) implementing the ERL on August 17, 1995. Potential exposure to liability under the ERL/State Contingency Plan is associated with the release of regulated substances, including oil, to the environment. For information regarding the investigation of the Honolulu Harbor area, see Note 3 to HEI's Consolidated Financial Statements and Note 11 to HECO's Consolidated Financial Statements. The Technical Work Group submitted the Phase I report to the DOH in September 1999. Phase I work includes: 1) data assimilation, review and evaluation to characterize the extent of subsurface contamination and 2) data gap analysis to determine additional areas requiring investigation. A conceptual site model, including an assessment of probable exposure pathways, was also submitted for comments to the DOH in September 1999. ASB may be subject to the provisions of CERCLA and regulations promulgated thereunder. CERCLA imposes liability for environmental cleanup costs on certain categories of responsible parties, including the current owner and operator of a facility and prior owners or operators who owned or operated the facility at the time the hazardous substances were released or disposed. CERCLA exempts persons whose ownership in a facility is held primarily to protect a security interest, provided that they do not participate in the management of the facility. Although there may be some risk of liability for ASB for environmental cleanup costs, 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 environmental conditions at the power plant in Guam operated by HEI Power Corp. Guam, see the "International power" section in HEI's MD&A. 45 Securities ratings - ------------------ As of March 13, 2000, the Standard & Poor's (S&P) and Moody's Investors Service's (Moody's) ratings of HEI's and HECO's securities were as follows: S&P Moody's - -------------------------------------------------------------------------------------------------------------- HEI - --- Commercial paper.............................................................. A-2 P-2 Medium-term notes............................................................. BBB Baa2 HEI-obligated preferred securities of trust subsidiary........................ BB+ baa3 HECO - ---- Commercial paper.............................................................. A-2 P-2 Revenue bonds (insured)....................................................... AAA Aaa Revenue bonds (noninsured).................................................... BBB+ Baa1 HECO-obligated preferred securities of trust subsidiaries..................... BBB- baa1 Cumulative preferred stock (selected series).................................. nr baa2
nr Not rated. The above ratings are not recommendations to buy, sell or hold any securities; such ratings may be subject to revision or withdrawal at any time by the rating agencies; and each rating should be evaluated independently of any other rating. These ratings reflect only the view of the applicable rating agency at the time the ratings are issued, from whom an explanation of the significance of such ratings may be obtained. There is no assurance that any such credit rating will remain in effect for any given period of time or that such rating will not be lowered, suspended or withdrawn entirely by the applicable rating agency if, in such rating agency's judgment, circumstances so warrant. Any such lowering, suspension or withdrawal of any rating may have an adverse effect on the market price or marketability of HEI's and/or HECO's securities, which could increase the cost of capital of HEI and HECO. Neither HEI nor HECO management can predict future rating agency actions or their effects on the future cost of capital of HEI or HECO. The revenue bonds in the above table are issued by the Department of Budget and Finance of the State of Hawaii for the benefit of HECO and its subsidiaries, but the source of their repayment are the unsecured obligations of HECO and its subsidiaries under loan agreements and notes issued to the Department, including HECO's guarantees of its subsidiaries' obligations. The payment of principal and interest due on several series of these revenue bonds are insured either by MBIA Insurance Corporation or by Ambac Assurance Corporation, and the ratings of those bonds are based on the ratings of the obligations of the bond insurer rather than HECO. On March 7, 2000, S&P affirmed its ratings on HEI and HECO and, at the same time, revised its credit outlook on HEI and HECO to negative from stable. The revision "reflects HEI's plan to expand its investment in independent power and integrated energy projects in the Asia-Pacific region." In S&P's view, "growth of these unregulated operations will weaken the company's consolidated business risk profile." S&P stated that, "stronger earnings and cash flow will be needed to compensate for a riskier business position." Research and development - ------------------------ HECO and its subsidiaries expensed approximately $2.4 million, $2.2 million and $2.3 million in 1999, 1998 and 1997, 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, 1999, the Company had 3,262 full-time employees, compared with 3,722 at December 31, 1998. The decrease in employees is primarily due to HTB's sale of its operating assets and YB. At December 31, 1999 and 1998, HEI had 51 and 49 full-time employees, respectively. 46 HECO At December 31, 1999, HECO and its subsidiaries had 1,975 full-time employees, compared with 2,020 at December 31, 1998. In August 1998, HECO, MECO and HELCO employees represented by the International Brotherhood of Electrical Workers, AFL-CIO, Local 1260, ratified new collective bargaining agreements covering approximately 63% of the employees of HECO, MECO and HELCO. The new collective bargaining agreements (including benefit agreements) cover a two-year period from November 1, 1998 through October 31, 2000. The main provisions of the agreements include noncompounded wage increases of 1.5% effective May 1, 1999 and 2.0% effective January 1, 2000, and lump sum payments of $350 or $500 per employee following ratification. The parties also signed an agreement committing to work towards resolving issues in order to succeed in a competitive environment and towards seeking improvements in efficiency and service while lowering costs, including changes in work practices and rules. Other The employees of HEI and its direct and indirect subsidiaries are not covered by any collective bargaining agreement, except as identified above. ITEM 2. PROPERTIES HEI leases office space from a nonaffiliated lessor in downtown Honolulu and - --- this lease expires on March 31, 2001. HEI also subleases office space from HECO in downtown Honolulu. The properties of HEI's subsidiaries are as follows: Electric utility - ---------------- See page 5 for the "Generation statistics" of HECO and its subsidiaries, including generating and firm purchased capability, reserve margin and annual load factor. The electric utilities' overhead and underground transmission and distribution systems (with the exception of substation buildings and contents) have a replacement value roughly estimated at $2 billion and are uninsured because the amount of transmission and distribution system insurance available is limited and the premiums are extremely high. HECO owns and operates three generating plants on the island of Oahu at - ---- Honolulu, Waiau and Kahe, with an aggregate generating capability of 1,263 MW at December 31, 1999. The three plants are situated on HECO-owned land having a combined area of 535 acres and one 3 acre parcel of land under a lease expiring December 31, 2018. In addition, HECO owns a total of 126 acres of land on which 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, poles (fully owned or jointly owned) and steel or aluminum high voltage transmission towers. The transmission system operates at 46,000 and 138,000 volts. The total capacity of HECO's transmission and distribution substations was 6,527,540 kilovoltamperes at December 31, 1999. HECO owns buildings and approximately 11.5 acres of land located in Honolulu which houses its operating, engineering and information services departments and a warehousing center. It also leases an office building and certain office spaces in Honolulu. The lease for the office building expires in November 2004, with an option to further extend the lease to November 2014. The leases for certain office spaces expire on various dates through November 30, 2007 with options to extend to various dates through November 30, 2017. 47 HECO owns 19.2 acres of land at Barbers Point used to situate fuel oil storage facilities with a combined capacity of 970,700 barrels. HECO also owns fuel oil tanks at each of its plant sites with a total maximum usable capacity of 844,600 barrels. MECO owns and operates two generating plants on the island of Maui, at Kahului - ---- and Maalaea, with an aggregate capability of 212.9 MW as of December 31, 1999. The plants are situated on MECO-owned land having a combined area of 28.6 acres. MECO also owns fuel oil storage facilities at these sites with a total maximum usable capacity of 176,355 barrels. MECO also owns 65.7 acres of undeveloped land at Waena. MECO's administrative offices and engineering and distribution departments are located on 9.1 acres of MECO-owned land in Kahului. MECO also owns and operates smaller distribution systems, generation systems (with an aggregate capability of 22.5 MW as of December 31, 1999) and fuel storage facilities on the islands of Lanai and Molokai, primarily on land owned by MECO. HELCO owns and operates five generating plants on the island of Hawaii. These - ----- plants at Hilo (2), Waimea, Kona and Puna have an aggregate generating capability of 152.9 MW as of December 31, 1999 (excluding two small run-of-river hydro units, four 1 MW dispersed generators and one small windfarm). The plants are situated on HELCO-owned land having a combined area of approximately 43 acres. HELCO also owns 6 acres of land in Kona, which is used for a baseyard, and it leases 4 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, 1999. 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, 1999.
Number of branches ------------------------------------------------------ Owned Leased Total - ---------------------------------------------------------------------------------------------------------------------- Oahu............................................................ 10 37 47 Maui............................................................ 3 4 7 Kauai........................................................... 3 3 6 Hawaii.......................................................... 2 5 7 Molokai......................................................... - 1 1 ------------------------------------------------------ 18 50 68 ======================================================
At December 31, 1999, the net book value of branches and office facilities is approximately $46 million. Of this amount, $37 million represents the net book value of the land and improvements for the branches and office facilities owned by ASB and $9 million represents the net book value of ASB's leasehold improvements. The leases expire on various dates from November 2000 through December 2029 and 21 of the leases have extension provisions. International power - -------------------- HEIPC leases office space in downtown Honolulu under a lease that expires on - ----- June 5, 2000 with an option to extend through June 5, 2005. The HEIPC Group also operates generating units at a facility in Guam, and has a 75% interest in a joint venture which is constructing and will operate a 200 MW (net) coal-fired power plant in China. In March 2000, the HEIPC Group acquired an effective 46% interest in East Asia Power Resources Corporation, a 48 Philippines holding company primarily engaged in the electric generation business in Manila and Cebu through its direct and indirect subsidiaries, using land and barge-based generating facilities, fired by bunker fuel oil, with total installed capacity of approximately 390 MW. See Item 1, "Business--International power--HEI Power Corp." Other - ----- HEIII. See Item 1, "Business--International power-HEI Power Corp.--HEI - ----- Investments, Inc." ITEM 3. LEGAL PROCEEDINGS Except as provided for in "Item 1. Business," there are no known material pending legal proceedings to which HEI or any of its subsidiaries is a party or to which any of their property is subject. Certain HEI subsidiaries are involved in ordinary routine litigation incidental to their respective businesses. Discontinued operations - ----------------------- See Note 17 to HEI's Consolidated Financial Statements, incorporated herein by reference to pages 66 to 67 of HEI's 1999 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS HEI and HECO: During the fourth quarter of 1999, no matters were submitted to a vote of security holders of the Registrants. EXECUTIVE OFFICERS OF THE REGISTRANT (HEI) The following persons are, or may be deemed, executive officers of HEI. Their ages are given as of February 16, 2000 and their years of company service are given as of December 31, 1999. 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 25, 2000) and/or until their successors have been appointed and qualified (or until their earlier resignation or removal). Company service includes service with an HEI subsidiary.
Business experience for HEI Executive Officers past five years - ----------------------------------------------------------------------------------------------------------------------------- Robert F. Clarke, age 57 Chairman of the Board, President and Chief Executive Officer............................... 9/98 to date President and Chief Executive Officer...................................................... 1/91 to 8/98 Director................................................................................... 4/89 to date (Company service: 12 years) T. Michael May, age 53 Senior Vice President and Director......................................................... 9/95 to date (Company service: 7 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 57 Financial Vice President and Chief Financial Officer....................................... 4/89 to date (Company service: 11 years) Peter C. Lewis, age 65 Vice President - Administration and Corporate Secretary.................................... 1/99 to date Vice President - Administration............................................................ 10/89 to 12/98 (Company service: 31 years)
49
Business experience for HEI Executive Officers past five years - ------------------------------------------------------------------------------------------------------------------------- (continued) Charles F. Wall, age 60 Vice President and Corporate Information Officer........................................... 7/90 to date (Company service: 9 years) Andrew I. T. Chang, age 60 Vice President - Government Relations...................................................... 4/91 to date (Company service: 14 years) Edwina H. Kawamoto, age 36 Treasurer.................................................................................. 10/99 to date Director, Investor Relations............................................................... 8/97 to 9/99 (Company service: 2 years) Edwina H. Kawamoto, prior to joining HEI, was at KPMG LLP from 1983 to 1997, most recently as a senior manager. Curtis Y. Harada, age 44 Controller................................................................................. 1/91 to date (Company service: 10 years) Wayne K. Minami, age 57 President and Chief Executive Officer, American Savings Bank, F.S.B........................ 1/87 to date (Company service: 13 years)
HEI's executive officers, with the exception of Charles F. Wall and Andrew I. T. Chang, are also officers and/or directors of one or more of HEI's subsidiaries. Mr. 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. 50 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 26, 66 and 69 (Note 15, "Regulatory restrictions on net assets" and Note 19, "Quarterly information (unaudited)" to HEI's Consolidated Financial Statements) of HEI's 1999 Annual Report to Stockholders, portions of which are filed 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, 2000, was 18,388. HEI has issued unregistered common stock during 1999 pursuant to the HEI 1990 Nonemployee Director Stock Plan, amended effective April 27, 1999 (the Subsidiary Director Plan), the HEI 1999 Nonemployee Company Director Stock Grant Plan (the HEI Nonemployee Director Plan), the HECO Utility Group Team Incentive Plan and the HECO Utility Group Team Incentive Plan for Bargaining Unit Employees (collectively, the Team Incentive Plan). HEI has issued unregistered common stock during 1998 and 1997 pursuant to the HEI 1990 Nonemployee Director Stock Plan and the Team Incentive Plan. Under the Subsidiary Director Plan, 60% of the annual retainer payable to nonemployee directors is paid in HEI common stock. Under the HEI Nonemployee Director Plan as amended in 1999, a stock grant of 300 shares of HEI common stock is granted to HEI nonemployee directors in addition to an annual retainer of $20,000. Under the Team Incentive Plan, eligible employees of HECO, MECO and HELCO receive awards of HEI common stock based on the attainment of performance goals by the respective companies. In 1999, 1998 and 1997, the director plans issued 2,004, 4,736 and 6,379 shares of HEI common stock, respectively, in exchange for the retention of cash by HEI that would otherwise have been paid to the directors as retainers in the aggregate amounts of $72,000, $192,000 and $213,000, respectively, and 3,000 shares of HEI common stock in the aggregate amount of $108,000 in 1999 to HEI directors in addition to the retainer. In addition, in 1999, 1998 and 1997, the Team Incentive Plan issued 51,974, 9,006 and 42,743 shares of HEI common stock, respectively, in exchange for cash received by HEI from the electric utility subsidiaries in the aggregate amounts of $1.9 million, $0.4 million and $1.5 million, respectively. The shares issued under the director stock plans were not registered since they did not involve a "sale" as defined under Section 2(3) of the Securities Act of 1933, as amended. Participation by nonemployee directors of HEI and subsidiaries in the director stock plans is mandatory and thus does not involve an investment decision. The shares issued under the Team Incentive Plan were not registered because their initial sales to HECO, MECO and HELCO were exempt as transactions not involving any public offering under Section 4(2) of the Securities Act of 1933, as amended, and because their subsequent award to eligible employees did not involve a "sale," as defined in Section 2(3) of the Securities Act of 1933, as amended. Awards of HEI common stock under the Team Incentive Plan are made to eligible employees on the basis of their attainment of performance goals established by their respective companies and no cash or other tangible or definable consideration is paid by such employees to their respective companies for the shares. HECO: The information required with respect to "Market information" and "holders" is not applicable. Since the corporate restructuring on July 1, 1983, all the common stock of HECO has been held solely by its parent, HEI, and is not publicly traded. The dividends declared and paid on HECO's common stock for the four quarters of 1999 and 1998 were as follows:
Quarters ended 1999 1998 - ------------------------------------------------------------------------------------------------------------- March 31........................................................... $13,387,000 $15,326,000 June 30............................................................ 12,810,000 - September 30....................................................... 14,419,000 28,464,000 December 31........................................................ 15,236,000 18,732,000
51 The discussion of regulatory restrictions on distributions is incorporated herein by reference to page 29 (Note 12 to HECO's Consolidated Financial Statements, "Regulatory restrictions on distributions to parent") of HECO's 1999 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 26 of HEI's 1999 Annual Report to Stockholders, portions of which are filed as HEI Exhibit 13. HECO: The information required by this item is incorporated herein by reference to page 2 of HECO's 1999 Annual Report to Stockholder, portions of which are filed as HECO Exhibit 13. ITEM 7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HEI: The information required by this item is set forth in HEI's MD&A, incorporated herein by reference to pages 27 to 39 of HEI's 1999 Annual Report to Stockholders, portions of which are filed 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 9 of HECO's 1999 Annual Report to Stockholder, portions of which are filed as HECO Exhibit 13. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS HEI: The information required by this item is incorporated herein by reference to pages 40 to 43 of HEI's 1999 Annual Report to Stockholders, portions of which are filed as HEI Exhibit 13. HECO: The information required by this item is incorporated herein by reference to pages 10 to 11 of HECO's 1999 Annual Report to Stockholder, portions of which are filed as HECO Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HEI: The information required by this item is incorporated herein by reference to pages 44 to 69 of HEI's 1999 Annual Report to Stockholders, portions of which are filed as HEI Exhibit 13. HECO: The information required by this item is incorporated herein by reference to pages 12 to 34 of HECO's 1999 Annual Report to Stockholder, portions of which are filed as HECO Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE HEI and HECO: None 52 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 49 and 50 of this report. The list of current directors of HEI is incorporated herein by reference to page 70 of HEI's 1999 Annual Report to Stockholders, portions of which are filed 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 25, 2000. HECO: The following persons are, or may be deemed, executive officers of HECO. Their ages are given as of February 16, 2000 and their years of company service are given as of December 31, 1999. 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 25, 2000) 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 57 Chairman of the Board........................................................................... 1/91 to date (Company service: 12 years) T. Michael May, age 53 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: 7 years) Jackie Mahi Erickson, age 59 Vice President - Customer Operations & General Counsel.......................................... 10/98 to date Vice President - General Counsel & Government Relations......................................... 9/95 to 9/98 Vice President - Corporate Counsel.............................................................. 2/91 to 8/95 (Company service: 18 years) Charles M. Freedman, age 53 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: 9 years) Edward Y. Hirata, age 66 Vice President - Regulatory Affairs & Government Relations...................................... 10/98 to date Vice President - Regulatory Affairs............................................................. 7/95 to 9/98 Vice President - Planning....................................................................... 12/91 to 6/95 Vice President, MECO and HELCO.................................................................. 12/91 to date (Company service: 13 years)
53
Business experience HECO Executive Officers for past five years - -------------------------------------------------------------------------------------------------------------------- (continued) Thomas J. Jezierny, age 55 Vice President - Energy Delivery............................................................ 9/96 to 1/00 President, MECO............................................................................. 4/90 to 8/96 (Company service: 29 years) Thomas L. Joaquin, age 56 Vice President - Power Supply............................................................... 7/95 to date Vice President - Operations................................................................. 5/94 to 6/95 (Company service: 26 years) Paul A. Oyer, age 59 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: 33 years) Chris M. Shirai, age 52 Vice President - Energy Delivery............................................................ 12/99 to date Manager, Engineering Department............................................................. 7/96 to 11/99 Manager, Planning and Analysis Department................................................... 7/95 to 6/96 Manager, System Operation Department........................................................ 7/90 to 6/95 (Company service: 30 years) Patricia U. Wong, age 43 Vice President - Corporate Excellence....................................................... 3/98 to date Manager, Environmental Department........................................................... 10/96 to 2/98 Associate General Counsel, Legal Department................................................. 5/90 to 9/96 (Company service: 9 years) Ernest T. Shiraki, age 52 Controller.................................................................................. 5/89 to date (Company service: 30 years) Molly M. Egged, age 49 Secretary................................................................................... 10/89 to date Secretary, MECO and HELCO................................................................... 10/89 to date (Company service: 19 years)
HECO executive officers Robert F. Clarke, T. Michael May and Molly M. Egged are also officers of one or more of the affiliated nonutility HEI companies. There are no family relationships between any executive officer or director of HECO and any other executive officer or director of HECO, or any arrangement or understanding between any director and any person pursuant to which the director was selected. The list of current directors of HECO is incorporated herein by reference to page 36 of HECO's 1999 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. Information on the business experience and 54 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 25, 2000. Paul C. Yuen and Anne M. Takabuki, ages 71 and 43, as of February 16, 2000, respectively, 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 retired 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 the board of directors of Cyanotech Corporation. Miss Takabuki was elected a director of HECO in April 1997 and is Vice President/Secretary and General Counsel of Wailea Golf Resort, Inc. She also serves on the boards of MECO, Wailea Golf Resort, Inc. and its affiliated companies and MAGBA, Inc. Paul A. Oyer is an employee director of HECO but not a director of HEI. 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, 12 to 18, and 25 to 27 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 2000. 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 1999. 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 25, 2000. Summary compensation table - -------------------------- The following summary compensation table shows the annual and long-term compensation of the chief executive officer of HECO and the four other most highly compensated executive officers of HECO (collectively, the HECO Named Executive Officers) who served at the end of 1999. 55 SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation ------------------------------------ --------------------------- Awards Payouts Other ---------- ---------- All Annual Securities Other Compen- Underlying LTIP Compen- Name and Principal Position Salary Bonus(2) sation(3) Options(4) Payouts(5) sation(6) (1) Year ($) ($) ($) (#) ($) ($) - ------------------------------------------------------------------------------------------------------------------------- T. Michael May............. 1999 $372,000 $211,652 $ 0 20,000 $ - $14,400 President and Chief 1998 325,000 92,425 0 12,000 55,973 11,612 Executive Officer 1997 313,000 0 0 12,000 0 10,333 Paul A. Oyer............... 1999 209,000 42,614 19,546 3,000 na 13,204 Financial Vice President 1998 205,000 33,760 17,707 0 na 11,920 and Treasurer 1997 202,000 0 16,042 3,000 na 10,822 Thomas J. Jezierny......... 1999 179,000 42,875 0 3,000 na 8,144 Vice President- 1998 174,000 33,100 0 0 na 7,300 Energy Delivery 1997 172,000 0 0 3,000 0 6,658 Thomas L. Joaquin.......... 1999 179,000 39,481 0 3,000 na 8,837 Vice President- 1998 172,000 35,740 0 0 na 7,825 Power Supply 1997 168,000 0 0 3,000 na 7,048 Jackie Mahi Erickson....... 1999 163,000 43,666 0 3,000 na 10,298 Vice President-Customer 1998 150,000 30,884 0 0 na 8,722 Operations/General Counsel 1997 148,000 0 0 3,000 na 7,929
na Not applicable (not participants in the plan). (1) Mr. Jezierny, Vice President-Energy Delivery, retired effective January 4, 2000. Mr. Shirai became Vice President-Energy Delivery effective December 1, 1999. (2) The HECO Named Executive Officers are eligible for an incentive award under the Company's annual Executive Incentive Compensation Plan (EICP). EICP bonus payouts are reflected as compensation for the year earned. (3) Amounts for Mr. Oyer represent above-market earnings on deferred compensation. (4) Options granted include dividend equivalents. (5) 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). In May 1998, no LTIP payouts were made for the 1995-1997 performance cycle because none of the minimum threshold levels was achieved. In April 1999, LTIP payouts were made for the 1996-1998 performance cycle and are reflected as LTIP compensation in the table for 1998. The determination of whether there will be a payout under the 1997-1999 LTIP will not be made until the second quarter of 2000. (6) Represents amounts accrued each year by the Company for certain preretirement death benefits provided to the named executive officers. Additional information is incorporated by reference to "Other Compensation Plans" on pages 22 to 23 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 2000. 56 Option grants in last fiscal year - --------------------------------- The following table presents information on the nonqualified stock options which were granted in 1999 to the executives named in the HECO Summary Compensation Table. The practice of granting stock options, which may include dividend equivalent shares, has been followed each year since 1987. OPTION GRANTS IN LAST FISCAL YEAR
Number of Percent of Securities Total Options Underlying Granted to Exercise Grant Date Options Employees in Price Expiration Present Granted (1)(#) Fiscal Year ($/share) Date Value (2)($) - --------------------------------------------------------------------------------------------------------------------------- T. Michael May................ 20,000 9% $35.21 April 26, 2009 $159,000 Paul A. Oyer.................. 3,000 1 35.21 April 26, 2009 23,850 Thomas J. Jezierny............ 3,000 1 35.21 April 26, 2009 23,850 Thomas L. Joaquin............. 3,000 1 35.21 April 26, 2009 23,850 Jackie Mahi Erickson.......... 3,000 1 35.21 April 26, 2009 23,850
(1) For the 32,000 option shares granted with an exercise price of $35.21 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 26, 1999, with a 10-year option period, an exercise price of $35.21, and with additional dividend equivalent shares granted for the first four years of the option, the Binomial Value adjusted for forfeiture risk is $7.95 per share. The following assumptions were used in the model: Stock Price: $35.21; Exercise Price: $35.21; Term: 10 years; Volatility: 0.1428; Interest Rate: 5.60%; and Dividend Yield: 6.65%. The following were the valuation results: Binomial Option Value: $3.40; Dividend Credit Value: $4.55; and Total Value $7.95. Aggregated option exercises and fiscal year-end option values - ------------------------------------------------------------- The following table shows the stock options, including dividend equivalents, exercised by the HECO Named Executive Officers in 1999. Also shown is the number of securities underlying unexercised options and the value of unexercised in the money options, including dividend equivalents, at the end of 1999. Under the Stock Option and Incentive Plan, dividend equivalents have been granted to all HECO Named Executive Officers as part of their 1999 and 1997 stock option grants, to Mr. May as part of his 1998 and 1996 stock option grants and to Mr. Jezierny as part of his stock option grants for each of the years 1990 through 1996. 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 throughout the four-year vesting period. Dividend equivalents are computed as of each dividend record date throughout the four-year vesting period (vesting in equal installments) which begins on the date of grant, both with respect to the number of shares underlying the option and with respect to the number of dividend equivalent shares previously credited to the HECO Named Executive Officer and not issued during the period prior to the dividend record date. 57 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Underlying Unexercised In the Unexercised Money Options Options (Including (Including Dividend Dividend Equivalents) Equivalents) at Shares Dividend Value at Fiscal Year-End Fiscal Year-End (1) Acquired Equivalents Value Realized On -------------------- ---------------------- On Exercise Acquired On Realized On Dividend Exercisable/ Exercisable/ Name (#) Exercise (#) Options ($) Equivalents ($) Unexercisable (#) Unexercisable ($) - --------------------------------------------------------------------------------------------------------------------------------- T. Michael May...... - - $ - $ - 23,190 / 42,321 $13,038 / 4,872 Paul A. Oyer........ - - - - 10,805 / 4,970 - / - Thomas J. Jezierny.. 17,500 5,254 19,964 188,881 4,703 / 5,936 - / - Thomas L. Joaquin... - - - - 4,805 / 4,970 - / - Jackie Mahi Erickson - - - - 4,805 / 4,970 - / -
(1) Values based on closing price of $28.88 per share on the New York Stock Exchange on December 31, 1999. Long-Term Incentive Plan awards table - ------------------------------------- A Long-Term Incentive Plan award made to Mr. May in 1999 was the only such award made to the HECO Named Executive Officers. Additional information required under this item is incorporated by reference on pages 15 to 16 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 2000. 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 16 to 18 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 2000. As of December 31, 1999, the HECO Named Executive Officers had the following number of years of credited service under the Retirement Plan: Mr. May, 7 years; Mr. Oyer, 33 years; Mr. Jezierny, 29 years; Mr. Joaquin, 26 years; and Ms. Erickson, 18 years. Change-in-Control Agreements - ---------------------------- Mr. May is the only HECO Named Executive Officer with whom HEI has a currently applicable Change-in-Control Agreement. Additional information required under this item is incorporated by reference to "Change-in-Control Agreements" on page 18 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 2000. Executive Management Compensation - --------------------------------- Changes to executive compensation for the HECO Named Executive Officers are approved by the HEI Compensation Committee which is composed of five independent nonemployee directors. All changes approved by the Committee concerning the HECO Named Executive Officers are reviewed and approved by the HEI Board of Directors as well as the HECO Board of Directors. 58 HECO Board of Directors - ----------------------- Committees of the HECO Board - ---------------------------- During 1999, the Board of Directors of HECO had only one standing committee, the Audit Committee, which was comprised of three nonemployee directors: Diane J. Plotts, Chairman, Anne M. Takabuki and Paul C. Yuen. The Audit Committee holds such meetings as it deems advisable to review the financial operations of HECO. In 1999, 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 1998 Annual Report to Stockholder. Remuneration of HECO Directors and attendance at meetings - --------------------------------------------------------- In 1999, 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 $12,000, 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 $35.9063, which is equal to the average high and low sales prices of HEI common stock on April 30, 1999, 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 1999, there were five regular bi-monthly meetings, one joint meeting 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 the Committee on which they served. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT HEI: The information required under this item 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 25, 2000. 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), by each HECO Named Executive Officer (other than Mr. May, who is an executive officer of HEI) and by all HECO directors and all HECO executive officers as a group, as of February 16, 2000, based on information furnished by the respective individuals. 59
Amount of Common Stock and Nature of Name of Individual or Group Beneficial Ownership - ---------------------------------------------------------------------------------------------------------------------- Total --------------------- Directors - --------- Paul A. Oyer* 1,994 (a) 11,764 (d) 13,758 -------------- Anne M. Takabuki 1,180 (a) 1,180 -------------- Paul C. Yuen 1,843 (a) 1,069 (b) 2,912 -------------- Other HECO Named Executive Officers - ----------------------------------- Thomas J. Jezierny 5,443 (a) 10,638 (d) 16,081 -------------- Thomas L. Joaquin 4,260 (a) 1,242 (b) 27 (c) 5,764 (d) 11,293 -------------- Jackie Mahi Erickson 4,279 (a) 1,008 (b) 2 (c) 5,764 (d) 11,053 -------------- All directors and executive officers 62,603 (a) as a group (19 persons) 15,936 (b) 790 (c) 224,402 (d) 303,731** --------------
* Also a HECO Named Executive Officer. ** HECO directors Clarke, Henderson, May, Plotts, Scott and Watanabe, who also serve on the HEI Board of Directors, are not shown separately, but are included in the total for all HECO directors and executive officers as a group. The information required as to these directors is incorporated by reference to page 11 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 2000. Messrs. Clarke and May are also named executive officers of HEI and are listed in the Summary Compensation Table incorporated by reference to pages 12 and 13 of the above-referenced Definitive Proxy 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). 60 (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 16, 2000, under the 1987 Stock Option and Incentive Plan (as amended and restated effective February 20, 1996). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS HEI: The information required under this item is incorporated by reference to pages 25 to 27 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 2000. HECO: The information required under this item is incorporated by reference to pages 25 to 27 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 2000. 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 1999 Annual Report to Stockholders and HECO's 1999 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:
1999 Annual Report to Stockholder(s) (Page/s) ------------------------------- HEI HECO --------------------------------------------------------------------------------------------------- Independent Auditors' Report...................................... 44 34 Consolidated Statements of Income, Years ended December 31, 1999, 1998 and 1997.................................................. 45 12 Consolidated Statements of Retained Earnings, Years ended December 31, 1999, 1998 and 1997............................... 45 12 Consolidated Balance Sheets, December 31, 1999 and 1998........... 46 13 Consolidated Statements of Capitalization, December 31, 1999 and 1998..................................... na 14-15 Consolidated Statements of Cash Flows, Years ended December 31, 1999, 1998 and 1997............................................ 47 16 Notes to Consolidated Financial Statements........................ 48-69 17-33 na Not applicable.
61 (a)(2) Financial statement schedules The following financial statement schedules for HEI and HECO are included in this report on the pages indicated below:
Page/s in Form 10-K ------------------------------ HEI HECO ------------------------------------------------------------------------------------------------------- Independent Auditors' Report 63 64 Schedule I Condensed Financial Information of Registrant, Hawaiian Electric Industries, Inc. (Parent Company) as of December 31, 1999 and 1998 and Years ended December 31, 1999, 1998 and 1997....... 65-67 na Schedule II Valuation and Qualifying Accounts, Years ended December 31, 1999, 1998 and 1997................... 68 68 na Not applicable.
Certain Schedules, other than those listed, are omitted because they are not required, or are not applicable, or the required information is shown in the consolidated financial statements or notes included in HEI's 1999 Annual Report to Stockholders and HECO's 1999 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 69 through 78 of this Form 10-K. The exhibits listed for HEI and HECO are listed in the index under the headings "HEI" and "HECO," respectively, except that the exhibits listed under "HECO" are also considered exhibits for HEI. (b) Reports on Form 8-K HEI and HECO: On January 25, 2000, HEI and HECO filed a Form 8-K, dated January 24, 2000, under Item 5 (HEI's January 24, 2000 news release reporting 1999 earnings). On February 29, 2000, HEI and HECO filed a Form 8-K, dated February 24, 2000, under Item 7, which included portions of HEI's 1999 Annual Report to Stockholders and HECO's 1999 Annual Report to Stockholder. 62 [KPMG LLP letterhead] Independent Auditors' Report ---------------------------- The Board of Directors and Stockholders Hawaiian Electric Industries, Inc.: Under date of January 24, 2000 (except as to the second paragraph of Note 5 of the notes to the consolidated financial statements, which is as of February 24, 2000), we reported on the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1999 and 1998, 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, 1999, as contained in the 1999 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 1999. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanying index under Item 14.(a)(2). These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Honolulu, Hawaii January 24, 2000, except as to the second paragraph of Note 5 of the notes to the consolidated financial statements, which is as of February 24, 2000 63 [KPMG LLP letterhead] Independent Auditors' Report ---------------------------- The Board of Directors and Stockholder Hawaiian Electric Company, Inc.: Under date of January 24, 2000, 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, 1999 and 1998, 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, 1999, as contained in the 1999 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 1999. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in the accompanying index under Item 14.(a)(2). The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Honolulu, Hawaii January 24, 2000 64 Hawaiian Electric Industries, Inc. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS
December 31, --------------------------------------- (in thousands) 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Assets Cash and equivalents............................................................. $ 756 $ 636 Advances to and notes receivable from subsidiaries............................... 3,010 13,823 Accounts receivable.............................................................. 1,325 1,370 Property, plant and equipment, net............................................... 3,489 4,464 Other assets..................................................................... 11,437 11,909 Net assets of discontinued operations............................................ 17,228 24,037 Investments in wholly owned subsidiaries, at equity.............................. 1,332,576 1,280,903 --------------------------------------- $1,369,821 $1,337,142 ======================================= Liabilities and stockholders' equity Accounts payable................................................................. $ 6,518 $ 5,995 Notes payable to subsidiaries.................................................... 37,336 11,261 Commercial paper................................................................. 44,820 88,984 Long-term debt................................................................... 331,500 272,000 Loan from HEI Preferred Funding, LP (8.36% due in 2017).......................... 103,000 103,000 Deferred income taxes............................................................ 1,364 (20) Other............................................................................ (2,303) 28,950 --------------------------------------- 522,235 510,170 --------------------------------------- Stockholders' equity Common stock..................................................................... 665,335 661,720 Retained earnings................................................................ 182,251 165,252 --------------------------------------- 847,586 826,972 --------------------------------------- $1,369,821 $1,337,142 ======================================= Note to Balance Sheets - ---------------------- Long-term debt consisted of the following: Promissory notes, 6.1 - 7.1%, due in various years through 2014.................. $ 305,500 $ 208,500 Promissory notes, 8.2 - 8.7%, due in various years through 2011.................. 26,000 28,500 Promissory note, variable rate paid in 1999...................................... - 35,000 --------------------------------------- $ 331,500 $ 272,000 =======================================
The aggregate payments of principal required subsequent to December 31, 1999 on long-term debt and a loan from HEI Preferred Funding, LP are $11 million in 2000, $58 million in 2001, $60 million in 2002, $37 million in 2003 and $2 million in 2004. 65 Hawaiian Electric Industries, Inc. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME
Years ended December 31, ------------------------------------------------------------- (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Revenues...................................................... $ 2,345 $ 2,067 $ 2,468 Equity in income from continuing operations of subsidiaries... 116,810 115,567 107,929 ------------------------------------------------------------- 119,155 117,634 110,397 ------------------------------------------------------------- Expenses: Operating, administrative and general......................... 4,759 6,395 7,661 Depreciation and amortization of property, plant and equipment........................................ 2,098 1,526 864 Taxes, other than income taxes................................ 299 286 300 ------------------------------------------------------------- 7,156 8,207 8,825 ------------------------------------------------------------- 111,999 109,427 101,572 Interest expense.............................................. 34,637 32,994 22,822 ------------------------------------------------------------- Income before income tax benefits............................. 77,362 76,433 78,750 Income tax benefits........................................... 15,532 18,195 13,093 ------------------------------------------------------------- Income from continuing operations............................. 92,894 94,628 91,843 Gain (loss) from discontinued subsidiary operations........... 3,953 (9,817) (5,401) ------------------------------------------------------------- Net income.................................................... $ 96,847 $ 84,811 $ 86,442 =============================================================
66 Hawaiian Electric Industries, Inc. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, -------------------------------------- (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Income from continuing operations.................................................. $ 92,894 $ 94,628 $ 91,843 Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities Equity in net income of continuing subsidiaries.............................. (116,810) (115,567) (107,929) Common stock dividends/distributions received from subsidiaries.............. 78,007 97,155 72,762 Depreciation and amortization of property, plant and equipment............... 2,098 1,526 864 Other amortization........................................................... 364 300 183 Deferred income taxes........................................................ 1,381 (5,329) (2,714) Changes in assets and liabilities Decrease (increase) in accounts receivable................................. 45 (55) 820 Increase (decrease) in accounts payable.................................... 523 2,440 (3,676) Changes in other assets and liabilities.................................... (24,703) 9,317 (2,851) -------------------------------------- Net cash provided by continuing operating activities............................... 33,799 84,415 49,302 -------------------------------------- Cash flows from investing activities Net decrease (increase) in advances to and notes receivable from subsidiaries...... 10,813 (9,700) 11,724 Capital expenditures............................................................... (1,123) (2,713) (975) Additional investments in subsidiaries............................................. (12,704) (25,291) (196,703) -------------------------------------- Net cash used in investing activities.............................................. (3,014) (37,704) (185,954) -------------------------------------- Cash flows from financing activities Net increase in notes payable to subsidiaries with original maturities of three months or less.................................................................... 26,075 8,081 3,180 Net increase (decrease) in commercial paper........................................ (44,164) (100,499) 101,883 Proceeds from issuance of long-term debt........................................... 100,000 112,500 19,000 Repayment of long-term debt........................................................ (40,500) (500) (50,500) Loan from HEI Preferred Funding, LP................................................ - - 103,000 Net proceeds from issuance of common stock......................................... 3,449 8,191 22,919 Common stock dividends............................................................. (79,848) (79,421) (61,799) -------------------------------------- Net cash provided by (used in) financing activities................................ (34,988) (51,648) 137,683 -------------------------------------- Net cash provided by (used in) discontinued operations............................. 4,323 5,157 (1,776) -------------------------------------- Net increase (decrease) in cash and equivalents.................................... 120 220 (745) Cash and equivalents, January 1.................................................... 636 416 1,161 -------------------------------------- Cash and equivalents, December 31.................................................. $ 756 $ 636 $ 416 ======================================
Supplemental disclosures of noncash activities: In 1999, 1998 and 1997, $0.8 million, $1.0 million and $1.0 million, respectively, of HEI advances to HEIDI were converted to equity in noncash transactions. Common stock dividends reinvested by stockholders in HEI common stock in noncash transactions amounted to $15 million in 1997. Beginning in March 1998, HEI acquired for cash its common shares in the open market to satisfy the requirements of the HEI Dividend Reinvestment and Stock Purchase Plan. 67 Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1999, 1998 and 1997
==================================================================================================================================== Col. A Col. B Col. C Col. D Col. E - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) Additions --------------------------- Balance at at begin- Charged to Charged Balance at ning of costs and to other end of Description period expenses accounts Deductions period - ------------------------------------------------------------------------------------------------------------------------------------ 1999 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries........................... $ 1,293 $ 2,299 $ 1,117 $ 3,652(b) $ 1,057 Other companies......................... 1,216 42 - 382(c) 876 ------------------------------------------------------------------------------------------- $ 2,509 $ 2,341 $ 1,117(a) $ 4,034 $ 1,933 =========================================================================================== Allowance for uncollectible interest (ASB)................................... $ 5,490 $ 205 - - $ 5,695 =========================================================================================== Allowance for losses for loans receivable (ASB)........................ $39,779 $16,500 $ 728(a) $21,659(b) $35,348 ========================================================================================== 1998 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries........................... $ 1,285 $ 2,194 $ 1,250 $ 3,436 $ 1,293 Other companies......................... 1,183 47 1 15 1,216 ------------------------------------------------------------------------------------------- $ 2,468 $ 2,241 $ 1,251(a) $ 3,451(b) $ 2,509 =========================================================================================== Allowance for uncollectible interest (ASB)................................... $ 4,438 $ 1,052 - - $ 5,490 =========================================================================================== Allowance for losses for loans receivable (ASB)........................ $29,950 $13,802 $ 591(a) $ 4,564(b) $39,779 =========================================================================================== 1997 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries........................... $ 1,167 $ 2,850 $ 1,256 $ 3,988 $ 1,285 Other companies......................... 1,138 82 - 37 1,183 ------------------------------------------------------------------------------------------- $ 2,305 $ 2,932 $ 1,256(a) $ 4,025(b) $ 2,468 =========================================================================================== Allowance for uncollectible interest (ASB)................................... $ 2,272 $ 2,166 - - $ 4,438 =========================================================================================== Allowance for losses for loans receivable (ASB)........................ $19,205 $ 6,934 $ 6,656(d) $ 2,845(b) $29,950 ===========================================================================================
(a) Primarily bad debts recovered. (b) Bad debts charged off. (c) Primarily related to the sale of YB. (d) Primarily related to loans receivable acquired from BoA. 68 INDEX TO EXHIBITS The exhibits designated by an asterisk (*) are filed herein. The exhibits not so designated are incorporated by reference to the indicated filing. A copy of any exhibit may be obtained upon written request for a $0.20 per page charge from the HEI Shareholder Services Division, P.O. Box 730, Honolulu, Hawaii 96808- 0730.
Exhibit no. Description - ---------- ----------- HEI: - --- 3(i).1 HEI's Restated Articles of Incorporation (Exhibit 4(b) to Registration No. 33-7895). 3(i).2 Articles of Amendment of HEI filed June 13, 1990 (Exhibit 4(b) to Registration No. 33-40813). 3(i).3 Statement of Issuance of Shares of Preferred or Special Classes in Series for HEI Series A Junior Participating Preferred Stock filed October 28, 1997. (Exhibit 3(i).3 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-8503). 3(ii) HEI's 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). 4.4(a) Second Supplemental Indenture dated as of April 1, 1999 between HEI and Citibank, N.A., as Trustee, to Indenture dated as of October 15, 1988 between HEI and Citibank, N.A., as Trustee (Exhibit 4.1 to HEI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, File No. 1-8503). 4.5 Pricing Supplements Nos. 1 through 7 to the Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed in connection with the sale of Medium-Term Notes, Series B (Exhibit 4(b) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-8503). 4.5(a) Pricing Supplement No. 11 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on December 1, 1995 in connection with the sale of Medium-Term Notes, Series B (Exhibit 4.8 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-8503).
69
Exhibit no. Description - ---------- ----------- 4.5(b) Pricing Supplement No. 12 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 12, 1996 in connection with the sale of Medium-Term Notes, Series B (Exhibit 4.9 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-8503). 4.5(c) Pricing Supplements Nos. 13 through 14 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on September 26, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(d) Pricing Supplement No. 15 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on September 29, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(e) Pricing Supplement No. 16 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on September 30, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(f) Pricing Supplement No. 17 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on October 2, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(g) Pricing Supplement No. 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(h) 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(i) 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(j) Pricing Supplement No. 21 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 12, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(k) Pricing Supplement No. 22 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on June 10, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(l) Pricing Supplement No. 23 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on June 10, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(m) Pricing Supplement No. 24 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on June 10, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(n) Pricing Supplement No. 1 to Registration Statement on Form S-3 of HEI (Registration No. 333-73225) filed on May 3, 1999 in connection with the sale of Medium-Term Notes, Series C. 4.6 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). 4.7 Amended and Restated Agreement of Limited Partnership of HEI Preferred Funding, LP dated as of February 1, 1997 (Exhibit 4(e) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503).
70
Exhibit no. Description - ---------- ----------- 4.8 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). 4.9 Junior Indenture between HEI and The Bank of New York, as Trustee, dated as of February 1, 1997 (Exhibit 4(i) to HEI's Current Report on Form 8-K dated February 4, 1997, File No. 1-8503). 4.10 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). 4.11 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). 4.12 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). 4.13 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). 4.14 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). 4.15 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). 4.16 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). 4.17 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).
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Exhibit no. Description - ---------- ----------- 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). 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, as amended effective April 27, 1999. *10.12 HEI 1999 Nonemployee Company Director Stock Grant Plan. 10.13 HEI Nonemployee Directors' Deferred Compensation Plan (Exhibit 10.14 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 10.14 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. Filed herein as page 79. *12.1 Computation of Ratio of Earnings to Fixed Charges. Filed herein as pages 80 and 81. 13 Pages 26 to 70 of HEI's 1999 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 1999 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 24, 2000, File No. 1-8503). *21.1 Subsidiaries of HEI. Filed herein as pages 83 and 85. *23 Accountants' Consent. Filed herein as page 86. *27.1 HEI and subsidiaries financial data schedule, December 31, 1999 and year ended December 31, 1999.
72
Exhibit no. Description - ---------- ----------- *99.1 Trust Agreement dated as of February 1, 2000 between HEI and Fidelity Management Trust Company for the Hawaiian Electric Industries Retirement Savings Plan HECO: - ---- 3(i).1 HECO's Certificate of Amendment of Articles of Incorporation (filed June 30, 1987) (Exhibit 3.1 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 3(i).2 Statement of Issuance of Preferred or Special Classes in Series for HECO Series R Preferred Stock filed December 15, 1989 (Exhibit 3.1(a) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 3(i).3 Articles of Amendment to HECO's Amended Articles of Incorporation filed December 21, 1989 (Exhibit 3.1(b) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No 1-4955). 3(i).4 Articles of Amendment to HECO's Amended Articles of Incorporation (filed May 24, 1990) (Exhibit 3(i).4 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No 1-4955). 3(ii) HECO's By-Laws (Exhibit 3.2 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 4.1 Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HECO, HELCO and MECO (Exhibit 4 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 4.2 Amended and Restated Trust Agreement of HECO Capital Trust I (HECO Trust I) dated as of March 1, 1997 (Exhibit 4(c) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.3 HECO Junior Indenture with The Bank of New York, as Trustee, dated as of March 1, 1997 (Exhibit 4(d) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.4 8.05% Cumulative Quarterly Income Preferred Security (liquidation preference $25 per preferred security) of HECO Trust I (Exhibit 4(e) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.5 8.05% Junior Subordinated Deferrable Interest Debenture, Series 1997 of HECO (Exhibit 4(f) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.6 Trust Guarantee Agreement with respect to HECO Trust I dated as of March 1, 1997 (Exhibit 4(g) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.7 MECO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of March 1, 1997 (with the form of MECO's 8.05% Junior Subordinated Deferrable Interest Debenture, Series 1997 included as Exhibit A) (Exhibit 4(h)-1 to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955).
73
Exhibit no. Description - ---------- ----------- 4.8 HELCO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of March 1, 1997 (with the form of HELCO's 8.05% Junior Subordinated Deferrable Interest Debenture, Series 1997 included as Exhibit A) (Exhibit 4(h)-2 to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.9 Agreement as to Expenses and Liabilities among HECO Trust I, HECO, MECO and HELCO (Exhibit 4(i) to HECO's Current Report on Form 8-K dated March 27, 1997, File No. 1-4955). 4.10 Amended and Restated Trust Agreement of HECO Capital Trust II (HECO Trust II) dated as of December 1, 1998 (Exhibit 4(c) to HECO's Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 4.11 HECO Junior Indenture with The Bank of New York, as Trustee, dated as of December 1, 1998 (with the form of HECO's 7.30% Junior Subordinated Deferrable Interest Debenture, Series 1998, included as Exhibit A) (Exhibit 4(d) to HECO's Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 4.12 7.30% Cumulative Quarterly Income Preferred Security (liquidation preference $25 per preferred security) of HECO Trust II (Exhibit 4(e) to HECO's Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 4.13 Trust Guarantee Agreement with respect to HECO Trust II dated as of December 1, 1998 (Exhibit 4(g) to HECO's Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 4.14 MECO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of December 1, 1998 (with the form of MECO's 7.30% Junior Subordinated Deferrable Interest Debenture, Series 1998 included as Exhibit A) (Exhibit 4(h) to HECO's Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 4.15 HELCO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of December 1, 1998 (with the form of HELCO's 7.30% Junior Subordinated Deferrable Interest Debenture, Series 1998) (Substantially the same as the MECO Junior Indenture included as Exhibit 4.14). 4.16 Agreement as to Expenses and Liabilities among HECO Trust II, HECO, MECO and HELCO (Exhibit 4(i) to HECO's Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 10.1 Power Purchase Agreement between Kalaeloa Partners, L.P., and HECO dated October 14, 1988 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, File No. 1-4955). 10.1(a) Amendment No. 1 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated June 15, 1989 (Exhibit 10(c) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.1(b) Lease Agreement between Kalaeloa Partners, L.P., as Lessor, and HECO, as Lessee, dated February 27, 1989 (Exhibit 10(d) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955).
74
Exhibit no. Description - ---------- ----------- 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). 10.2(c) HECO's Conditional Notice of Acceptance to AES Barbers Point, Inc. dated January 15, 1990 (Exhibit 10.3(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 10.3 Amended and Restated Power Purchase Agreement between Hilo Coast Processing Company and HELCO dated March 24, 1995 (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, File No. 1-4955). 10.3(a) Seconded Amended and Restated Power Purchase Agreement between Hilo Coast Power Company and HELCO dated October 4, 1999 (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-4955). 10.4 Agreement between MECO and Hawaiian Commercial & Sugar Company pursuant to letters dated November 29, 1988 and November 1, 1988 (Exhibit 10.8 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 10.4(a) Amended and Restated Power Purchase Agreement by and between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 30, 1989 (Exhibit 10(e) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-4955). 10.4(b) First Amendment to Amended and Restated Power Purchase Agreement by and between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 1, 1990, amending the Amended and Restated Power Purchase Agreement dated November 30, 1989 (Exhibit 10(f) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-4955). 10.4(c) Letter agreement dated December 11, 1997 to Extend Term of Amended and Restated Power Purchase Agreement Between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO dated November 30, 1989, as Amended on November 1, 1990 (Exhibit 10.4(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955).
75
Exhibit no. Description - ---------- ----------- 10.4(d) Letter agreement dated October 22, 1998 to Extend Term of Amended and Restated Power Purchase Agreement Between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO dated November 30, 1989, as Amended on November 1, 1990 (Exhibit 10.4(d) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.5 Purchase Power Contract between HELCO and Thermal Power Company dated March 24, 1986 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.5(a) Firm Capacity Amendment between HELCO and Puna Geothermal Venture (assignee of AMOR VIII, who is the assignee of Thermal Power Company) dated July 28, 1989 to Purchase Power Contract between HELCO and Thermal Power Company dated March 24, 1986 (Exhibit 10(b) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.5(b) Amendment made in October 1993 to Purchase Power Contract between HELCO and Puna Geothermal Venture dated March 24, 1986, as amended (Exhibit 10.5(b) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.5(c) Third Amendment dated March 7, 1995 to the Purchase Power Contract between HELCO and Puna Geothermal Venture dated March 24, 1986, as amended (Exhibit 10.5(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.5(d) Performance Agreement and Fourth Amendment dated February 12, 1996 to the Purchase Power Contract between HELCO and Puna Geothermal Venture dated March 24, 1986, as amended (Exhibit 10.5(b) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4955). 10.6 Purchase Power Contract between HECO and the City and County of Honolulu dated March 10, 1986 (Exhibit 10.9 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 10.6(a) 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 (Exhibit 10.6(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.7 Power Purchase Agreement between Encogen Hawaii, L.P. and HELCO dated October 22, 1997 (but with the following attachments omitted: Attachment C, "Selected portions of the North American Electric Reliability Council Generating Availability Data System Data Reporting Instructions dated October 1996" and Attachment E, "Form of the Interconnection Agreement between Encogen Hawaii, L.P. and HELCO," which is provided in final form as Exhibit 10.7(a)) (Exhibit 10.7 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955).
76
Exhibit no. Description - ---------- ----------- 10.7(a) Interconnection Agreement between Encogen Hawaii, L.P. and HELCO dated October 22, 1997 (Exhibit 10.7(a) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.7(b) Amendment No. 1, executed on January 14, 1999, to Power Purchase Agreement between Encogen Hawaii, L.P. and HELCO dated October 22, 1997 (Exhibit 10.7(b) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.8 Low Sulfur Fuel Oil Supply Contract by and between Chevron and HECO dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.8 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.9 Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between Chevron and HECO, MECO, HELCO, HTB and YB dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.9 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). *10.9(a) Agreement between HECO, MECO, HELCO, HTB, YB, Saltchuk Resources Inc. and Moana Pa'a Kai, Inc. dated October 29, 1999 relating to the Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract. 10.10 Facilities and Operating Contract by and between Chevron and HECO dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.10 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.11 Low Sulfur Fuel Oil Supply Contract by and between BHP Petroleum Americas Refining Inc. and HECO dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.11 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.12 Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between BHP Petroleum Americas Refining Inc. and HECO, MECO and HELCO dated November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.12 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.13 Contract of private carriage by and between HITI and HELCO dated 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 (Exhibit 10.13(a) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 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).
77
Exhibit no. Description - ---------- ----------- 10.14(a) Extension, dated December 1, 1997, of the contract of private carriage by and between HITI and MECO dated November 12, 1993 (Exhibit 10.14(a) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). 10.15 HECO Nonemployee Directors' Deferred Compensation Plan (Exhibit 10.16 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4955). 10.16 HEI and HECO Executives' Deferred Compensation Agreement. The agreement pertains to and is substantially identical for all the HEI and HECO executive officers (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8503). 11 Computation of Earnings Per Share of Common Stock. See note on page 2 of HECO's 1999 Annual Report to Stockholder, HECO Exhibit 13. *12.2 Computation of Ratio of Earnings to Fixed Charges. Filed herein as page 82. 13 Pages 2 to 34 and 36 of HECO's 1999 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 1999 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 24, 2000, File No. 1-4955). *21.2 Subsidiaries of HECO. Filed herein as page 86. *27.2 HECO and subsidiaries financial data schedule, December 31, 1999 and year ended December 31, 1999. *99.2 Reconciliation of electric utility operating income per HEI and HECO Consolidated Statements of Income. Filed herein as page 87.
78 HEI Exhibit 11 Hawaiian Electric Industries, Inc. COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK Years ended December 31, 1999, 1998, 1997, 1996 and 1995
(in thousands, except per share amounts) 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) Continuing operations.......... $92,894 $94,628 $91,843 $80,555 $80,114 Discontinued operations........ 3,953 (9,817) (5,401) (1,897) (2,621) ------------ ------------- ----------- ----------- ----------- $96,847 $84,811 $86,442 $78,658 $77,493 ============ ============= ============ ============ =========== Weighted-average number of common shares outstanding................... 32,188 32,014 31,375 30,310 29,187 ============ ============= ============ ============ =========== Adjusted weighted-average number of common shares outstanding................... 32,291 32,129 31,470 30,388 29,248 ============ ============= ============ ============ =========== Basic earnings (loss) per common share Continuing operations.......... $2.89 $2.96 $2.93 $2.66 $2.75 Discontinued operations........ 0.12 (0.31) (0.17) (0.06) (0.09) ------------ ------------- ------------ ------------ ----------- $3.01 $2.65 $2.76 $2.60 $2.66 ============ ============= ============ ============ =========== Diluted earnings (loss) per common share Continuing operations.......... $2.88 $2.95 $2.92 $2.65 $2.74 Discontinued operations........ 0.12 (0.31) (0.17) (0.06) (0.09) ------------ ------------- ------------ ------------ ----------- $3.00 $2.64 $2.75 $2.59 $2.65 ============ ============= ============ ============ ===========
79 HEI Exhibit 12.1 (page 1 of 2) Hawaiian Electric Industries, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1999, 1998, 1997, 1996 and 1995
1999 1998 1997 --------------------------- --------------------------- -------------------------- (dollars in thousands) (1) (2) (1) (2) (1) (2) - ----------------------------------------------------------------------------------------------------------------------------- Fixed charges Total interest charges (3)......... $159,729 $280,067 $145,449 $287,518 $137,855 $226,954 Interest component of rentals...... 4,429 4,429 3,599 3,599 2,973 2,973 Pretax preferred stock dividend requirements of subsidiaries...... 3,415 3,415 9,404 9,404 9,999 9,999 Preferred securities distributions of trust subsidiaries............. 16,025 16,025 12,557 12,557 10,600 10,600 -------- -------- -------- -------- -------- -------- Total fixed charges................ $183,598 $303,936 $171,009 $313,078 $161,427 $250,526 ======== ======== ======== ======== ======== ======== Earnings Pretax income from continuing operations........................ $149,884 $149,884 $151,581 $151,581 $150,616 $150,616 Fixed charges, as shown............ 183,598 303,936 171,009 313,078 161,427 250,526 Interest capitalized............... (2,844) (2,844) (5,915) (5,915) (6,190) (6,190) -------- -------- -------- -------- -------- -------- Earnings available for fixed charges........................... $330,638 $450,976 $316,675 $458,744 $305,853 $394,952 ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges.................. 1.80 1.48 1.85 1.47 1.89 1.58 ======== ======== ======== ======== ======== ========
(1) Excluding interest on ASB deposits. (2) Including interest on ASB deposits. (3) Interest on nonrecourse debt from leveraged leases is not included in total interest charges nor in interest expense in HEI's consolidated statements of income. Note: Prior years' ratios have been restated to remove the effects of discontinued operations. 80 HEI Exhibit 12.1 (page 2 of 2) Hawaiian Electric Industries, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1999, 1998, 1997, 1996 and 1995--Continued
1996 1995 ---------------------------------------- ------------------------------- (dollars in thousands) (1) (2) (1) (2) - ----------------------------------------------------------------------------------------------------------------------- Fixed charges Total interest charges (3)................ $127,006 $218,170 $114,626 $203,922 Interest component of rentals............. 3,583 3,583 3,857 3,857 Pretax preferred stock dividend requirements of subsidiaries............. 10,730 10,730 11,424 11,424 --------------- --------------- --------------- --------------- Total fixed charges....................... $141,319 $232,483 $129,907 $219,203 =============== =============== =============== =============== Earnings Pretax income from continuing operations.................. $136,585 $136,585 $137,469 $137,469 Fixed charges, as shown................... 141,319 232,483 129,907 219,203 Interest capitalized...................... (5,862) (5,862) (5,112) (5,112) --------------- --------------- --------------- --------------- Earnings available for fixed charges...... $272,042 $363,206 $262,264 $351,560 =============== =============== =============== =============== Ratio of earnings to fixed charges........ 1.93 1.56 2.02 1.60 =============== =============== =============== ===============
(1) Excluding interest on ASB deposits. (2) Including interest on ASB deposits. (3) Interest on nonrecourse debt from leveraged leases is not included in total interest charges nor in interest expense in HEI's consolidated statements of income. Note: Prior years' ratios have been restated to remove the effects of discontinued operations. 81 HECO Exhibit 12.2 Hawaiian Electric Company, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1999, 1998, 1997, 1996 and 1995
(dollars in thousands) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ Fixed charges Total interest charges.................... $ 48,460 $ 47,921 $ 48,778 $ 47,451 $ 44,377 Interest component of rentals............. 785 730 757 690 672 Pretax preferred stock dividend requirements of subsidiaries............. 1,479 4,081 4,150 4,358 4,494 Preferred securities distributions of trust subsidiaries....................... 7,665 4,197 3,052 - - ------------------------------------------------------------------------------------ Total fixed charges....................... $ 58,389 $ 56,929 $ 56,737 $ 52,499 $ 49,543 ==================================================================================== Earnings Income before preferred stock dividends of HECO.................................. $ 76,400 $ 84,230 $ 81,849 $ 85,213 $ 77,023 Fixed charges, as shown................... 58,389 56,929 56,737 52,499 49,543 Income taxes (see note below)............. 48,047 54,572 52,535 55,888 50,198 Allowance for borrowed funds used during construction............................. (2,576) (5,915) (6,190) (5,862) (5,112) ------------------------------------------------------------------------------------ Earnings available for fixed charges...... $180,260 $189,816 $184,931 $187,738 $171,652 ==================================================================================== Ratio of earnings to fixed charges........ 3.09 3.33 3.26 3.58 3.46 ==================================================================================== Note: Income taxes is comprised of the following: Income tax expense relating to operating income for regulatory purposes.......... $ 48,281 $ 54,719 $ 52,795 $ 56,170 $ 50,719 Income tax benefit relating to nonoperating loss....................... (234) (147) (260) (282) (521) ------------------------------------------------------------------------------------ $ 48,047 $ 54,572 $ 52,535 $ 55,888 $ 50,198 ====================================================================================
82 HEI Exhibit 21.1 (Page 1 of 2) Hawaiian Electric Industries, Inc. SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiaries of the registrant as of March 13, 2000. The state/place of incorporation or organization is noted in parentheses. Hawaiian Electric Company, Inc. (Hawaii) Maui Electric Company, Limited (Hawaii) Hawaii Electric Light Company, Inc. (Hawaii) HECO Capital Trust I (Delaware) HECO Capital Trust II (Delaware) HEI Diversified, Inc. (Hawaii) American Savings Bank, F.S.B. (federally chartered) American Savings Investment Services Corp. (Hawaii) ASB Service Corporation (Hawaii) AdCommunications, Inc. (Hawaii) American Savings Mortgage Co., Inc. (Hawaii) ASB Realty Corporation (Hawaii) HEI Power Corp. (Hawaii) HEI Power Corp. Guam (Hawaii) HEI Power Corp. Saipan (Commonwealth of the Northern Mariana Islands) HEI Power Corp. International (Cayman Islands) HEIPC Cambodia Ventures (Cayman Islands) HEIPC Phnom Penh Power (Limited) LLC (Cayman Islands) HEI Power Corp. Philippines (Cayman Islands) HEIPC Philippine Ventures (Cayman Islands) HEIPC Philippine Development, LLC (Cayman Islands) Lake Mainit Power, LLC (Cayman Islands) HEIPC Bulacan I, LLC (Cayman Islands) HEIPC Bulacan II, LLC (Cayman Islands) HEI Power Corp. China (Republic of Mauritius) Dafeng Sanlian Cogeneration Co., Ltd. (People's Republic of China) (76% owned by HEI Power Corp. China) HEI Power Corp. China II (Republic of Mauritius) United Power Pacific Company Limited (Republic of Mauritius) Baotou Tianjiao Power Co., Ltd. (People's Republic of China) (75% owned by United Power Pacific Company Limited) HEI Power Corp. China III (Republic of Mauritius) HEI Power Corp. China IV (Republic of Mauritius) HEI Investments, Inc. (Hawaii; continued in Nova Scotia, Canada) HEIPC Philippines Holding Co., Inc. (Republic of Philippines) 83 HEI Exhibit 21.1 (Page 2 of 2) Hawaiian Electric Industries, Inc. SUBSIDIARIES OF THE REGISTRANT (continued) Pacific Energy Conservation Services, Inc. (Hawaii) HEI District Cooling, Inc. (Hawaii) ProVision Technologies, Inc. (Hawaii) HEI Properties, Inc. (Hawaii) HEI Leasing, Inc. (Hawaii) Hycap Management, Inc. (Delaware) HEI Preferred Funding, LP (a limited partnership in which Hycap Management, Inc. is the sole general partner) (Delaware) Hawaiian Electric Industries Capital Trust I (a business trust) (Delaware) Hawaiian Electric Industries Capital Trust II (a business trust) (Delaware) Hawaiian Electric Industries Capital Trust III (a business trust) (Delaware) The Old Oahu Tug Service, Inc. (Hawaii) Malama Pacific Corp. (Hawaii) Malama Property Investment Corp. (Hawaii) Malama Development Corp. (Hawaii) Malama Mohala Corp. (Hawaii) 84 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 13, 2000. The state/place of incorporation or organization is noted in parentheses. Maui Electric Company, Limited (Hawaii) Hawaii Electric Light Company, Inc. (Hawaii) HECO Capital Trust I (a business trust) (Delaware) HECO Capital Trust II (a business trust) (Delaware) 85 HEI Exhibit 23 [KPMG LLP letterhead] Accountants' Consent -------------------- The Board of Directors Hawaiian Electric Industries, Inc.: We consent to incorporation by reference in Registration Statement Nos. 333- 44737, 33-58820, 333-73225 and 333-18809 on Form S-3 and Registration Statement Nos. 33-65234, 333-05667 and 333-02103 on Form S-8 of Hawaiian Electric Industries, Inc., and Registration Statement Nos. 333-18809-01, 333-18809-02, 333-18809-03 and 333-18809-04 on Form S-3 of Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III and HEI Preferred Funding, LP of our report dated January 24, 2000, relating to the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1999 and 1998, 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, 1999 (except as to the second paragraph of Note 5 of the notes to the consolidated financial statements, which is as of February 24, 2000), which report is incorporated by reference in the 1999 annual report on Form 10-K of Hawaiian Electric Industries, Inc. We also consent to incorporation by reference of our report dated January 24, 2000 (except as to the second paragraph of Note 5 of the notes to the consolidated financial statements, which is as of February 24, 2000), relating to the financial statement schedules of Hawaiian Electric Industries, Inc. in the aforementioned 1999 annual report on Form 10-K, which report is included in said Form 10-K. /s/ KPMG LLP Honolulu, Hawaii March 21, 2000 86 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) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Operating income from regulated and nonregulated activities before income taxes (per HEI Consolidated Statements of Income)....................................................... $174,714 $177,450 $171,753 Deduct: Income taxes on regulated activities.......................... (48,281) (54,719) (52,795) Revenues from nonregulated activities......................... (4,881) (7,384) (8,768) Add: Expenses from nonregulated activities......................... 1,289 805 850 -------------------------------------------------------- Operating income from regulated activities after income taxes (per HECO Consolidated Statements of Income).................. $122,841 $116,152 $111,040 ========================================================
87 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 21, 2000 Date: March 21, 2000
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 21, 2000. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named companies and any subsidiaries thereof.
Signature Title - -------------------------------------------- ------------------------------------------- /s/ Robert F. Clarke Chairman, President and Director of HEI - -------------------------------------------- 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
88 SIGNATURES (continued)
Signature Title - -------------------------------------------- ------------------------------------------- /s/ Paul Oyer Financial Vice President, Treasurer and - -------------------------------------------- Director of HECO Paul A. Oyer (Principal Financial Officer of HECO) /s/ Ernest T. Shiraki Controller of HECO - -------------------------------------------- (Principal Accounting Officer of HECO) Ernest T. Shiraki /s/ Don E. Carroll Director of HEI - -------------------------------------------- Don E. Carroll /s/ Richard Henderson Director of HEI and HECO - -------------------------------------------- Richard Henderson /s/ Victor Hao Li Director of HEI - -------------------------------------------- Victor Hao Li Director of HEI - -------------------------------------------- Bill D. Mills /s/ A. Maurice Myers Director of HEI - -------------------------------------------- A. Maurice Myers
89 SIGNATURES (continued)
Signature Title - -------------------------------------------- ------------------------------------------- /s/ Diane J. Plotts Director of HEI and HECO - -------------------------------------------- Diane J. Plotts /s/ James K. Scott Director of HEI and HECO - -------------------------------------------- James K. Scott 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 and HECO - -------------------------------------------- Jeffrey N. Watanabe /s/ Paul C. Yuen Director of HECO - -------------------------------------------- Paul C. Yuen
90 EX-10.9(A) 2 INTER-ISLAND INDUSTRIAL FUEL OIL SUPPLY CONTRACT HECO Exhibit 10.9(a) -------------------- AGREEMENT RELATING TO INTER-ISLAND INDUSTRIAL FUEL OIL AND DIESEL FUEL SUPPLY CONTRACT THIS AGREEMENT (hereinafter "Agreement") is made as of the 29th day of October, 1999, by and between HAWAIIAN ELECTRIC COMPANY, INC. ("HECO"), a Hawaii corporation whose principal place of business and address is 900 Richards Street, Honolulu, Hawaii 96813, MAUI ELECTRIC COMPANY, LIMITED ("MECO"), a Hawaii corporation whose principal place of business and address is 210 Kamehameha Avenue, Kahului, Maui, Hawaii 96732, HAWAII ELECTRIC LIGHT COMPANY, INC. ("HELCO"), a Hawaii corporation whose principal place of business and address is 1200 Kilauea Avenue, Hilo, Hawaii 96720, HAWAIIAN TUG & BARGE CORP. ("HTB"), a Hawaii corporation whose principal place of business and address is Pier 21, Box 3288, Honolulu, Hawaii 96801, YOUNG BROTHERS, LIMITED ("YB"), a Hawaii corporation whose principal place of business and address is Pier 40, Box 3288, Honolulu, Hawaii 96801, SALTCHUK RESOURCES, INC. ("Saltchuk"), a Washington corporation whose principal place of business and address is 1111 Fairview Ave. North, Seattle, Washington 98109 and MOANA PA'A KAI, INC., a Hawaii corporation formed or being formed by Saltchuk (referred to herein as "Moana"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, HECO, MECO, HELCO (collectively, the "Utilities"), HTB and YB are parties to that certain Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract with Chevron U.S.A. Inc. ("Chevron"), dated as of November 14, 1997 (hereinafter the "Fuel Contract"); and WHEREAS, HTB, YB, and Hawaiian Electric Industries, Inc. ("HEI"), have entered into a stock purchase agreement with Saltchuk dated August 4, 1999 whereby HTB will sell to Saltchuk all of the issued and outstanding capital stock of YB (the "Stock Purchase Agreement") and HEI and HTB have entered into an asset purchase agreement with Saltchuk also dated August 4, 1999, whereby HTB will sell certain of the other assets of HTB to Saltchuk (the "Asset Purchase Agreement"); and WHEREAS, under the Asset Purchase Agreement HTB will assign to Moana the interests of HTB under the Fuel Contract (hereinafter the "Assignment"); and WHEREAS, it is contemplated by the Stock Purchase Agreement and the Asset Purchase Agreement (the "Purchase Agreements") that this Agreement will be entered into by the parties hereto, with the provisions hereof to become effective on the closing date of the transactions contemplated by the Purchase Agreements (the "Closing Date"); NOW, THEREFORE, in consideration of these premises and of the mutual promises herein contained, the parties hereto hereby agree as follows: I. ASSIGNMENT; FURTHER ASSIGNMENT. Subject to obtaining such consents or approvals as shall be required from Chevron, and subject to the terms and conditions of this Agreement, HECO, MECO and HELCO hereby consent to the assignment of HTB's interests under the Fuel Contract to Moana. After such assignment, neither the Fuel Contract nor the interests of YB and Moana thereunder shall be further assigned by YB or Moana without the consent of the Utilities and Chevron. II. QUANTITIES; AMENDMENTS. By letter of even date herewith, (the "Notification/Consent Letter") HTB and YB shall notify Chevron (in accordance with section 3.1 of the Fuel Contract) that the annual physical quantities of Diesel to be purchased by YB and Moana in the aggregate under the Fuel Contract shall be a minimum of 0 barrels and a maximum of 78,000 barrels. Such notification shall be effective on the Closing Date. Thereafter, neither YB nor Moana shall (a) make any change to the individual minimum or maximum annual physical quantities of Diesel specified in such letter to be purchased by YB and/or Moana, nor (b) make any other change under the Fuel Contract that is not contemplated by this Agreement, nor (c) commence any negotiations with Chevron with respect to amendment or other modification of the Fuel Contract, without the express prior written consent of the Utilities, which consent may be granted or denied in the Utilities' sole discretion. The Utilities may amend or otherwise modify the Fuel Contract with the consent of Chevron and without the consent of YB or Moana, provided they do not thereby breach any provision of this Agreement and provided further that the consent of YB and Moana shall be required for any amendment which materially and adversely affects their rights or obligations under the Fuel Contract (which consent shall not be unreasonably withheld). YB and Moana may also negotiate a new, separate contract with Chevron, without the consent of the Utilities, provided that such new contract shall become effective only upon termination of YB's and Moana's interests under the Fuel Contract. III. FORECAST. Prior to the 15th day of each calendar month, YB and Moana, individually and collectively, shall provide to HECO a forecast of monthly liftings of Diesel (as that term is defined in the Fuel Contract) for the coming three calendar months, in order that HECO can meet its obligations under section 3.2 of the Fuel Contract. YB and Moana agree to update HECO of any change in their lifting forecast as soon as it shall become known. Within fifteen (15) business days after the end of each calendar month, YB and Moana shall furnish HECO a schedule of the volume of Diesel purchased on behalf of their vessels and others for the referenced period. 2 IV. RATABILITY. Assignees' liftings of Diesel will occur in a reasonably ratable fashion throughout the calendar year. The maximum volume of Diesel purchased by YB and Moana in any calendar quarter shall in no case exceed an amount equivalent to 35% of their total actual purchases for the calendar year in question. V. TERM, TERMINATION AND DEFAULT. Section 5.1. Term. ------------------ The term of this Agreement shall commence on the Closing Date and shall be void and of no force or effect in the event the transactions contemplated by the Purchase Agreements are not closed. If this Agreement becomes effective, it shall continue in full force and effect until the earlier to occur of (a) December 31, 2001 or such later date as the Utilities in their sole discretion shall agree in writing, if Chevron consents to the termination of the interest of YB and Moana on such date as requested in the Notification/Consent Letter or (b) termination of the interests of YB and Moana in accordance with the provisions of Article II hereof or the provisions of the Fuel Contract; provided, however, that any such termination shall not relieve any party of any obligations under the Fuel Contract or this Agreement arising or accruing prior to the date of such termination. Section 5.2. Optional Termination of YB's and Moana's Interests by HECO. ------------------------------------------------------------------------ Notwithstanding any other provision to the contrary, each of YB and Moana acknowledge and agree that HECO may terminate YB's and Moana's respective interest in the Fuel Contract if YB and Moana is in default of any obligation under the Fuel Contract or this Agreement. Section 5.3. Mandatory Reduction of Purchases by YB and Moana. -------------------------------------------------------------- YB and Moana each agrees to that if for any reason their interests under the Fuel Contract have not been terminated on or before December 31, 2001, the aggregate maximum annual physical quantities of Diesel to be purchased by them during the remaining term of the Fuel Contract shall be 0 barrels unless the Utilities shall before such date agree in writing, in their sole discretion, that such maximum shall be a greater number of barrels. VI. INDEMNITY. Section 6.1. No Joint and Several Liability. -------------------------------------------- Each of the parties hereto acknowledges and agrees that any liability of the parties to the Fuel Contract shall be individual and not joint and several. Each party to the Fuel Contract shall be responsible for its own actions, including without limitation any 3 negligence or breach of contract, and all direct, indirect, consequential, special and incidental damages, losses, penalties and claims arising therefrom. Section 6.2. Indemnity. ----------------------- (a) YB and Moana, jointly and severally, shall indemnify, defend and hold harmless HECO, MECO, HELCO and each of their respective 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 costs), and proceedings of any nature whatsoever for personal injury (including death), or property damage, including but not limited to HECO's, MECO's or HELCO's facilities (collectively, "Injury or Damage"), that results from non-specification or contaminated Diesel in the custody or control of YB or Moana or that arises out of or is in any manner connected with the delivery or receipt of Diesel when in the custody or control of YB or Moana, any carrier for YB or Moana or subsequent buyer from YB or Moana of Diesel related to the Fuel Contract, except to the extent that such Injury or Damage may be attributable to the negligence or willful action of the party seeking indemnity. (b) Without limiting the generality of Section 6.2.(a), YB and Moana, jointly and severally, shall indemnify, defend and hold harmless HECO, MECO, HELCO and each of their respective 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 Diesel or hazardous material related to the Fuel Contract when in the custody of YB or Moana, any carrier for or subsequent buyer from YB or Moana of Diesel related to the Fuel Contract, except to the extent that such release, threatened release, discharge, disposal or presence of Diesel or hazardous material may be attributable to the negligence or willful action of the party seeking indemnity, including without limitation: (1) all foreseeable and unforeseeable consequential damages; (2) the reasonable costs of any required or necessary repair, cleanup or detoxification of any area of Diesel or hazardous material and the preparation and implementation of any closure, remedial or other required plans; (3) the reasonable costs of investigation of any environmental claims by the party seeking indemnity; (4) the reasonable costs of HECO's enforcement of the Fuel Contract and this Agreement by the party seeking indemnity; and (5) all reasonable costs and expenses incurred by the party seeking indemnity in connection with clauses (1), (2), (3) and (4), including without limitation reasonable attorneys' fees and court costs. (c) HECO, MECO, HELCO, jointly and severally, shall indemnify, defend and hold harmless YB and Moana and each of their respective 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, 4 expenses (including reasonable attorneys' fees and costs), and proceedings of any nature whatsoever for personal injury (including death), or property damage, including but not limited to YB's or Moana's facilities (collectively, "Injury or Damage"), that results from non-specification or contaminated Diesel in the custody or control of HECO, MECO or HELCO or that arises out of or is in any manner connected with the delivery or receipt of Diesel when in the custody or control of HECO, MECO or HELCO, any carrier for HECO, MECO or HELCO or subsequent buyer from HECO, MECO or HELCO of Diesel related to the Fuel Contract, except to the extent that such Injury or Damage may be attributable to the negligence or willful action of the party seeking indemnity. (d) Without limiting the generality of Section 6.2.(c), HECO, MECO or HELCO, jointly and severally, shall indemnify, defend and hold harmless YB, Moana and each of their respective 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 Diesel or hazardous material related to the Fuel Contract when in the custody of HECO, MECO or HELCO, any carrier for or subsequent buyer from HECO, MECO or HELCO of Diesel related to the Fuel Contract, except to the extent that such release, threatened release, discharge, disposal or presence of Diesel or hazardous material may be attributable to the negligence or willful action of the party seeking indemnity, including without limitation: (1) all foreseeable and unforeseeable consequential damages; (2) the reasonable costs of any required or necessary repair, cleanup or detoxification of any area of Diesel or hazardous material and the preparation and implementation of any closure, remedial or other required plans; (3) the reasonable costs of investigation of any environmental claims by the party seeking indemnity; (4) the reasonable costs of YB's or Moana's enforcement of the Fuel Contract and this Agreement by the party seeking indemnity; and (5) all reasonable costs and expenses incurred by the party seeking indemnity in connection with clauses (1), (2), (3) and (4), including without limitation reasonable attorneys' fees and court costs. (e) Nothing in this Section 6.2 is intended to diminish in any respect the indemnity obligations of Chevron under the Fuel Contract. VII. CONFIDENTIALITY. YB and Moana shall keep the terms of this Agreement and the Fuel Contract in strictest confidence and shall not disclose them to any other party without the prior written consent of the Utilities, which consent may be withheld in the Utilities' sole discretion. 5 VIII. INSURANCE. YB and Moana shall each maintain all of the insurance specified in Article XX of the Fuel Contract. The insurance specified in Sections 20.1(ii), 20.1(iii) and 20.1(v) Option One shall name the Utilities as additional insureds. On or prior to the Closing Date, YB and Moana shall provide HECO with certificates of insurance or other documentary evidence satisfactory to HECO of the insurance coverages and endorsements required by Article XX of the Fuel Contract and by this Article VIII. IX. MISCELLANEOUS PROVISIONS. Section 9.1. Headings of Articles and Sections. ----------------------------------------------- Headings of Articles and sections are for convenient reference only and are not considered part of this Agreement. Section 9.2. Entire Agreement. ------------------------------ This Agreement contains the entire agreement between the parties covering the subject matter and cancels all prior agreements of any kind covering such subject matter and any amendments thereto. Section 9.3. Notice. -------------------- 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. HECO, MECO, HELCO: Manager, Power Supply Services Department Hawaiian Electric Company, Inc. P.O. Box 2750 Honolulu, Hawaii 96840-0001 Fax: (808) 543-4366 HTB: Financial Vice President Hawaiian Electric Industries, Inc. P.O. Box 730 Honolulu, Hawaii 96801 YB: President Young Brothers, Limited Pier 40, Box 3288 Honolulu, Hawaii 96801 Fax: (808) 543-9458 Saltchuk: President Saltchuk Resources, Inc. 1111 Fairview Avenue North Seattle, Washington 98109 Fax: (206) 652-1110 6 Moana: President Saltchuk Resources, Inc. 1111 Fairview Avenue North Seattle, Washington 98109 Fax: (206) 652-1110 Section 9.4. Court Rulings. --------------------------- If any term or provision, or any part of any term or provision, of this Agreement 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 9.5. Binding Effect. ---------------------------- This Agreement shall inure to the benefit of and be binding upon the parties hereto, their successors and permitted assigns. Section 9.6. Governing Law. --------------------------- This Agreement shall be governed by and construed in accordance with the laws of the State of Hawaii. Section 9.7. Contract Administration ------------------------------------- HECO shall act as an agent of YB and Moana with respect to the compilation of market price data, computation of the monthly price of Diesel, obtaining the agreement of Chevron to the price of the Diesel, and other operational and contract administration issues. HECO shall issue a monthly notice showing the Diesel price calculation, substantially in the same format as the current "HTB Diesel Prices" notice. It is expressly agreed and understood that YB and Moana shall reimburse HECO for one-quarter of the cost of an annual subscription to "Platt's Oilgram Price Report" or its successor publication used in the determination of the Diesel price, and shall reimburse HECO for labor and other non-labor costs reasonably incurred by HECO in the performance of the monthly Diesel price determination and other administrative activities with respect to the Fuel Contract. YB and Moana shall promptly notify HECO of any and all disputes with Chevron that arise relating to the Fuel Contract, including without limitation disputes regarding delivery operations, safety issues, pollution mitigation, Diesel quality, Diesel quantity, invoicing, payment and the like. Section 9.8. Affiliated Entity Filing. --------------------------------------- Although this Agreement shall become effective only upon the closing or the Closing Date, after which neither YB nor Moana will be an affiliate of HECO, MECO or HELCO, the parties hereto nevertheless agree that the Agreement shall be submitted promptly after the date hereof to the Public Utilities Commission under Hawaii Revised Statutes (S) 269-19.5. 7 Section 9.9. No Resale or Unauthorized Use. -------------------------------------------- It is expressly understood and agreed that the Diesel is provided for the exclusive use of YB and Moana and that its intended use is as a fuel for marine vessels in a non-vehicular application. IN WITNESS WHEREOF, the parties have caused these presents to become effective as of the day and year first written above. HAWAIIAN ELECTRIC COMPANY, INC. ("HECO") HAWAIIAN TUG & BARGE CORP. ("HTB") By: /s/ Edward Y. Hirata By: /s/ Glenn K. Y. Hong ----------------------------- ------------------------------ Its Vice President Its President MAUI ELECTRIC COMPANY, LIMITED ("MECO") YOUNG BROTHERS, LIMITED ("YB") By: /s/ Edward Y. Hirata By: /s/ Glenn K. Y. Hong ----------------------------- ------------------------------ Its Vice President Its President HAWAII ELECTRIC LIGHT COMPANY, SALTCHUK RESOURCES, INC. INC. ("HELCO") ("Saltchuk") By: /s/ Edward Y. Hirata By: /s/ Charles H. Kauffman ----------------------------- ------------------------------ Its Vice President Its Vice President MOANA PA'A KAI, INC. ("Moana") By: /s/ Glenn K. Y. Hong ------------------------------ Its President 8 EX-10.11 3 HEI NONEMPLOYEE DIRECTOR STOCK PLAN HEI Exhibit 10.11 ----------------- HAWAIIAN ELECTRIC INDUSTRIES, INC. 1990 Nonemployee Director Stock Plan, as amended effective April 27, 1999 1. Purposes of the Plan -------------------- The purposes of the 1990 Nonemployee Director Stock Plan of Hawaiian Electric Industries, Inc. are to provide participating directors with additional incentives to improve the Company's performance by increasing the level of stock owned by nonemployee directors to reinforce the participating directors' role in enhancing stockholder value, and to provide an additional means of attracting and retaining nonemployee directors through the issuance of Common Stock under the Plan as compensation to Nonemployee Directors. 2. Definitions ----------- When used herein, the following terms shall have the respective meanings set forth below: (a) "Annual Retainer" means the annual retainer payable to all Nonemployee Directors as provided in Section 6 below (exclusive of any per meeting fees or expense reimbursements). (b) "Annual Meeting of Stockholders" means the annual meeting of stockholders of the Company or any Participating Company at which directors of the Company or the Participating Company, as the case may be, are elected. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means a committee whose members meet the requirements of Section 4(a) hereof, appointed from time to time by the Board to administer the Plan. (e) "Common Stock" means the common stock, without par value, of the Company. (f) "Company" means Hawaiian Electric Industries, Inc., a Hawaii corporation, and any successor corporation. -1- (g) "Company Director" means any person who is elected or appointed to the Board of Directors of the Company and who is not an Employee. (h) "Employee" means any officer or employee of the Company or any of its direct or indirect subsidiaries or affiliates (whether or not such subsidiary or affiliate participates in the Plan). (i) "Nonemployee Director" or "Participant" means any Company Director or Participating Company Director. (j) "Participating Company" means the Company and any direct or indirect subsidiary or affiliate of the Company whose participation in the Plan has been approved by such subsidiary's or affiliate's Board of Directors. (k) "Participating Company Director" means any person who is elected or appointed to the Board of Directors of any one or more Participating Companies other than the Company and who is not an Employee. (l) "Plan" means the Company's 1990 Nonemployee Director Stock Plan, as amended effective April 27, 1999, as set forth herein, as it may be amended from time to time. (m) "Stock Payment" means the fixed portion of the Annual Retainer to be paid to Participating Company Directors in shares of Common Stock rather than cash for services rendered as a director of a Participating Company other than the Company, as provided in Section 6 hereof. 3. Shares of Common Stock Subject to the Plan ------------------------------------------ Subject to adjustment as provided in Section 9 below, the maximum aggregate number of shares of Common Stock that may be issued under the Plan is 100,000 shares. The Common Stock to be issued under the Plan will be made available from authorized but unissued shares of Common Stock, and the Company shall set aside and reserve for issuance under the Plan said number of shares. 4. Administration of the Plan -------------------------- (a) The Plan will be administered by the Committee, which will consist of three or more persons who are not eligible to participate in the Plan. -2- Members of the Committee need not be members of the Board. The Company shall pay all costs of administration of the Plan. (b) Subject to the express provisions of the Plan, the Committee has and may exercise such powers and authority of the Board as may be necessary or appropriate for the Committee to carry out its functions under the Plan. Without limiting the generality of the foregoing, the Committee shall have full power and authority (i) to determine all questions of fact that may arise under the Plan, (ii) to interpret the Plan and to make all other determinations necessary or advisable for the administration of the Plan, and (iii) to prescribe, amend, and rescind rules and regulations relating to the Plan, including, without limitation, any rules which the Committee determines are necessary or appropriate to ensure that the Company, each Participating Company and the Plan will be able to comply with all applicable provisions of any federal, state or local law, including securities laws and laws relating to the withholding of tax. All interpretations, determinations, and actions by the Committee will be final, conclusive, and binding upon all parties. Any action of the Committee with respect to the administration of the Plan shall be taken pursuant to a majority vote at a meeting of the Committee (at which members may participate by telephone) or by the unanimous written consent of its members. (c) Neither the Company, nor any other Participating Company, nor any representatives, employees or agents of any Participating Company, nor any member of the Board or the Committee or designee thereof will be liable for any damages resulting from any action or determination made by the Board or the Committee with respect to the Plan or any transaction arising under the Plan or any omission in connection with the Plan in the absence of willful misconduct or gross negligence. 5. Participation in the Plan ------------------------- (a) All Nonemployee Directors shall participate in the applicable provisions of the Plan, subject to the conditions and limitations of the Plan, so long as they remain eligible to participate in the Plan. (b) Participating Company Directors shall be eligible for Annual Retainers and Stock Payments pursuant to the terms of Section 6 of the Plan. Company Directors shall be eligible for Annual Retainers, pursuant to the terms of Section 7 of the Plan. (c) No Nonemployee Director shall be eligible for a Stock Payment if, at the time said payment will otherwise be made, such Nonemployee Director owns (or is deemed to own) directly or indirectly, shares of Common Stock -3- representing more than ten percent of the total combined voting power of all classes of stock of the Company. The compensation, if any, of such directors shall be determined by the Board or the Committee. 6. Determination of Participating Company Directors' Annual Retainers and ---------------------------------------------------------------------- Stock Payments -------------- (a) The Committee shall determine the Annual Retainer for all Participating Company Directors, subject to approval by the Board. The Annual Retainer shall not be determined by the Committee and approved by the Board more than once every calendar year. No Annual Retainer may be changed after it has been so determined and approved. No Participating Company Director shall be entitled to receive more than one Annual Retainer (or more than one Stock Payment) per calendar year even if such Participating Company Director serves as a director for more than one Participating Company. The Annual Retainer shall be paid to each Participating Company Director (or to the Company to the extent shares of Common Stock are issued in lieu thereof) by the Participating Company for which a Participating Company Director serves as a director. (b) Each Participating Company Director who is a Participating Company Director immediately following the date of the Annual Meeting of Stockholders of one or more Participating Companies (other than the Company) shall receive a Stock Payment as a portion of the Annual Retainer payable to such director as provided in the Plan for serving in such capacity. The number of shares allocated to each Participating Company Director as a Stock Payment shall be determined by dividing the applicable Market Price into sixty percent (60%) of the Annual Retainer payable to such Participating Company Director, provided that no fractional shares shall be issued (cash shall be paid in lieu thereof). The "Market Price" of Common Stock shall be the average of the high and low sales prices of Common Stock as quoted in the New York Stock Exchange Composite Transactions Section published in the Western Edition of the Wall Street Journal on the third business day after the date of the applicable Annual Meeting of Stockholders of the Company, or if there is no trading of Common Stock on such date, the average of the high and low sales prices of Common Stock as quoted in such Composite Transactions on the next preceding date on which there was trading in such shares, or if the Common Stock is not admitted to trade on the New York Stock Exchange, the Market Price shall be determined by the Committee in such other reasonable manner as the Committee shall decide. Such Market Price shall be used to determine the number of shares of Common Stock to be issued to all Participating Company Directors for the current year. Stock Payments shall be allocated to Participating Company Directors as soon as practicable following the applicable Annual Meeting of Stockholders of the Company. The cash portion of the Annual Retainer shall be paid to Participating -4- Company Directors at such times and in such manner as may be determined by the Board or the Committee. (c) Any person who is not a Participating Company Director immediately following the completion of all elections of the directors for all Participating Companies (other than the Company) for the current year, but later becomes a Participating Company Director, whether by appointment as a director of such Participating Company (other than the Company) or by change in status from an Employee to a non-Employee, shall receive shares of Common Stock as a portion of the compensation to be paid to such Participating Company Director until the next Annual Meeting of Stockholders of such Participating Company. The number of shares issued to such Participating Company Director shall be determined by dividing the Market Price previously used to determine the number of shares issued to directors for the current year into sixty percent (60%) of the Annual Retainer to be paid to such director until the next Annual Meeting of Stockholders of such Participating Company. The cash portion of such compensation, if any, to be paid to any such Participating Company Director shall be paid at such times and in such manner as may be determined by the Board or the Committee. (d) No Participating Company Director shall be required to forfeit or otherwise return to the Company any shares of Common Stock issued to him or her as a Stock Payment pursuant to the Plan notwithstanding any change in status of such Participating Company Director which renders him or her ineligible to continue as a Participant in the Plan. Any person who is a Participating Company Director immediately following the date of the respective Participating Company's Annual Meeting of Stockholders shall be entitled to receive a Stock Payment as a portion of the applicable Annual Retainer notwithstanding any change in status of such Participating Company Director which renders such director ineligible to continue participation in the Plan prior to delivery of certificates evidencing shares of Common Stock. 7. Determination of Company Directors' Annual Retainers ---------------------------------------------------- The Committee shall determine the Annual Retainer for all Company Directors, subject to approval by the Board. The Annual Retainer shall not be determined by the Committee and approved by the Board more than once every calendar year. No Annual Retainer may be changed after it has been so determined and approved. No Company Director shall be entitled to receive more than one Annual Retainer per calendar year even if such Company Director serves as a director for more than one Participating Company. The Annual Retainer shall be paid, in cash, to each Company Director by the Company at such times and in such manner as may be determined by the Board or the Committee. -5- 8. Stockholder Rights ------------------ (a) Nonemployee Directors shall not be deemed for any purpose to be or have rights as stockholders of the Company with respect to any shares of Common Stock except as and when such shares are issued and then only from the date of the certificate therefor. No adjustment shall be made for dividends or distributions or other rights for which the record date precedes the date of such stock certificate. (b) Subject to the provisions of Section 8(a) above, a Participant will have all rights of a stockholder with respect to Common Stock issued to the Participant, including the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto. 9. Adjustment for Changes in Capitalization ---------------------------------------- If the outstanding shares of Common Stock of the Company are increased, 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, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, combination of shares, rights offering, distribution of assets or other distribution with respect to such shares of Common Stock or other securities or other change in the corporate structure or shares of Common Stock, the maximum number of shares and/or the kind of shares that may be issued under the Plan may be appropriately adjusted by the Committee. Any determination by the Committee as to any such adjustment will be final, binding, and conclusive. The maximum number of shares issuable under the Plan as a result of any such adjustment shall be rounded up to the nearest whole share. 10. Continuation of Director or Other Status ---------------------------------------- Nothing in the Plan or in any instrument executed pursuant to the Plan or any action taken pursuant to the Plan shall be construed as creating or constituting evidence of any agreement or understanding, express or implied, that the Company or any other Participating Company, as the case may be, will retain a Nonemployee Director as a director or in any other capacity for any period of time or at a particular retainer or other rate of compensation, as conferring upon any Participant any legal or other right to continue as a director or in any other capacity, or as limiting, interfering with or otherwise affecting the right of a Participating Company to terminate a Participant in his or her capacity as a -6- director or otherwise at any time for any reason, with or without cause, and without regard to the effect that such termination might have upon him or her as a Participant under the Plan. 11. Compliance with Government Regulations -------------------------------------- Neither the Plan nor the Company shall be obligated to issue any shares of Common Stock pursuant to the Plan at any time unless and until all applicable requirements imposed by any federal and state securities and other laws, rules, and regulations, by any regulatory agencies or by any stock exchanges upon which the Common Stock may be listed have been fully met. As a condition precedent to any issuance of shares of Common Stock and delivery of certificates evidencing such shares pursuant to the Plan, the Board or the Committee may require a Participant to take any such action and to make any such covenants, agreements and representations as the Board or the Committee, as the case may be, in its discretion deems necessary or advisable to ensure compliance with such requirements. The Company shall in no event be obligated to register the shares of Common Stock issued or issuable under the Plan pursuant to the Securities Act of 1933, as now or hereafter amended, or to qualify or register such shares under any securities laws of any state upon their issuance under the Plan or at any time thereafter, or to take any other action in order to cause the issuance and delivery of such shares under the Plan or any subsequent offer, sale or other transfer of such shares to comply with any such law, regulation or requirement. Participants are responsible for complying with all applicable federal and state securities and other laws, rules and regulations in connection with any offer, sale or other transfer of the shares of Common Stock issued under the Plan or any interest therein including, without limitation, compliance with the registration requirements of the Securities Act of 1933, as amended (unless an exemption therefrom is available), or with the provisions of Rule 144 promulgated thereunder, if available, or any successor provisions. 12. Nontransferability of Rights ---------------------------- No Participant shall have the right to assign the right to receive any Stock Payment or any other right or interest under the Plan, contingent or otherwise, or to cause or permit any encumbrance, pledge or charge of any nature to be imposed on any such payment (prior to the issuance of stock certificates evidencing such Stock Payment) or any such right or interest. -7- 13. Amendment and Termination of Plan --------------------------------- (a) The Board will have the power in its discretion, to amend, suspend or terminate the Plan at any time. No such amendment will, without approval of the stockholders of the Company: (i) Change the class of persons eligible to receive Stock Payments under the Plan or otherwise modify the requirements as to eligibility for participation in the Plan; or (ii) Materially increase the benefits accruing to Participants under the Plan; or (iii) Increase the number of shares of Common Stock which may be issued under the Plan (except for adjustments as provided in Section 9 hereof). (b) No amendment, suspension or termination of the Plan will, without the consent of the Participant, alter, terminate, impair, or adversely affect any right or obligations under any Stock Payment previously granted under the Plan to such Participant, unless such amendment, suspension or termination is required by applicable law. (c) Notwithstanding the foregoing, the Board may, without further action by the stockholders of the Company, amend the Plan or modify Stock Payments under the Plan (i) in response to changes in securities or other laws, or rules, regulations or regulatory interpretations thereof, applicable to the Plan, or (ii) to comply with stock exchange rules or requirements. 14. Governing Law ------------- The laws of the State of Hawaii shall govern and control the interpretation and application of the terms of the Plan. 15. Effective Date and Duration of the Plan --------------------------------------- The Plan, as amended, will become effective as of April 27, 1999. Unless previously terminated by the Board, the Plan will terminate on April 27, 2010. -8- EX-10.12 4 HEI 1999 NONEMPLOYEE COMPANY DIRECTOR STOCK GRANT Exhibit 10.12 ------------- HAWAIIAN ELECTRIC INDUSTRIES, INC. 1999 Nonemployee Company Director Stock Grant Plan 1. Purposes of the Plan -------------------- The purposes of the 1999 Nonemployee Company Director Stock Grant Plan of Hawaiian Electric Industries, Inc. are to provide participating directors with additional incentives to improve the Company's performance by increasing the level of stock owned by such nonemployee directors to reinforce the participating directors' role in enhancing stockholder value, and to provide an additional means of attracting and retaining such nonemployee directors through the issuance of Common Stock under the Plan as compensation to Nonemployee Company Directors. 2. Definitions ----------- When used herein, the following terms shall have the respective meanings set forth below: (a) "Annual Retainer" means the annual retainer payable to all Nonemployee Company Directors as provided in the 1990 Nonemployee Director Stock Plan. (b) "Annual Meeting of Stockholders" means the annual meeting of stockholders of the Company at which directors of the Company are elected. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means a committee whose members meet the requirements of Section 4(a) hereof, appointed from time to time by the Board to administer the Plan. (e) "Common Stock" means the common stock, without par value, of the Company. (f) "Company" means Hawaiian Electric Industries, Inc., a Hawaii corporation, and any successor corporation. -1- (g) "Employee" means any officer or employee of the Company or any of its direct or indirect subsidiaries or affiliates (whether or not such subsidiary or affiliate participates in the Plan). (h) "1990 Nonemployee Director Stock Plan" means the 1990 Nonemployee Director Stock Plan, as it may be amended from time to time, or any successor thereto. (i) "Nonemployee Company Director" or "Participant" means any person who is elected or appointed to the Board of Directors of the Company and who is not an Employee. (j) "Plan" means the Company's 1999 Nonemployee Company Director Stock Grant Plan, effective April 27, 1999, as set forth herein, as it may be amended from time to time. (k) "Stock Grant" means the grant of shares of Common Stock to Company Directors for services rendered as a director of the Company, as provided in Section 6(a) hereof. 3. Shares of Common Stock Subject to the Plan ------------------------------------------ Subject to adjustment as provided in Section 9 of the 1990 Nonemployee Director Stock Plan, the maximum aggregate number of shares of Common Stock that may be issued under the Plan, when taken together with shares reserved for issuance under the 1990 Nonemployee Director Stock Plan heretofore or hereafter granted thereunder, shall not exceed 100,000 shares. The Common Stock to be issued under the Plan will be made available from authorized but unissued shares of Common Stock, and the Company shall set aside and reserve for issuance under the Plan said number of shares. 4. Administration of the Plan -------------------------- (a) The Plan will be administered by the Committee, which will consist of three or more persons who are not eligible to participate in the Plan. Members of the Committee need not be members of the Board. The Company shall pay all costs of administration of the Plan. (b) Subject to the express provisions of the Plan, the Committee has and may exercise such powers and authority of the Board as may be necessary or appropriate for the Committee to carry out its functions under the Plan. Without limiting the generality of the foregoing, the Committee shall have full power and -2- authority (i) to determine all questions of fact that may arise under the Plan, (ii) to interpret the Plan and to make all other determinations necessary or advisable for the administration of the Plan, and (iii) to prescribe, amend, and rescind rules and regulations relating to the Plan, including, without limitation, any rules which the Committee determines are necessary or appropriate to ensure that the Company, and the Plan will be able to comply with all applicable provisions of any federal, state or local law, including securities laws and laws relating to the withholding of tax. All interpretations, determinations, and actions by the Committee will be final, conclusive, and binding upon all parties. Any action of the Committee with respect to the administration of the Plan shall be taken pursuant to a majority vote at a meeting of the Committee (at which members may participate by telephone) or by the unanimous written consent of its members. (c) Neither the Company nor any representatives, employees or agents of the Company, nor any member of the Board or the Committee or designee thereof will be liable for any damages resulting from any action or determination made by the Board or the Committee with respect to the Plan or any transaction arising under the Plan or any omission in connection with the Plan in the absence of willful misconduct or gross negligence. 5. Participation in the Plan ------------------------- (a) All Nonemployee Company Directors shall participate in the Plan, subject to the conditions and limitations of the Plan, so long as they remain eligible to participate in the Plan. (b) No Nonemployee Company Director shall be eligible for a Stock Grant if, at the time such grant will otherwise be made, such Nonemployee Company Director owns (or is deemed to own) directly or indirectly, shares of Common Stock representing more than ten percent of the total combined voting power of all classes of stock of the Company. The compensation, if any, of such directors shall be determined by the Board or the Committee. 6. Determination of Nonemployee Company Directors' Stock Grants ------------------------------------------------------------ (a) Each Nonemployee Company Director who is a Nonemployee Company Director immediately following the date of the Annual Meeting of Stockholders of the Company shall receive, in addition to the Annual Retainer payable to such Nonemployee Company Director, a Stock Grant equal to three hundred (300) shares of Common Stock, for serving as a Nonemployee Company Director. Stock Grants shall be allocated to Nonemployee Company Directors as soon as practicable following the respective Annual Meeting of Stockholders of the Company. Each Nonemployee Company Director who thereafter becomes a -3- Nonemployee Company Director for the first time (whether by election or appointment as a director of the Company or by change in status from an Employee to a non-Employee), shall receive, in addition to any Annual Retainer payable to such Nonemployee Company Director, a Stock Grant equal to three hundred (300) shares of Common Stock, for serving as a Nonemployee Company Director. Such Stock Grants shall be allocated to each such Nonemployee Company Director as soon as practicable following the date such Nonemployee Company Director is first elected or appointed to the Board or otherwise becomes a Nonemployee Company Director. (b) No Nonemployee Company Director shall be required to forfeit or otherwise return to the Company any shares of Common Stock issued to him or her as a Stock Grant pursuant to the Plan notwithstanding any change in status of such Nonemployee Company Director which renders him or her ineligible to continue as a Participant in the Plan. Any person who is a Nonemployee Company Director immediately following the date of the Annual Meeting of Stockholders of the Company who was eligible to receive a Stock Grant pursuant to Section 6(b) above, shall be entitled to receive such grant notwithstanding any change in status of such Nonemployee Company Director which renders such director ineligible to continue participation in the Plan prior to delivery of certificates evidencing shares of Common Stock. 7. Stockholder Rights ------------------ (a) Nonemployee Company Directors shall not be deemed for any purpose to be or have rights as stockholders of the Company with respect to any shares of Common Stock except as and when such shares are issued and then only from the date of the certificate therefor. No adjustment shall be made for dividends or distributions or other rights for which the record date precedes the date of such stock certificate. (b) Subject to the provisions of Section 7(a) above, a Participant will have all rights of a stockholder with respect to Common Stock issued to the Participant, including the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto. 8. Continuation of Director or Other Status ---------------------------------------- Nothing in the Plan or in any instrument executed pursuant to the Plan or any action taken pursuant to the Plan shall be construed as creating or constituting evidence of any agreement or understanding, express or implied, that the Company will retain a Nonemployee Company Director as a director or in any other capacity -4- for any period of time or at a particular retainer or other rate of compensation, as conferring upon any Participant any legal or other right to continue as a director or in any other capacity, or as limiting, interfering with or otherwise affecting the right of the Company to terminate a Participant in his or her capacity as a director or otherwise at any time for any reason, with or without cause, and without regard to the effect that such termination might have upon him or her as a Participant under the Plan. 9. Compliance with Government Regulations -------------------------------------- Neither the Plan nor the Company shall be obligated to issue any shares of Common Stock pursuant to the Plan at any time unless and until all applicable requirements imposed by any federal and state securities and other laws, rules, and regulations, by any regulatory agencies or by any stock exchanges upon which the Common Stock may be listed have been fully met. As a condition precedent to any issuance of shares of Common Stock and delivery of certificates evidencing such shares pursuant to the Plan, the Board or the Committee may require a Participant to take any such action and to make any such covenants, agreements and representations as the Board or the Committee, as the case may be, in its discretion deems necessary or advisable to ensure compliance with such requirements. The Company shall in no event be obligated to register the shares of Common Stock issued or issuable under the Plan pursuant to the Securities Act of 1933, as now or hereafter amended, or to qualify or register such shares under any securities laws of any state upon their issuance under the Plan or at any time thereafter, or to take any other action in order to cause the issuance and delivery of such shares under the Plan or any subsequent offer, sale or other transfer of such shares to comply with any such law, regulation or requirement. Participants are responsible for complying with all applicable federal and state securities and other laws, rules and regulations in connection with any offer, sale or other transfer of the shares of Common Stock issued under the Plan or any interest therein including, without limitation, compliance with the registration requirements of the Securities Act of 1933, as amended (unless an exemption therefrom is available), or with the provisions of Rule 144 promulgated thereunder, if available, or any successor provisions. 10. Nontransferability of Rights ---------------------------- No Participant shall have the right to assign the right to receive any Stock Grant or any other right or interest under the Plan, contingent or otherwise, or to cause or permit any encumbrance, pledge or charge of any nature to be imposed on any such grant (prior to the issuance of stock certificates evidencing such Stock Grant) or any such right or interest. -5- 11. Amendment and Termination of Plan --------------------------------- (a) The Board will have the power in its discretion, to amend, suspend or terminate the Plan at any time. (b) No amendment, suspension or termination of the Plan will, without the consent of the Participant, alter, terminate, impair, or adversely affect any right or obligations under any Stock Grant previously granted under the Plan to such Participant, unless such amendment, suspension or termination is required by applicable law. (c) Notwithstanding the foregoing, the Board may amend the Plan or modify Stock Grants under the Plan (i) in response to changes in securities or other laws, or rules, regulations or regulatory interpretations thereof, applicable to the Plan, or (ii) to comply with stock exchange rules or requirements. 12. Governing Law ------------- The laws of the State of Hawaii shall govern and control the interpretation and application of the terms of the Plan. 13. Effective Date and Duration of the Plan --------------------------------------- The Plan, as amended, will become effective as of April 27, 1999. Unless previously terminated by the Board, the Plan will terminate on April 27, 2010. -6- EX-27.1 5 HEI AND SUBSIDIARIES FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC INDUSTRIES, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES, INC. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 199,906 2,159,945 162,233 7,628 0 0 3,195,273 1,129,078 8,291,026 0 977,529 100,000 134,406 665,335 182,251 8,291,026 0 1,523,290 0 1,289,419 11,356 2,546 72,631 149,884 56,990 92,894 3,953 0 0 96,847 3.01 3.00
EX-27.2 6 HECO AND SUBSIDIARIES FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND CONSOLIDATED STATEMENT OF INCOME AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000046207 HAWAIIAN ELECTRIC COMPANY, INC. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 PER-BOOK 1,958,144 0 186,385 13,224 145,056 2,302,809 85,387 295,510 425,206 806,103 100,000 34,293 646,029 0 0 107,013 0 0 0 0 609,371 2,302,809 1,050,323 48,281 879,201 927,482 122,841 8,054 130,895 54,495 76,400 1,178 75,222 55,852 41,212 158,657 0 0
EX-99.1 7 TRUST AGREEMENT DATED FEBRUARY 1, 2000 HEI Exhibit 99.1 ---------------- TRUST AGREEMENT BETWEEN HAWAIIAN ELECTRIC INDUSTRIES, INC. AND FIDELITY MANAGEMENT TRUST COMPANY HAWAIIAN ELECTRIC INDUSTRIES RETIREMENT SAVINGS PLAN DATED AS OF FEBRUARY 1, 2000 ____________________________________________ TABLE OF CONTENTS -----------------
Section Page - ------- ---- 1 Trust........................................................... 2 2 Exclusive Benefit and Reversion of Sponsor Contributions........ 2 3 Disbursements................................................... 2 4 Investment of Trust............................................. 3 (a) Selection of Investment Options (b) Available Investment Options (c) Participant Direction (d) Sponsor Stock (e) ASB Money Market Account Operating Procedures (f) Execution of Trades (g) Mutual Fund Voting (h) Limitation of Liability; Reliance of Trustee on Directions (i) Trustee Powers (j) Loans (k) Non-Fidelity Mutual Funds 5 Recordkeeping to be Performed................................... 13 (a) General (b) Accounts (c) Inspection and Audit (d) Necessary Information (e) Returns, Reports and Information 6 Compensation and Expenses....................................... 14 7 Directions...................................................... 14 (a) Identity of Administrator and Named Fiduciary (b) Directions from Administrator (c) Co-Fiduciary Liability (d) Indemnification of Trustee (e) Indemnification of Sponsor (f) Survival
-i- TABLE OF CONTENTS ----------------- (Continued)
Section Page - ------- ---- 8 Resignation or Removal of Trustee................................. 15 (a) Resignation (b) Removal 9 Successor Trustee................................................. 15 (a) Appointment (b) Acceptance (c) Corporate Action 10 Termination....................................................... 16 11 Resignation, Removal, and Termination Notices..................... 16 12 Duration.......................................................... 16 13 Amendment or Modification......................................... 16 14 General........................................................... 16 (a) Performance by Trustee, its Agents or Affiliates (b) Entire Agreement (c) Waiver (d) Successors and Assigns (e) Partial Invalidity (f) Section Headings 15 Governing Law..................................................... 17 (a) Massachusetts Law Controls (b) Trust Agreement Controls Schedules - --------- A Administrative Services...................................... 19 B Fee Schedule................................................. 21 C Investment Options........................................... 22 D Authorization Letter......................................... 23 E IRS Determination Letter..................................... 25 F Telephone Exchange Guidelines................................ 28 G Operating Procedures Agreement - ASB Money Market Account.... 29 H Operating Procedures for Non-Fidelity Mutual Funds........... 33 I Plan Sponsor Webstation Agreement............................ 35
-ii- TRUST AGREEMENT, dated as of the 1st day of February, 2000, between HAWAIIAN ELECTRIC INDUSTRIES, INC., a Hawaii corporation, having an office at 900 Richards Street, Honolulu, Hawaii 96813 (the "Sponsor"), and FIDELITY MANAGEMENT TRUST COMPANY, a Massachusetts trust company, having an office at 82 Devonshire Street, Boston, Massachusetts 02109 (the "Trustee"). WITNESSETH: WHEREAS, the Sponsor is the sponsor of the Hawaiian Electric Industries Retirement Savings Plan, a defined contribution, 401(k) plan (the "Plan"); and WHEREAS, the Sponsor and the Trustee have heretofore entered into a trust agreement (the "Trust Agreement") establishing a trust to hold and invest Plan assets for the exclusive benefit of participants in the Plan and their beneficiaries; and WHEREAS, the Sponsor and the Trustee wish to restate the Trust Agreement in its entirety effective February 1, 2000; and WHEREAS, the Sponsor has established the Hawaiian Electric Industries, Inc. Pension Investment Committee (the "PIC") and appointed it "named fiduciary" and "administrator" of the Plan, as defined in sections 402(a) and 3(16)(A), respectively, of the Employee Retirement Income Security Act of 1974, as amended, ("ERISA"); and WHEREAS, the PIC has established an administrative committee (the "Administrative Committee") to oversee the day-to-day administration of the Plan; and WHEREAS, the Trustee is a nondiscretionary trustee, subject to the direction of the PIC with respect to the investment options available under the Plan and to the direction of participants and beneficiaries with respect to investments in the participants' individual accounts; and WHEREAS, the Plan is intended to be a plan described in section 404(c) of ERISA, under which the fiduciaries of the Plan shall not be liable for any loss, or with respect to any breach of Part 4, Title I of ERISA, that is the direct and necessary result of a participant's or beneficiary's exercise of control over the investments in his or her individual account; and WHEREAS, the Sponsor wishes to have the Trustee continue to perform certain ministerial recordkeeping and administrative functions with respect to the Plan in a nonfiduciary capacity; and WHEREAS, the Trustee wishes to continue to serve as a directed trustee with respect to Plan investments and to perform recordkeeping and administrative services for the Plan if the services are purely ministerial in nature and are provided within a framework of administration (including Plan policies, interpretations, rules, practices, and procedures) provided in writing by the Sponsor, the PIC, or the Administrative Committee. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements set forth below, the Sponsor and the Trustee agree as follows: Section 1. Trust. The Sponsor hereby reestablishes the Hawaiian Electric ----- Industries Retirement Savings Plan Trust (the "Trust") with the Trustee. The Trust consists of such assets held by the Trustee for the Plan at 12:00 a.m. on February 1, 2000, and shall include such additional sums of money, HEI common stock and other property acceptable to the Trustee in its sole discretion as shall from time to time be delivered to the Trustee under the Plan, all investments made therewith and proceeds thereof, and all earnings and profits thereon, less the payments that are made by the Trustee as provided herein, without distinction between principal and income. The Trustee hereby accepts the reestablished Trust on the terms and conditions set forth in this Agreement. In accepting this Trust, the Trustee shall be accountable for the assets held and received by it, subject to the terms and conditions of this Agreement. Section 2. Exclusive Benefit and Reversion of Sponsor Contributions. -------------------------------------------------------- (a) Except as provided in paragraphs (b), (c), and (d) of this Section, no part of the Trust may be used for, or diverted to, purposes other than the exclusive benefit of the participants in the Plan or their beneficiaries prior to the satisfaction of all liabilities with respect to the participants and their beneficiaries. 2 (b) In the case of any contribution made by the Sponsor by a mistake of fact, the Sponsor may direct the Trustee to return to the Sponsor that portion of the contribution that was due to the mistake of fact within one year after the contribution. (c) In the case of any portion of a contribution made by the Sponsor and disallowed by the Internal Revenue Service as a deduction under section 404 of the Internal Revenue Code of 1986, the Sponsor may direct the Trustee to return to the Sponsor that portion of the contribution within one year after the Internal Revenue Service disallows the deduction in writing. (d) Earnings attributable to the contributions returnable under paragraph (b) or (c) shall not be returned to the Sponsor, and any losses attributable to those contributions shall reduce the amount returned; provided that any losses shall first be netted against any earnings attributable to those contributions prior to being used to reduce the amount returned. Section 3. Disbursements. ------------- (a) The Trustee shall make disbursements in the amounts and in the manner that the Administrator directs from time to time in writing. The Trustee shall have no responsibility to ascertain any direction's compliance with the terms of the Plan or of any applicable law or the direction's effect for tax purposes or otherwise; nor shall the Trustee have any responsibility to see to the application of any disbursement. (b) The Trustee shall not be required to make any disbursement in excess of the net realizable value of the assets of the Trust at the time of the disbursement. The Trustee shall not be required to make any disbursement in cash unless the Administrator has provided a written direction as to the assets to be converted to cash for the purpose of making the disbursement. Section 4. Investment of Trust. ------------------- (a) Selection of Investment Options. Except as otherwise provided ------------------------------- herein, the Trustee shall have no responsibility for the selection of investment options under the Trust and shall not render investment advice to any person in connection with the selection of such options. (b) Available Investment Options. The PIC shall direct the Trustee as to ---------------------------- what investment options Plan participants may invest in as set forth in Schedule "C", subject to the following limitations. The PIC may determine to offer as investment options only (i) securities issued by the investment companies advised by Fidelity Management & Research Company ("Fidelity Mutual Funds") and securities issued by registered investment companies not advised by Fidelity Management & Research Company ("Non-Fidelity Mutual Funds") (collectively, "Mutual Funds"), (ii) equity securities issued by the Sponsor or an affiliate which are publicly-traded and which are "qualifying employer securities" 3 within the meaning of section 407(d)(5) of ERISA ("Sponsor Stock"), (iii) a ------------- money market account sponsored by American Savings Bank, F.S.B. ("ASB MMA"), (iv) notes evidencing loans to Plan participants in accordance with the terms of the Plan's loan procedures, (v) guaranteed investment contracts chosen by the Trustee, and (vi) collective investment funds maintained by the Trustee for qualified plans; provided, however, that the Trustee shall be considered a fiduciary with investment discretion only with respect to Plan assets that are invested in guaranteed investment contracts chosen by the Trustee or in collective investment funds maintained by the Trustee for qualified plans. (c) Participant Direction. Each Plan participant or the participant's --------------------- beneficiary shall direct the Trustee in which investment option(s) to invest the assets in the participant's individual account. Such directions may be made by Plan participants by use of the telephone exchange system maintained for such purposes by the Trustee or its agent in accordance with written Telephone Exchange Guidelines as revised from time to time. Except to the extent of its negligence, the Trustee shall be fully protected in following the directions received from a participant or beneficiary through the telephone exchange service with respect to the participant's individual account. In the event that the Trustee fails to receive a proper direction from a participant or beneficiary, the assets shall be invested in the investment option set forth on Schedule "C", until the Trustee receives a proper direction from such participant or beneficiary. Furthermore, if any assets, allocable to participants accounts hereunder are received from a predecessor trustee, such assets shall be invested in the Fidelity Retirement Money Market Portfolio until the Trustee receives a full reconciliation of such assets from the predecessor trustee, at which time such assets shall then be invested pursuant to proper directions received from the PIC, participant or beneficiary, as the case may be. (d) Sponsor Stock. Trust investments in the HEI Common Stock Fund shall ------------- consist of shares of HEI common stock and short-term liquid investments. The cash will be invested via the Fidelity Institutional Cash Portfolios: Money Market: Class I or such other Mutual Fund or commingled money market pool as agreed to by the Sponsor or the PIC and the Trustee. To satisfy the HEI Common Stock Fund's cash needs for participant-directed distributions and exchanges, a target range for cash shall be maintained in the HEI Common Stock Fund. Such target range is currently 2%, plus/minus 0.2%, and may be changed as agreed to in writing by the Sponsor or the PIC and the Trustee. The Trustee is responsible for ensuring that the actual cash held in the HEI Common Stock Fund falls within the agreed upon range. Each participant's proportional interest in the HEI Common Stock Fund shall be measured in units of participation, rather than shares of HEI common stock. Such units shall represent a proportionate interest in all of the assets of the HEI Common Stock Fund, which includes shares of HEI common stock, short-term investments, money market mutual fund shares, interest in commingled money market pools and, at times, receivables for dividends and interest and HEI common stock sold and payables for HEI common 4 stock purchased. A Net Asset Value ("NAV") per unit for the HEI Common Stock Fund will be determined daily for each unit outstanding of the HEI Common Stock Fund. The Net Asset Value is calculated as follows: The daily NAV is equal to the total net assets of the HEI Common Stock Fund divided by the outstanding units of the HEI Common Stock Fund on the valuation date. The total net assets of the HEI Common Stock Fund is equal to the number of underlying shares of HEI common stock multiplied by the stock's closing price on the New York Stock Exchange plus the market value of the Fund's interest in Fidelity Institutional Cash Portfolio: Money Market: Class I ("FICAP"), short-term investments, money market mutual funds and commingled money market pools; plus receivables for HEI common stock sold; minus payables for HEI common stock purchased; plus dividends accrued as of the ex-date on the underlying stock; plus interest accrued on the FICAP or other component of the Fund. The total return on the HEI Common Stock Fund shall include all accrued dividends and interest, realized and unrealized gains/losses on the underlying investments. Dividends received by the HEI Common Stock Fund shall be reinvested in the HEI Common Stock Fund. Investments in HEI common stock shall be subject to the following limitations: (i) Acquisition Limit. The Trust will be invested in HEI common ----------------- stock to the extent necessary to comply with investment directions of participants and beneficiaries under Section 4(c) of this Agreement. (ii) Responsibility of PIC. The PIC is responsible for offering the ---------------------- HEI Common Stock Fund as an investment option under the Plan. The Trustee shall not be liable for any loss, or by reason of any breach of fiduciary responsibility, which arises from the directions of the PIC with respect to the acquisition and holding of HEI common stock, unless the Trustee knew or should have known that the actions to be taken under those directions would be prohibited by ERISA or would be contrary to the terms of this Agreement. (iii) Execution of Purchases and Sales. -------------------------------- (A) Purchases and sales of HEI common stock shall be made on the open market, on the date on which the Trustee receives from the Sponsor or PIC in good order all information and documentation necessary to accurately effect such purchases and sales and in the case of purchases, upon receipt of the wire transfer necessary to make such purchases. If directed by the Sponsor or PIC in writing the Trustee may purchase or sell HEI common stock from or to the Sponsor. Exchanges of HEI common stock shall be made in accordance with the Telephone Exchange Guidelines attached hereto as Schedule "F". The Trustee is not obligated to buy or sell some or all of the shares of HEI common stock required for the transaction in the following circumstances: (1) If the Trustee is unable to determine the number of shares required to be purchased or sold on such day; or 5 (2) If the Trustee is unable to purchase or sell the total number of shares required to be purchased or sold on such day as a result of market conditions; or (3) If the Trustee is prohibited by the Securities and Exchange Commission, the New York Stock Exchange, or any other regulatory body from purchasing or selling any or all of the shares required to be purchased or sold on such day. The Trustee may follow directions from the Sponsor or PIC to deviate from the above purchase and sale procedures provided that such direction is made in writing by the Sponsor or PIC. (B) Purchases and Sales from or to Sponsor. If directed by the -------------------------------------- Sponsor or PIC in writing prior to the trading date, the Trustee may purchase or sell HEI common stock from or to the Sponsor if the purchase or sale is for adequate consideration (within the meaning of Section 3(18) of ERISA) and no commission is charged. If Sponsor contributions or contributions made by the Sponsor on behalf of the participants under the Plan are to be invested in the HEI Common Stock Fund, the Sponsor may transfer HEI common stock in lieu of cash to the Trust. In either case, the number of shares to be transferred will be determined by dividing the total amount of HEI common stock to be purchased or sold by the closing price of the HEI common stock on the New York Stock Exchange on the trading date, rounded up to the nearest whole share. (C) Use of an Affiliated Broker. The Sponsor hereby authorizes the --------------------------- Trustee to use Fidelity Capital Markets ("Capital Markets") to provide brokerage services in connection with any purchase or sale of HEI common stock on the open market in accordance with directions from Plan participants. Capital Markets shall execute such directions directly or through its affiliate, National Financial Services Company ("NFSC"). The provision of brokerage services shall be subject to the following: (1) As consideration for such brokerage services, the Sponsor agrees that Capital Markets shall be entitled to remuneration under this authorization provision in an amount of no more than three and one-fifth cents ($.032) commission on each share of HEI common stock purchased or sold. Any change in such remuneration may be made only by a signed agreement between Sponsor and Trustee. (2) The Trustee will provide the Sponsor with a description of Capital Markets' brokerage placement practices and a form by which the Sponsor may terminate this direction to use a broker affiliated with the Trustee. The Trustee will provide the Sponsor with this termination form annually, as well as quarterly and annual reports which summarize all securities transaction-related charges incurred by the Plan. (3) Any successor organization of Capital Markets, through reorganization, consolidation, merger or similar transactions, shall, upon consumption of such transaction, 6 become the successor broker in accordance with the terms of this authorization provision, provided Capital Markets provides advance written notice of such transfer to the Sponsor. (4) The authorization by the Sponsor to use Capital Markets for brokerage services as provided in this Section is terminable at will by the Sponsor, without penalty to the Plan, upon receipt by the Trustee of a written notice of termination. (iv) Securities Law Reports. The Sponsor or PIC shall be ---------------------- responsible for filing all reports required under federal or state securities laws with respect to the Trust's ownership of HEI common stock, including, without limitation, any reports required under Sections 13 or 16 of the Securities Exchange Act of 1934, and shall immediately notify the Trustee in writing of any requirement to stop purchases or sales of HEI common stock pending the filing of any report. The Trustee shall provide to the Sponsor or PIC such information on the Trust's ownership of HEI common stock as the Sponsor or PIC may reasonably request in order to comply with federal or state securities laws. (v) Voting and Tender Offers. Notwithstanding any other provision of ------------------------ this Agreement the provisions of this Section shall govern the voting and tendering of HEI common stock. The Sponsor, after consultation with the Trustee, shall provide and pay for all printing, mailing, tabulation and other costs associated with the voting and tendering of HEI common stock. (A) Voting. ------ (1) When the Sponsor prepares for any annual or special meeting, the Sponsor shall notify the Trustee thirty (30) days in advance of the intended record date (or as soon as administratively feasible) and the Trustee shall furnish to the Sponsor's transfer agent the name, address and social security number of the participants holding units in the HEI Common Stock Fund, and each participant's interest (in number of shares) as of the record date. The Sponsor shall prepare proxy materials and voting instruction forms to be distributed to participants holding an interest in the HEI Common Stock Fund. The Sponsor shall provide the Trustee with a copy of any materials provided to the participants and shall certify to the Trustee that the materials have been mailed or otherwise sent to participants. (2) Each participant with an interest in the HEI Common Stock Fund shall have the right to direct the Trustee as to the manner in which the Trustee is to vote (including not to vote) that number of shares of HEI common stock reflecting such participant's proportional interest in the HEI Common Stock Fund (both vested and unvested). Directions from a participant to the Trustee concerning the voting of HEI common stock shall be communicated in writing, or by mailgram or similar means. These directions shall be tabulated by an affiliate of the Sponsor or any other organization deemed appropriate by the Sponsor, held in confidence, in accordance with confidentiality procedures established by the Sponsor or PIC. Upon its receipt of the directions, the Sponsor or PIC shall provide the 7 Trustee with an omnibus proxy form and the Trustee shall vote the shares of HEI common stock reflecting the participant's proportional interest in the HEI Common Stock Fund as directed by the participant for HEIRS. The Trustee shall vote shares of HEI common stock reflecting the participant's proportional interest in the HEI Common Stock Fund for which it has received no direction from the participant in the same proportion on each issue as it votes those shares reflecting a participant's proportional interest in the HEI Common Stock Fund for which it received voting directions from participants. The Sponsor or PIC shall notify the Trustee of any situation regarding undue influence including, but not limited to the following: tender offers, exchange offers, contested board elections, mergers and the disposition of corporate assets. In the event of any of the above mentioned actions, directions from a participant concerning the voting of HEI common stock shall be communicated to the Trustee. Directions from a participant to the Trustee concerning the voting of HEI common stock shall be communicated in writing, or by mailgram or similar means. These directions shall be held in confidence by the Trustee and shall not be divulged to the Sponsor, or any officer or employee thereof, or any other person except (i) as necessary to meet applicable legal requirements, (ii) in the case of any contested proxy solicitation, as may be necessary to permit proper parties to verify the propriety of proxies presented by any person and the results of the voting, and (iii) in the event a shareholder has made a written comment on the proxy form. In addition, the Trustee will provide the Sponsor as reasonably requested by the Sponsor, periodic reports indicating the number of shares voted and not voted. Upon its receipt of the directions, the Trustee shall vote the shares of HEI common stock reflecting the participant's proportional interest in the HEI Common Stock Fund as directed by the participant. The Trustee shall vote shares of HEI common stock reflecting the participant's proportional interest in the HEI Common Stock Fund for which it has received no direction from the participant in the same proportion on each issue as it votes those shares reflecting a participant's proportional interest in the HEI Common Stock Fund for which it received voting directions from participants. (3) The Trustee shall vote that number of shares of HEI common stock not credited to participants' accounts in the same proportion on each issue as it votes those shares credited to participants' accounts for which it received voting directions from participants. (B) Tender Offers. ------------- (1) Upon commencement of a tender offer for any securities held in the Trust that are HEI common stock, the Sponsor shall notify each Plan participant with an interest in such HEI common stock of the tender offer and utilize its best efforts to timely distribute or cause to be distributed to the participant the same information that is distributed to all shareholders of HEI common stock in connection with the tender offer, and, after consulting with the Trustee, shall provide and pay for a means by which the participant may direct the Trustee whether or not to tender the HEI common stock 8 reflecting such participant's proportional interest in the HEI Common Stock Fund (both vested and unvested). The Sponsor shall provide the Trustee with a copy of any material provided to the participants and shall certify to the Trustee that the materials have been mailed or otherwise sent to participants. (2) Each participant shall have the right to direct the Trustee to tender or not to tender some or all of the shares of HEI common stock reflecting such participant's proportional interest in the HEI Common Stock Fund (both vested and unvested). Directions from a participant to the Trustee concerning the tender of HEI common stock shall be communicated in writing, or by mailgram or such similar means as is agreed upon by the Trustee and the Sponsor under the preceding paragraph. These directions shall be held in confidence by the Trustee and shall not be divulged to the Sponsor, or any officer or employee thereof, or any other person except to the extent that the consequences of such directions are reflected in reports regularly communicated to any such persons in the ordinary course of the performance of the Trustee's services hereunder. However, the Trustee will provide to the Sponsor, as reasonably requested by the Sponsor, periodic reports indicating the number of shares tendered and not tendered. The Trustee shall tender or not tender shares of HEI Common Stock as directed by the participant. The Trustee shall not tender shares of HEI common stock reflecting a participant's proportional interest in the HEI Common Stock Fund for which it has received no direction from the participant. (3) The Trustee shall tender that number of shares of HEI common stock not credited to participants' accounts in the same proportion as the total number of shares of HEI common stock credited to participants' accounts for which it has received instructions from participants. (4) A participant who has directed the Trustee to tender some or all of the shares of HEI common stock reflecting the participant's proportional interest in the HEI Common Stock Fund may, at any time prior to the tender offer withdrawal date, direct the Trustee to withdraw some or all of the tendered shares reflecting the participant's proportional interest, and the Trustee shall withdraw the directed number of shares from the tender offer prior to the tender offer withdrawal deadline. Prior to the withdrawal deadline, if any shares of HEI common stock not credited to participants' accounts have been tendered, the Trustee shall redetermine the number of shares of HEI common stock that would be tendered under Section 4(d)(v)(B)(3) if the date of the foregoing withdrawal were the date of determination, and withdraw from the tender offer the number of shares of HEI common stock not credited to participants' accounts necessary to reduce the amount of tendered HEI common stock not credited to participants' accounts to the amount so redetermined. A participant shall not be limited as to the number of directions to tender or withdraw that the participant may give to the Trustee. (5) A direction by a participant to the Trustee to tender shares of HEI common stock reflecting the participant's proportional interest in the HEI Common Stock Fund shall not 9 be considered a written election under the Plan by the participant to withdraw, or have distributed, any or all of his withdrawable shares. The Trustee shall credit to each participant's account a proportional share of the proceeds received by the Trustee for the shares of HEI common stock tendered. Pending receipt of directions from the participant or the PIC, as to which of the remaining investment options the proceeds should be invested in, the Trustee shall invest the proceeds in the investment option described in Schedule "C". (vi) Shares Credited. For all purposes of this Section, the number --------------- of shares of HEI common stock deemed credited to each participant's account as of the relevant date (the record date or the date specified in a tender offer) shall be calculated by reference to the number of shares reflected on the books of the transfer agent as of the relevant date. In the case of a tender, the number of shares credited shall be determined as of a date as close as administratively feasible to the relevant date. For the HEI Common Stock Fund, each participant shall be credited with a pro rata portion of the shares held by the fund calculated in accordance with the preceding sentences. (vii) General. With respect to all rights other than the right to ------- vote, the right to tender, and the right to withdraw shares previously tendered, in the case of HEI common stock credited to a participant's proportional interest in the HEI Common Stock Fund, the Trustee shall follow the directions of the participant and if no such directions are received, the directions of the Sponsor or PIC. The Trustee shall have no duty to solicit directions from participants. With respect to all rights other than the right to vote and the right to tender, in the case of HEI common stock not credited to participants' accounts, the Trustee shall follow the directions of the Sponsor or PIC. (viii) Conversion. All provisions in this Section 4(d) shall also ---------- apply to any securities received as a result of a conversion of HEI common stock. (e) ASB Money Market Account Operating Procedures. Transactions involving --------------------------------------------- the ASB Money Market Account shall be executed in accordance with separate written Operating Procedures as agreed to between the Sponsor or PIC and the Trustee as amended from time to time in writing and attached hereto as Schedule "G". (f) Execution of Trades. Purchases and sales of securities issued by ------------------- investment companies shall be made by the Trustee at the same time as purchases of Sponsor Stock are made pursuant to subparagraph (d) (iii) above. (g) Mutual Fund Voting. At the time of mailing of notice of each annual ------------------ or special stockholders' meeting of any investment company, the Trustee shall send a copy of the notice and all proxy solicitation materials to each Plan participant who has shares of the investment company credited to the participant's accounts, together with a voting direction form for return to the Trustee or its designee. The participant shall have the right to direct the Trustee as to the manner in which the Trustee is to vote the shares 10 credited to the participant's accounts (both vested and unvested). The Trustee shall vote the shares as directed by the participant. The Trustee shall not vote shares for which it has received no directions from the participant. With respect to all rights other than the right to vote, the Trustee shall follow the directions of the participant and if no such directions are received, the directions of the PIC. The Trustee shall have no duty to solicit directions from participants. (h) Limitation of Liability; Reliance of Trustee on Directions. ---------------------------------------------------------- (i) Neither the Trustee nor any other fiduciary of the Plan shall be liable for any loss, or by reason of any breach of fiduciary responsibility, which arises from any participant's exercise or non-exercise of rights under this Section 4 over the assets in the participant's accounts. (ii) The Trustee shall not be liable for any loss, or by reason of any breach of fiduciary responsibility, which arises from the Sponsor's or PIC's exercise or non-exercise of rights under this Section 4, unless the Trustee knew or should have known that the actions to be taken under the Sponsor's or PIC's directions were prohibited by the fiduciary duty rules of ERISA or were contrary to the terms of this Agreement. (i) Trustee Powers. The Trustee shall have the following powers and -------------- authority: (i) Subject to paragraphs (b), (c), and (d) of this Section 4, to sell, exchange, convey, transfer, or otherwise dispose of any property held in the Trust, by private contract or at public auction. No person dealing with the Trustee shall be bound to see to the application of the purchase money or other property delivered to the Trustee or to inquire into the validity, expediency, or propriety of any such sale or other disposition. (ii) Subject to paragraphs (b) and (c) of this Section 4, to invest in guaranteed investment contracts and short-term investments (including interest bearing accounts with the Trustee or money market mutual funds advised by affiliates of the Trustee) and in collective investment funds maintained by the Trustee for qualified plans, in which case the provisions of each collective investment fund in which the Trust is invested shall be deemed adopted by the Sponsor and the provisions thereof incorporated as a part of this Trust and the Plan. (iii) To cause any securities or other property held as part of the Trust to be registered in the Trustee's own name, in the name of one or more of its nominees, or in the Trustee's account with the Depository Trust Company of New York and to hold any investments in bearer form, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust. (iv) To keep that portion of the Trust in cash or cash balances as the PIC may, from time to time, deem to be in the best interest of the Trust. 11 (v) To borrow funds from a bank not affiliated with the Trustee in order to provide sufficient liquidity to process Plan transactions relating to the HEI Common Stock Fund in a timely fashion; provided that the cost of such borrowing shall be allocated to the HEI Common Stock Fund. (vi) To make, execute, acknowledge, and deliver any and all documents of transfer or conveyance and to carry out the powers herein granted. (vii) To settle, compromise, or submit to arbitration any claims, debts, or damages due to or arising from the Trust; to commence or defend suits or legal or administrative proceedings; to represent the Trust in all suits and legal and administrative hearings; and to pay all reasonable expenses arising from any such action, from the Trust if not paid by the Sponsor. (viii) To employ legal, accounting, clerical, and other assistance as may be required in carrying out the provisions of this Agreement and to pay their reasonable expenses and compensation from the Trust if not paid by the Sponsor. (ix) To do all other acts although not specifically mentioned herein, as the Trustee may deem necessary to carry out any of the foregoing powers and the purposes of the Trust. (j) Loans. The Sponsor shall act as the Trustee's agent for the purpose ----- of holding all trust investments in participant loan notes and related documentation and as such shall (i) hold physical custody of and keep safe the notes and other loan documents, (ii) separately account for repayments of such loans and clearly identify such assets as Plan assets, (iii) collect and remit all principal and interest payments to the Trustee, and (iv) cancel and surrender the notes and other loan documentation when a loan has been paid in full. To originate a participant loan, the Plan participant shall direct the Trustee as to the type of loan to be made from the participant's individual account. Such directions shall be made by Plan participants by use of the telephone exchange system maintained for such purpose by the Trustee or its agent. The Trustee shall determine, based on the current value of the participant's account, the amount available for the loan. Based on the annual interest rate, but changed from time to time, supplied by the Sponsor, PIC or Administrative Committee in accordance with the Plan's loan procedures, the Trustee shall advise the participant of such interest rate, as well as the installment payment amounts. The Trustee shall forward the loan document to the participant for execution and submission for approval to the Administrative Committee. The Administrative Committee shall have the responsibility for approving the loan and instructing the Trustee to send the loan proceeds to the participant. If the Administrative Committee does not approve or disapprove the loan within 30 days of the participant's initial request, the participant must reinitiate the request with the Trustee. (k) Non-Fidelity Mutual Funds. All transactions involving Non-Fidelity ------------------------- Mutual Funds shall be done in accordance with the Operating Procedures attached hereto as Schedule "I". 12 Section 5. Recordkeeping to Be Performed ----------------------------- (a) General. The Trustee shall perform only the recordkeeping and ------- administrative services set forth on Schedule "A" attached hereto and made a part hereof, as amended from time to time, and only within a framework of administration, including Plan policies, interpretations, rules, practices, and procedures provided in writing by the Sponsor, PIC, or Administrative Committee. (b) Accounts. The Trustee shall keep accurate accounts of all -------- investments, receipts, disbursements, and other transactions hereunder, and shall value the assets held in the Trust as of the last day of each fiscal quarter of the Plan and, if not on the last day of a fiscal quarter, the date on which the Trustee resigns or is removed as provided in Section 9 of this Agreement or is terminated as provided in Section 10 (the "Valuation Date"). Within thirty (30) days following each valuation date or within sixty (60) days in the case of the resignation or removal of the Trustee, or the termination of this Agreement, the Trustee shall file with the PIC a written account setting forth all investments, receipts, disbursements, and other transactions effected by the Trustee between the valuation date and the prior Valuation Date, and setting forth the value of the Trust as of the Valuation Date. Except as otherwise required under ERISA, upon the expiration of six (6) months from the date of filing such account with the PIC, the Trustee shall have no liability or further accountability to anyone with respect to the propriety of its acts or transactions shown in such account, except with respect to such acts or transactions as to which the Sponsor or PIC shall within such six (6) month period file with the Trustee written objections. (c) Inspection and Audit. All records generated by the Trustee in -------------------- accordance with paragraphs (a) and (b) of this Section 5 shall be open to inspection and audit during the Trustee's regular business hours by the PIC or any person designated by the PIC. Upon the resignation or removal of the Trustee or the termination of this Agreement, the Trustee shall provide to the Sponsor or the Sponsor's agent, at no expense to the Sponsor, in the format regularly provided to the PIC, a statement of each participant's accounts as of the resignation, removal, or termination, and the Trustee shall provide to the Sponsor or the Plan's new recordkeeper such further records as are reasonably necessary or requested to facilitate the transition at the Sponsor's expense. (d) Necessary Information. The Trustee's provision of the recordkeeping --------------------- services set forth in this Section 5 shall be conditioned on the Sponsor, PIC or Administrative Committee providing the Trustee on a timely basis with all the information the Sponsor, PIC or Administrative Committee deems necessary for the Trustee to perform the recordkeeping services and such other information as the Trustee may reasonably request including, but not limited to, copies of all Plan amendments. (e) Returns, Reports and Information. The PIC or Administrative Committee -------------------------------- shall be responsible for the preparation and filing of all returns, reports, and information required of the Trust or Plan by law. The Trustee shall provide the PIC or Administrative Committee with such information as 13 each may reasonably request to make these filings. The PIC or Administrative Committee shall also be responsible for making any disclosures to participants required by law including, without limitation, such disclosures as may be required under federal or state truth-in-lending laws with regard to participant loans. Section 6. Compensation and Expenses. Within thirty (30) days of receipt of the ------------------------- Trustee's quarterly bill, which shall be computed in accordance with Schedule "B" attached hereto and made a part hereof, as amended from time to time, the Sponsor shall send to the Trustee a payment in such amount. All expenses of the Trustee relating directly to the acquisition and disposition of investments constituting part of the Trust, and all taxes of any kind whatsoever that may be levied or assessed under existing or future laws upon or in respect of the Trust or the income thereof, shall be a charge against and paid from the appropriate Plan participants' accounts if not paid by the Sponsor. Section 7. Directions. ---------- (a) Identity of Administrator and Named Fiduciary. The Trustee shall be --------------------------------------------- fully protected in relying on the fact that the PIC is the named fiduciary and the administrator of the Plan and that the Sponsor will notify the Trustee in writing if there is a change in this fact. (b) Directions from Administrator. Whenever the Sponsor, PIC or ----------------------------- Administrative Committee provides a direction to the Trustee, the Trustee shall not be liable for any loss, or by reason of any breach of fiduciary responsibility, arising from the carrying out of the direction if the direction is contained in writing (or is oral and immediately confirmed in writing) signed by any individual whose name and signature have been submitted (and not withdrawn) in writing to the Trustee by the Sponsor (see Schedule "D"), provided the Trustee reasonably believes the signature of the individual to be genuine, unless the Trustee knew or should have known that the actions to be taken under the direction would be prohibited by the fiduciary duty rules of ERISA or would be contrary to the terms of this Agreement. The Trustee shall have no responsibility to ascertain any direction's (i) compliance with the terms of the Plan or any applicable law, or (ii) effect for tax purposes or otherwise. (c) Co-fiduciary Liability. In any other case, the Trustee shall not be ---------------------- liable for any loss, or by reason of any breach of fiduciary responsibility, arising from any act or omission of another fiduciary under the Plan except as provided in section 405(a) of ERISA. (d) Indemnification of Trustee. The Sponsor shall indemnify the Trustee -------------------------- against, and hold the Trustee harmless from, any and all loss, damage, penalty, liability, cost, and expense, including without limitation, reasonable attorneys' fees and disbursements, that may be incurred by or imposed upon the Trustee by reason of any claim, regulatory proceeding, or litigation arising from any act done or omitted 14 to be done by any individual or person with respect to the Plan or Trust, excepting only any and all loss, etc., arising solely from the Trustee's negligence or bad faith. (e) Indemnification of Sponsor. The Trustee agrees to indemnify and hold -------------------------- harmless the Sponsor for (i) any loss incurred by the Sponsor, a participant, or a beneficiary due to a trading error caused by the Trustee on any investment option included on Schedule A and (ii) any loss related to balance discrepancies between the participant balances maintained by Trustee and the balance maintained by any outside fund provider for any Plan investment option included on Schedule A. The Trustee agrees to compensate the Sponsor, participant, or a beneficiary for the cost of any adjustments due to any such error. (f) Survival. The provisions of this Section 7 shall survive the -------- termination of this Agreement. Section 8. Resignation or Removal of Trustee. --------------------------------- (a) Resignation. The Trustee may resign at any time upon ninety (90) ----------- days' notice in writing to the Sponsor, unless a shorter period of notice is agreed upon by the Sponsor. (b) Removal. The Sponsor may remove the Trustee at any time upon sixty ------- (60) days' notice in writing to the Trustee, unless a shorter period of notice is agreed upon by the Trustee. Section 9. Successor Trustee. ----------------- (a) Appointment. If the office of Trustee becomes vacant for any reason, ----------- the Sponsor may in writing appoint a successor trustee under this Agreement. The successor trustee shall have all of the rights, powers, privileges, obligations, duties, liabilities, and immunities granted to the Trustee under this Agreement. The successor trustee and predecessor trustee shall not be liable for the acts or omissions of the other with respect to the Trust. (b) Acceptance. When the successor trustee accepts its appointment under ---------- this Agreement, title to and possession of the Trust assets shall immediately vest in the successor trustee without any further action on the part of the predecessor trustee. The predecessor trustee shall execute all instruments and do all acts that reasonably may be necessary or reasonably may be requested in writing by the Sponsor or the successor trustee to vest title to all Trust assets in the successor trustee or to deliver all Trust assets and all pertinent data to the successor trustee. (c) Corporate Action. Any successor of the Trustee or successor trustee, ---------------- through sale or transfer of the business or trust department of the Trustee or successor trustee, or through reorganization, consolidation, or merger, or any similar transaction, shall, upon consummation of the transaction, become the successor trustee under this Agreement, and the successor trustee shall be liable for the acts or omissions of the other with respect to the Trust. 15 Section 10. Termination. The trust created under this Agreement may be ----------- terminated at any time by the Sponsor upon sixty (60) days' notice in writing to the Trustee. On the date of the termination of this Agreement, the Trustee shall forthwith transfer and deliver to such individual or entity as the Sponsor shall designate, all cash and assets then constituting the Trust. If, by the termination date, the Sponsor has not notified the Trustee in writing as to whom the assets and cash are to be transferred and delivered to, the Trustee may bring an appropriate action or proceeding for leave to deposit the assets and cash in a court of competent jurisdiction. The Trustee shall be reimbursed by the Sponsor for all costs and expenses of the action or proceeding including, without limitation, reasonable attorneys' fees. Section 11. Resignation, Removal and Termination Notices. All notices of --------------------------------------------- resignation, removal, or termination under this Agreement must be in writing and mailed to the party to which the notice is being given by certified or registered mail, return receipt requested, to the Sponsor c/o Treasurer, Hawaiian Electric Industries, Inc., 900 Richards Street, Honolulu, Hawaii 96813, and to the Trustee c/o Deputy General Counsel - ERISA Group, Fidelity Investments, 82 Devonshire Street, Boston, Massachusetts 02109, or to such other addresses as the parties have notified each other of in the foregoing manner. Section 12. Duration. This Trust shall continue in effect without limit as to -------- time, subject, however, to the provisions of this Agreement relating to amendment, modification, and termination thereof. Section 13. Amendment or Modification. Subject to the provisions of Section 2, -------------------------- this Agreement may be amended or modified at any time and from time to time only by an instrument executed by both the Sponsor and the Trustee. In addition, no amendment to the Plan that might affect the Trustee's responsibilities hereunder will be effective against the Trustee, unless the Trustee has given its written consent to the Plan amendment. The Trustee shall not unreasonably withhold its consent to any amendment or modification of this Agreement or the Plan. Notwithstanding the foregoing, to reflect increased operating costs the Trustee may once each calendar year amend Schedule "B" without the Sponsor's consent upon seventy-five (75) days written notice to the Sponsor. Section 14. General. ------- (a) Performance by Trustee, its Agents or Affiliates. The Sponsor ------------------------------------------------ acknowledges and authorizes that the services to be provided under this Agreement shall be provided by the Trustee, its agents or affiliates, including Fidelity Investments Institutional Operations Company or its successor, and that 16 certain of such services may be provided pursuant to one or more other contractual agreements or relationships. (b) Entire Agreement. This Agreement contains all of the terms agreed ---------------- upon between the parties with respect to the subject matter hereof. (c) Waiver. No waiver by either party of any failure or refusal to ------ comply with an obligation hereunder shall be deemed a waiver of any other or subsequent failure or refusal to so comply. (d) Successors and Assigns. The stipulations in this Agreement shall ---------------------- inure to the benefit of, and shall bind, the successors and assigns of the respective parties. (e) Partial Invalidity. If any term or provision of this Agreement or ------------------ the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held 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. (f) Section Headings. The headings of the various sections and ---------------- subsections of this Agreement have been inserted only for the purposes of convenience and are not part of this Agreement and shall not be deemed in any manner to modify, explain, expand or restrict any of the provisions of this Agreement. Section 15. Governing Law. -------------- (a) Massachusetts Law Controls. This Agreement is being made in the -------------------------- Commonwealth of Massachusetts, and the Trust shall be administered as a Massachusetts trust. The validity, construction, effect, and administration of this Agreement shall be governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts, except to the extent those laws are superseded under section 514 of ERISA. (b) Trust Agreement Controls. The Trustee is not a party to the Plan, ------------------------ and in the event of any conflict between the provisions of the Plan and the provisions of this Agreement, the provisions of this Agreement will control with respect to the rights and obligations of the Trustee. 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. HAWAIIAN ELECTRIC INDUSTRIES, INC. BY: HAWAIIAN ELECTRIC INDUSTRIES, INC. PENSION INVESTMENT COMMITTEE Attest: /s/ Molly M. Egged By: /s/ Peter C. Lewis ------------------- ------------------------- Assistant Secretary Name: Peter C. Lewis ------------------------- Title: Member ------------------------- Date: 1/14/00 ------------------------- Attest: /s/ Molly M. Egged By: /s/ Edwina H. Kawamoto ------------------- ------------------------- Assistant Secretary Name: Edwina H. Kawamoto ------------------------- Title: Member ------------------------- Date: 1/14/00 ------------------------- FIDELITY MANAGEMENT TRUST COMPANY Attest: /s/ Douglas O. Kant By: /s/ Carolyn Redden ------------------- -------------------------- Assistant Clerk Name: Carolyn Redden -------------------------- Title: Vice President -------------------------- Date: 1/27/2000 -------------------------- 18 Schedule "A" ADMINISTRATIVE SERVICES ----------------------- Administration - -------------- * Establishment and maintenance of participant account and election percentages. * Maintenance of the following plan investment options: - Fidelity Retirement Money Market Portfolio - ASB Money Market Account - HEI Common Stock Fund - Fidelity Puritan Fund - Fidelity Magellan Fund - Fidelity Overseas Fund - Fidelity Freedom 2000 Fund - Fidelity Freedom 2010 Fund - Fidelity Freedom 2020 Fund - Fidelity Freedom 2030 Fund - Fidelity Freedom Income Fund - Spartan U.S. Equity Index Fund - MAS Value Portfolio Adviser - Neuberger Berman Partners Trust - PBHG Emerging Growth Fund - Fidelity U.S. Bond Index Fund * Maintenance of the following money classifications: - Salary Reduction - Participant Voluntary - Rollover - HEI Diversified Plan - Employer ASB - Employer Supplemental - IRA - Voluntary HEISOP - Employer HEISOP * Processing of investment option trades. The Trustee will provide only the recordkeeping and administrative services set forth on this Schedule "A" and no others. 19 Processing - ---------- * Weekly processing of participant data, contributions, and loan repayments * Daily processing of transfers and changes of future allocations via the telephone exchange system * Daily processing of withdrawals Other - ----- * Monthly trial balance * Monthly loan reports * Quarterly administrative reports * Quarterly participant statements * 1099Rs * Account segregation for Qualified Domestic Relations Orders ("QDRO") as directed by Sponsor * Excess contributions report * Participant loans * Periodic meetings with Sponsor * Educational services as needed and mutually agreed upon by the Trustee and the Sponsor * Minimum Required Distribution ("MRD") service HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, INC. COMPANY PENSION INVESTMENT COMMITTEE By: /s/ Peter C. Lewis 1/14/00 By: /s/ Carolyn Redden 1/27/2000 ---------------------------------- ------------------------------- Peter C. Lewis Date Vice President Date Member By: /s/ Edwina H. Kawamoto 1/14/00 ---------------------------------- Edwina H. Kawamoto Date Secretary and Member 20 Schedule "B" FEE SCHEDULE ------------ Recordkeeping Fees - ------------------ * Annual Participation Fee $5.00 per participant** per year, billed and payable quarterly. * Minimum Required Distribution ("MRD") $25.00 per MRD recipient per year. * Plan Establishment Fee $2,500.00 * Loan Fee Establishment fee of $35.00 per loan account; annual fee of $15.00 per loan account.** * Plan Sponsor WebStation ("WebStation") All User ID fees waived. * NetBenefits All User ID fees waived. * Other Fees: extraordinary expenses resulting from large numbers of simultaneous manual transactions or from errors not caused by Fidelity. ** This fee will be imposed pro rata for each calendar quarter, or any part -------- thereof, that it remains necessary to keep a participant's account(s) and/or loans(s) as part of the Plan's records, e.g. vested, deferred, forfeiture, top- heavy and terminated participants, if applicable, who must remain on file through the calendar year-end for 1099R reporting. Trustee Fee - ----------- Investment Options * Sponsor Stock: 0.10% per annum of such assets in the Trust payable quarterly on the basis of such assets as of the average market value for each calendar quarter. In no event will the fee be less than $10,000 nor more than $35,000 per year. * Others: None. HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, INC. COMPANY PENSION INVESTMENT COMMITTEE By: /s/ Peter C. Lewis 1/14/00 By: /s/ Carolyn Redden 1/27/2000 ---------------------------------- -------------------------------- Peter C. Lewis Date Vice President Date Member By: /s/ Edwina H. Kawamoto 1/14/00 ---------------------------------- Edwina H. Kawamoto Date Secretary and Member 21 Schedule "C" INVESTMENT OPTIONS ------------------ In accordance with Section 4(b), the PIC hereby directs the Trustee that participants' individual accounts may be invested in the following investment options: - Fidelity Retirement Money Market Portfolio - ASB Money Market Account - HEI Common Stock Fund - Fidelity Puritan Fund - Fidelity Magellan Fund - Fidelity Overseas Fund - Fidelity Freedom 2000 Fund - Fidelity Freedom 2010 Fund - Fidelity Freedom 2020 Fund - Fidelity Freedom 2030 Fund - Fidelity Freedom Income Fund - Spartan U.S. Equity Index Fund - 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/ Peter C. Lewis 1/14/00 ---------------------------------- Peter C. Lewis Date Member By: /s/ Edwina H. Kawamoto 1/14/00 ---------------------------------- Edwina H. Kawamoto Date Secretary and Member 22 Schedule "D", Part 1 February 1, 2000 [LOGO] Ms. Carolyn Redden Fidelity Investments Institutional Operations Company, Inc. 300 Puritan Way - MM3H Marlborough, Massachusetts 01752-3078 Re: Hawaiian Electric Industries Retirement Savings Plan Dear Ms. Redden: This letter is sent to you in accordance with Section 7(b) of the Trust Agreement dated February 1, 2000 between Hawaiian Electric Industries, Inc. and Fidelity Management Trust Company. We hereby designate Robert F. Mougeot, Peter C. Lewis, Edwina H. Kawamoto, Brenda J. K. Lee, Julie C. Haraga, Julie K. Price, and Myra A. O'Brien as the individuals who may provide directions upon which Fidelity Management Trust Company shall be fully protected in relying. Only one such individual need provide any direction. The signature of each designated individual is set forth on Schedule "D", Part 2, and certified to be such. You may rely upon each designation and certification set forth in this letter until we deliver to you written notice of the termination of authority of a designated individual. Very truly yours, HAWAIIAN ELECTRIC INDUSTRIES, INC. BY: HAWAIIAN ELECTRIC INDUSTRIES, INC. PENSION INVESTMENT COMMITTEE By: /s/ Peter C. Lewis ------------------------------- Peter C. Lewis Member By: /s/ Edwina H. Kawamoto ------------------------------- Edwina H. Kawamoto Secretary and Member Attachment 23 Schedule "D", Part 2 Signature of Designated Individuals /s/ Robert F. Mougeot /s/ Julie K. Price - ------------------------------------ ------------------------------------- Robert F. Mougeot Julie K. Price Financial Vice President & Manager, Employee Benefits Chief Financial Officer, HEI and Health Services, HECO Chairman, PIC Secretary, Administrative Committee /s/ Peter C. Lewis /s/ Myra A. O'Brien - ------------------------------------ ------------------------------------- Peter C. Lewis Myra A. O'Brien Vice President, Administration & Benefits Administrator, HECO Corporate Secretary, HEI Member, Administrative Committee Member, PIC Chairman, Administrative Committee /s/ Edwina H. Kawamoto /s/ Julie C. Haraga - ------------------------------------ ------------------------------------- Edwina H. Kawamoto Julie C. Haraga Treasurer, HEI Corporate Finance & Investments Secretary and Member, PIC Administrator, HEI /s/ Brenda J. K. Lee - ------------------------------------ Brenda J. K. Lee Director - Corporate Finance & Investments, HEI Hawaiian Electric Industries, Inc. (HEI) Hawaiian Electric Company, Inc. (HECO) HEI Pension Investment Committee (PIC) 24 Schedule "E" DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE DISTRICT DIRECTOR 915 SECOND AVENUE, MS 510 SEATTLE, WA 98174 Employer Identification Number: Date: June 21, 1995 99-0208097 File Folder Number: 990010537 HAWAIIAN ELECTRIC INDUSTRIES, INC. Person to Contact: P.O. BOX 730 CODE FB WAYNE LUNCEFORD HONOLULU, HI 96808 Contact Telephone Number: (206) 220-6080 Plan Name: HAWAIIAN ELECTRIC INDUSTRIES RETIREMENT SAVINGS PLAN Plan Number: 003
Dear Applicant: We have made a favorable determination on your plan, identified above, based on the information supplied. Please keep this letter in your permanent records. Continued qualification of the plan under its present form will depend on its effect in operation. (See section 1.401-1(b)(3) of the Income Tax Regulations.) We will review the status of the plan in operation periodically. The enclosed document explains the significance of this favorable determination letter, points out some features that may affect the qualified status of your employee retirement plan, and provides information on the reporting requirements for your plan. It also describes some events that automatically nullify it. It is very important that you read the publication. This letter relates only to the status of your plan under the Internal Revenue Code. It is not a determination regarding the effect of other federal or local statutes. Your plan does not consider total compensation for purposes of figuring benefits. In operation, the provision may discriminate in favor of employees who are highly compensated. If this occurs, your plan will not remain qualified. This determination letter is applicable for the amendment(s) adopted on 11- 21-94. This plan has been mandatorily disaggregated, permissively aggregated, or restructured to satisfy the nondiscrimination requirements. This letter is issued under Rev. Proc. 93-39 and considers the amendments required by the Tax Reform Act of 1986 except as otherwise specified in this letter. This plan satisfies the nondiscriminatory current availability requirements of section 1.401(a)(4)-4(b) of the regulations with respect to those benefits, rights, and features that are currently available to all employees in the plan's coverage group. For this purpose, the plan's coverage group consists of those employees treated as currently benefiting for purposes of Letter 835(DO/CG) 25 - 2- HAWAIIAN ELECTRIC INDUSTRIES, INC. demonstrating that the plan satisfies the minimum coverage requirements of section 410(b) of the Code. This letter may not be relied upon with respect to whether the plan satisfies the qualification requirements as amended by the Uruguay Round Agreements Act, Pub. L. 103-465. The information on the enclosed addendum is an integral part of this determination. Please be sure to read and keep it with this letter. We have sent a copy of this letter to your representative as indicated in the power of attorney. If you have questions concerning this matter, please contact the person whose name and telephone number are shown above. Sincerely yours, /s/ Richard R. Orosco Richard R. Orosco District Director Enclosures: Publication 794 Reporting & Disclosure Guide For Employee Benefit Plans Addendum Letter 835 (DO/CG) 26 - 3 - HAWAIIAN ELECTRIC INDUSTRIES, INC. This plan also satisfies the requirements of Code section 401(k). Letter 835 (DO/CG) 27 Schedule "F" TELEPHONE EXCHANGE GUIDELINES ----------------------------- The following telephone exchange guidelines are currently employed by Fidelity Institutional Retirement Services Company ("FIRSCO"). Telephone exchange hours are 8:30 a.m. Eastern time ("ET") to 8:00 p.m. ET on each business day. A "business day" is any day on which the New York Stock Exchange is open. Exchanges via Voice Response System ("VRS") and the internet (NetBenefits) may be made virtually 24 hours a day. FIRSCO reserves the right to change these telephone exchange guidelines at its discretion. FIRSCO will notify the Sponsor of its intent to change these guidelines prior to any change being instituted. Note: The NYSE's normal closing time is 4:00 p.m. ET; in the event the NYSE alters its closing time, all references below to 4:00 p.m. ET shall mean the NYSE closing time as altered. Investment Options ------------------ Exchanges Between Investment Options - ------------------------------------ Participants may call on any business day to exchange between investment options. If the request is received before 4:00 p.m. ET, it will receive that day's trade date. Calls received after 4:00 p.m. ET will be processed on a next business day basis. HAWAIIAN ELECTRIC INDUSTRIES, INC. BY: HAWAIIAN ELECTRIC INDUSTRIES, INC. PENSION INVESTMENT COMMITTEE By: /s/ Peter C. Lewis 1/14/00 ---------------------------------- Peter C. Lewis Date Member By: /s/ Edwina H. Kawamoto 1/14/00 ---------------------------------- Edwina H. Kawamoto Date Member 28 Schedule "G" Operating Procedures Agreement - ASB Money Market Account --------------------------------------------------------- Based upon Fidelity Institutional Retirement Services Company's ("FIRSCO") understanding of the American Savings Bank ("ASB") Money Market Account (the "Fund") which will be priced at $1.00, the operating procedures are as follows: Pricing - ------- ASB shall provide Fidelity with a change to the net asset value ("NAV") and interest rate, in writing, via fax, at least fifteen calendar days prior to the effective date. A list of employee names, including signatures, that are authorized to initiate changes to the interest rate are attached hereto as Exhibit 1. If for any reason, ASB is unable to determine a current valuation, the last reported valuation of the Fund shall remain in effect. The valuations provided by ASB shall not be reviewed by Fidelity. Fidelity shall be responsible for accurately reflecting the NAV on the Fidelity Plan Sponsor WebStation and participant statements. Trade Instructions - ------------------ By 9:00 a.m. Eastern Time ("ET") each business day, Fidelity will provide to Hawaiian Electric Industries ("Sponsor"), via fax, a report of net activity that occurred in the Fund on the prior business day. The report will reflect the net dollar and share amounts of assets invested or withdrawn as of the end of the processing date. Fidelity will fax the report to the Sponsor each day, regardless of processing activity. If for any reason Fidelity is unable to fax the report to the Sponsor, Fidelity will notify the Sponsor of this by 2:00 p.m. ET. Sponsor is responsible each business day, by 3:00 p.m. ET, for notifying Fidelity if the report has not been received. Monetary Transfers - ------------------ For purposes of wire transfers, Fidelity will net purchase and redemption activity occurring on the same day. The monetary transfers between Fidelity and ASB will operate as follows: . Based upon the cash value of the net redemption activity reported each day, ASB will initiate a wire transfer to Fidelity for receipt by no later than the close of business at the New York Federal Reserve Bank on the date the report of net activity is received by ASB. The mailing of participant distribution checks and investments into other investment options will occur upon receipt of the wire from ASB. . Based upon the cash value of the net purchase activity reported each day, Fidelity will initiate a wire transfer to ASB for receipt by no later than the close of business at the New York Federal Reserve Bank on the business day after the transactions are processed on the Fidelity Participant Recordkeeping System . Wires will be sent according to wire instructions listed below. Fidelity and ASB will monitor the receipt of wires on a daily basis. If for any reason a wire is not received, the receiving party is responsible for notifying the sender of this problem by 3:00 p.m. ET the next day. The party in error shall be responsible for the amount of such wire, plus associated bank penalties. 29 Corporate Actions - ----------------- If applicable, Sponsor will notify Fidelity of any proxies and other corporate actions. If requested, Fidelity will provide Sponsor with participant balance and address information necessary for any proxy mailing or other corporate actions. Fidelity will not have any additional responsibilities relative to corporate actions. Fidelity assumes no responsibility for any loss incurred due to inaccurate communications of corporate actions or failure to communicate corporate actions by Sponsor. Reconciliation - -------------- Fidelity shall send a Monthly Trial Balance that summarizes activity in the Fund to the Sponsor within twenty (20) business days of each calendar month end. The Sponsor or ASB shall notify Fidelity of any discrepancies within twenty (20) business days of receipt. Additionally, ASB shall send Fidelity monthly fund statements no later than ten (10) business days after each calendar month end. The Sponsor agrees to indemnify and hold harmless Fidelity for any loss related to discrepancies between the participant balances maintained by Fidelity and the Plan's balance in the Fund, as maintained by ASB, due to errors caused by ASB or the Sponsor. Fidelity agrees to indemnify and hold harmless the Sponsor and ASB for any loss related to balance discrepancies between the participant balances maintained by Fidelity and the Plan's balance in the Fund, as maintained by ASB, due to errors caused by Fidelity. Indemnifications - ---------------- Sponsor agrees to indemnify and hold harmless Fidelity for the following: . Any loss incurred by Fidelity due to a pricing error caused by the Sponsor or ASB. The Sponsor also agrees to compensate Fidelity for the cost of any adjustments made to participant accounts due to such an error. . Any loss incurred by Fidelity due to the inaccurate communication of corporate actions by the Sponsor or ASB, or failure to communicate corporate actions by the Sponsor or ASB. . Any loss related to balance discrepancies between the participant balances maintained by Fidelity and the balance maintained by ASB due to errors caused by the Sponsor or ASB. Fidelity agrees to indemnify and hold harmless Sponsor and ASB for the following: . Any loss incurred by ASB, the Sponsor, a participant or a beneficiary due to a trading error caused by Fidelity. Fidelity also agrees to compensate the Sponsor, ASB, participant or a beneficiary for the cost of any adjustments to the Fund due to such error. . Any loss related to balance discrepancies between the participant balances maintained by Fidelity and the balance maintained by ASB due to errors caused by Fidelity. 30 Fidelity's Wire Transfer Instructions: Bankers Trust of New York, NY ABA Number: 021 001 033 Account Name: FPRS Depository Account Account Number: 001 63002 Beneficiary Reference: Plan 02045 American Savings Bank's Wire Instructions: Federal Home Loan Bank of Seattle ABA Number: 125040880 Account Name: American Savings Bank Account Number: 8384-0012 Ref: Hawaiian Electric Industries Retirement Savings Plan The above procedure and conditions are hereby confirmed by all parties. FIDELITY INSTITUTIONAL HAWAIIAN ELECTRIC INDUSTRIES, INC. RETIREMENT SERVICES COMPANY BY: HAWAIIAN ELECTRIC INDUSTRIES, INC. PENSION INVESTMENT COMMITTEE By: /s/ Carolyn Redden By: /s/ Peter C. Lewis ------------------------------ ------------------------------- Peter C. Lewis Title: Vice-President Title: Member --------------------------- ---------------------------- Date: 1/27/2000 Date: 1/14/00 ---------------------------- ----------------------------- By: /s/ Edwina H. Kawamoto ------------------------------- Edwina H. Kawamoto AMERICAN SAVINGS BANK, F.S.B. Title: Secretary and Member ---------------------------- By: /s/ Wayne Minami Date: 1/14/00 ------------------------------ ----------------------------- Title: President Date: 1/18/00 ---------------------------- 31 Exhibit 1 The following individuals are authorized to initiate changes to the daily interest rate for the ASB Money Market Account investment alternative. /s/ Ralph Y. Nakatsuka - -------------------------------------------- Ralph Y. Nakatsuka, Executive Vice President /s/ Alvin N. Sakamoto - -------------------------------------------- Alvin N. Sakamoto, Senior Vice President/Finance /s/ Gary Horita - -------------------------------------------- Gary Horita, Vice President/Controller /s/ Elizabeth Kunishima - -------------------------------------------- Elizabeth Kunishima, Assistant Vice President Assistant Controller 32 Schedule "H" OPERATING PROCEDURES FOR NON-FIDELITY MUTUAL FUNDS -------------------------------------------------- (Excluding HEI Common Stock Fund and ASB Money Market Account) This schedule is part of an agreement between Fidelity Investments and non- Fidelity mutual fund vendors; Hawaiian Electric Industries, Inc. is not a party to this agreement and thus is not obligated under its terms. Schedule H is included for informational purposes. Pricing - ------- By 7:00 p.m. Eastern Time ("ET") each day the New York Stock Exchange is open for business (a "Business Day"), the non-Fidelity mutual fund vendor ("Fund Vendor") will input the following information ("Price Information") into the Fidelity Participant Recordkeeping System ("FPRS") via the remote access price screen that Fidelity Investments Institutional Operations Company, Inc. ("FIIOC"), an affiliate of the Trustee, has provided to the Fund Vendor: (1) the net asset value for each Fund at the close of trading on the New York Stock Exchange ("Close of Trading"), (2) the change in each Fund's net asset value from the Close of Trading on the prior Business Day, and (3) in the case of an income fund or funds, the daily accrual for interest rate factor ("mil rate"). FIIOC must receive Price Information each Business Day. If on any Business Day the Fund Vendor does not provide such Price Information to FIIOC, FIIOC shall pend all associated transaction activity in FPRS until the relevant Price Information is made available by the Fund Vendor. Trade Activity and Wire Transfers - --------------------------------- "Trade Date" refers to the Business Day on which FIIOC receives the instructions from the Plan Participant. Instructions received prior to 4:00 p.m ET on a Business Day will receive that Business Day's NAV. Instructions received after 4:00 p.m. ET will receive the NAV on the next Business Day. By 7:00 a.m. ET each Business Day following Trade Date ("Trade Date plus One"), ---- FIIOC will provide, via facsimile, to the Fund Vendor a consolidated report of net purchase or net redemption activity that occurred in each of the Funds up to 4:00 p.m. ET on the prior Business Day. The report will reflect the dollar amount of assets and shares to be invested or withdrawn for each Fund. FIIOC will transmit this report to the Fund Vendor each Business Day, regardless of processing activity. In the event that data contained in the 7:00 a.m. ET facsimile transmission represents estimated trade activity, FIIOC shall provide a final facsimile to the Fund Vendor by no later than 9:00 a.m. ET. Any resulting adjustments shall be processed by the Fund Vendor at the net asset value for the prior Business Day. The Fund Vendor shall send via regular mail to FIIOC transaction confirmation for all daily activity in each of the Funds. The Fund Vendor shall also send via regular mail to FIIOC, by no later than the fifth Business Day following the end of each calendar month end close, a monthly statement for each Fund. FIIOC agrees to notify the Fund Vendor of any balance discrepancies within twenty (20) Business Days of receipt of the monthly statement. For purposes of wire transfers, FIIOC shall transmit a daily wire for aggregate purchase activity and the Fund Vendor shall transmit a daily wire for aggregate redemption activity, in each case including all activity across all Funds occurring on the same day. 33 Prospectus Delivery - ------------------- FIIOC shall be responsible for the timely delivery of Fund prospectuses and periodic Fund reports ("Required Materials") to Plan participants, and shall retain the services of a third-party vendor to handle such mailings. The Fund Vendor shall be responsible for all materials and production costs, and hereby agrees to provide the Required Materials to the third-party vendor selected by FIIOC. The Fund Vendor shall bear the costs of mailing annual Fund reports to Plan participants. FIIOC shall bear the costs of mailing prospectuses to Plan participants. Proxies - ------- Participants shall have the right to direct the Trustee as to the manner in which the Trustee is to vote the shares of the Non-Fidelity Mutual Funds credited to the participant's accounts (both vested and unvested). The Trustee shall vote the shares as directed by the participant. The Trustee shall not vote shares for which it has received no directions from the participant. With respect to all rights other than the right to vote, the Trustee shall follow the directions of the participant and if no such directions are received, the directions of the Named Fiduciary. The Trustee shall have no further duty to solicit directions from participants or the Sponsor. The Fund Vendor shall be responsible for all costs associated with the production of proxy materials. FIIOC shall retain the services of a third-party vendor to handle proxy solicitation mailings and vote tabulation. Expenses associated with such services shall be billed directly to the Fund Vendor by the third-party vendor. Participant Communications - -------------------------- The Fund Vendor shall provide internally-prepared fund descriptive information approved by the Funds' legal counsel for use by FIIOC in its written participant communication materials. FIIOC shall utilize historical performance data obtained from third-party vendors (currently Morningstar, Inc., FACTSET Research Systems and Lipper Analytical Services) in telephone conversations with plan participants and in quarterly participant statements. The Sponsor hereby consents to FIIOC's use of such materials and acknowledges that FIIOC is not responsible for the accuracy of such third-party information. FIIOC shall seek the approval of the Fund Vendor prior to retaining any other third-party vendor to render such data or materials under this agreement. Compensation - ------------ FIIOC shall be entitled to fees as set forth in a separate agency agreement with the Fund Vendor. Indemnification - --------------- The Fund Vendor shall be responsible for compensating participants and/or FIIOC in the event that losses occur as a result of (1) the Fund Vendor's failure to provide FIIOC with Price Information or (2) providing FIIOC with incorrect Price Information. 34 SCHEDULE "I" PLAN SPONSOR WEBSTATION AGREEMENT This Agreement is entered into effective as of the 1st day of February, 2000, by and between Fidelity Institutional Retirement Services Company, a division of FMR Corp., a Massachusetts corporation ("Fidelity") and Hawaiian Electric Industries, Inc. ("Sponsor"). 1. Terms of Access and Use. Fidelity will provide the Sponsor and any ------------------------ individual authorized to act on behalf of the Sponsor, as identified in the Trust or Recordkeeping Agreement entered into between Fidelity or Fidelity Management Trust Company and the Sponsor, (collectively referred to as "User") with access to Plan Sponsor WebStation ("WebStation") upon Fidelity's acceptance of a properly completed Security Access Form. Fidelity hereby grants the User a non-transferable license to access WebStation in accordance with the terms and conditions described herein. No rights are conveyed to any property, intellectual or tangible, associated with WebStation. The User agrees to use WebStation in accordance with the terms described herein and will not make it available to any third party without the prior written consent of Fidelity. 2. Authorization of Directions. User agrees that Fidelity shall not be under --------------------------- a duty to inquire as to the authority or propriety of any directions given to Fidelity by the User and shall be entitled to act upon the direction any person whom it reasonably believes to be an authorized representative of the User. 3. Security of System. The User shall be responsible for the confidentiality ------------------ and use of any passwords and other security data, methods and devices issued to or obtained by it or its employees, representatives or agents in connection with the use of WebStation. The User shall comply with the security procedures established by Fidelity for WebStation, including the use of passwords and/or encryption methods. The User agrees to promptly notify Fidelity of any unauthorized, negligent or inadvertent use of the system of which it is aware. The User further agrees to notify Fidelity of the termination of any employee who was granted access to WebStation. Fidelity retains the right to immediately suspend or withdraw access to WebStation, if, in Fidelity's opinion, such action is necessary to maintain the integrity of WebStation. 4. Liability of the Parties. To the extent that Plan Sponsor WebStation ------------------------- utilizes Internet services to transport data or communications, Fidelity will take reasonable security precautions, but Fidelity disclaims any liability for losses or other damages to the User resulting from interception, alteration or loss of any such data or communications. Fidelity shall not be responsible for, and makes no warranties regarding, the access, speed or availability of Internet or network services. 5. Miscellaneous. This Agreement shall be binding upon and inure to the -------------- benefit of the parties and their respective successors and assigns, and to the beneficiaries of the Trust. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, except to the extent pre-empted by the provisions of the Employee Retirement Income Security Act of 1974. This Agreement may be terminated by either party upon seven (7) days' written notice to the other party hereto at the address indicated below. Sections 2, 4, and 5 shall survive any termination of this Agreement. 6. WebStation will replace Remote Access and Plan Sponsor WorkStation. All references and fees to Remote Access and Plan Sponsor WorkStation are hereby amended as follows: 35 Plan Sponsor WebStation ("WebStation"): All User ID fees waived. HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY INSTITUTIONAL BY: HAWAIIAN ELECTRIC INDUSTRIES, INC. RETIREMENT SERVICES COMPANY PENSION INVESTMENT COMMITTEE By: /s/ Peter C. Lewis 1/14/00 By: /s/ Carolyn Redden 1/27/2000 ---------------------------------- -------------------------------- Peter C. Lewis Date Vice President Date Member By: /s/ Edwina H. Kawamoto 1/14/00 ---------------------------------- Edwina H. Kawamoto Date Secretary and Member 36 -----END PRIVACY-ENHANCED MESSAGE-----