HAWAIIAN ELECTRIC INDUSTRIES INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended June 30, 2003

	OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Exact Name of Registrant as Specified in Its Charter	Commission File Number	I.R.S. Employer Identification No.

HAWAIIAN ELECTRIC INDUSTRIES, INC.	1-8503	99-0208097

and Principal Subsidiary


HAWAIIAN ELECTRIC COMPANY, INC.		1-4955		99-0040500

State of Hawaii

(State or other jurisdiction of incorporation or organization)

900 Richards Street, Honolulu, Hawaii 96813

(Address of principal executive offices and zip code)

Hawaiian Electric Industries, Inc.----- (808) 543-5662

Hawaiian Electric Company, Inc. ----- (808) 543-7771

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether Registrant Hawaiian Electric Industries, Inc. is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No o

Indicate by check mark whether Registrant Hawaiian Electric Company, Inc. is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class of Common Stock	Outstanding August 1, 2003

Hawaiian Electric Industries, Inc. (Without Par Value)	37,470,715 Shares
Hawaiian Electric Company, Inc. ($6 2/3 Par Value)	12,805,843 Shares (not publicly traded)

Hawaiian Electric Industries, Inc. and Subsidiaries
Hawaiian Electric Company, Inc. and Subsidiaries
Form 10-Q—Quarter ended June 30, 2003

INDEX

		Page No.
Glossary of terms		ii
Forward-looking statements and risk factors		v
PART I. FINANCIAL INFORMATION

Item 1.	Financial statements

	Hawaiian Electric Industries, Inc. and Subsidiaries

	Consolidated balance sheets (unaudited) - June 30, 2003 and December 31, 2002	1

	Consolidated statements of income (unaudited) - three and six months ended June 30, 2003 and 2002	2

	Consolidated statements of changes in stockholders’ equity (unaudited) - six months ended June 30, 2003 and 2002	3

	Consolidated statements of cash flows (unaudited) - six months ended June 30, 2003 and 2002	4

	Notes to consolidated financial statements (unaudited)	5

	Hawaiian Electric Company, Inc. and Subsidiaries

	Consolidated balance sheets (unaudited) - June 30, 2003 and December 31, 2002	15

	Consolidated statements of income (unaudited) - three and six months ended June 30, 2003 and 2002	16

	Consolidated statements of retained earnings (unaudited) - three and six months ended June 30, 2003 and 2002	16

	Consolidated statements of cash flows (unaudited) - six months ended June 30, 2003 and 2002	17

	Notes to consolidated financial statements (unaudited)	18

Item 2.	Management’s discussion and analysis of financial condition and results of operations	38

Item 3.	Quantitative and qualitative disclosures about market risk	60

Item 4.	Controls and procedures	61

PART II. OTHER INFORMATION

Item 1.	Legal proceedings	61

Item 2.	Changes in securities and use of proceeds	61

Item 5.	Other information	62

Item 6.	Exhibits and reports on Form 8-K	63

Signatures		65

Hawaiian Electric Industries, Inc. and Subsidiaries
Hawaiian Electric Company, Inc. and Subsidiaries
Form 10-Q—Quarter ended June 30, 2003

GLOSSARY OF TERMS


Terms		Definitions

AES Hawaii		AES Hawaii, Inc., formerly known as AES Barbers Point, Inc.

AFUDC		Allowance for funds used during construction

AOCI		Accumulated other comprehensive income

ASB		American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corp. (and its subsidiary since March 15, 2001, Bishop Insurance Agency of Hawaii, Inc.), ASB Service Corporation, AdCommunications, Inc., American Savings Mortgage Co., Inc. and ASB Realty Corporation

BLNR		Board of Land and Natural Resources of the State of Hawaii

CDUP		Conservation District Use Permit

CEPALCO		Cagayan Electric Power & Light Co., Inc.

CHP		Combined heat and power

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, Renewable Hawaii, Inc., HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, Pacific Energy Conservation Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc. (sold in July 2003), HEI Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III, HEI Preferred Funding, LP, The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.), HEI Power Corp. and its subsidiaries and Malama Pacific Corp. and its subsidiaries

Consumer Advocate		Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii

D&O		Decision and order

DG		Distributed generation

DLNR		Department of Land and Natural Resources of the State of Hawaii

DOH		Department of Health of the State of Hawaii

DRIP		HEI Dividend Reinvestment and Stock Purchase Plan

EAB		Environmental Appeals Board

GLOSSARY OF TERMS, continued


Terms		Definitions

ECAC		Energy cost adjustment clause

EPA		Environmental Protection Agency - federal

FASB		Financial Accounting Standards Board

Federal		U.S. Government

FHLB		Federal Home Loan Bank

GAAP		Accounting principles generally accepted in the United States of America

HECO		Hawaiian Electric Company, Inc., an electric utility subsidiary of Hawaiian Electric Industries, Inc.and parent company of Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I, HECO Capital Trust II and Renewable Hawaii, Inc.

HEI		Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., HEI Diversified, Inc., Pacific Energy Conservation Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc. (sold in July 2003), HEI Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III, The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.), HEI Power Corp. and Malama Pacific Corp.

HEIDI		HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B.

HEIII		HEI Investments, Inc. (formerly HEI Investment Corp.), a subsidiary of HEI Power Corp.

HEIPC		HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc., and the parent company of several subsidiaries. On October 23, 2001, the HEI Board of Directors adopted a formal plan to exit the international power business (engaged in by HEIPC and its subsidiaries).

HEIPC Group		HEI Power Corp. and its subsidiaries

HELCO		Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc.

HTB		Hawaiian Tug & Barge Corp. On November 10, 1999, HTB sold substantially all of its operating assets
		and the stock of Young Brothers, Limited, and changed its name to The Old Oahu Tug Service, Inc.

iii

GLOSSARY OF TERMS, continued


Terms		Definitions


IPP		Independent power producer

kV		Kilovolt

KW		Kilowatt

KWH		Kilowatthour

LUC		Hawaii State Land Use Commission

MECO		Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.

MW		Megawatt

NII		Net interest income

NPV		Net portfolio value

OTS		Office of Thrift Supervision, Department of Treasury

PBR		Performance-based rate-making

PPA		Power purchase agreement

PRPs		Potentially responsible parties

PUC		Public Utilities Commission of the State of Hawaii

RFEIS		Revised Final Environmental Impact Statement

RHI		Renewable Hawaii, Inc., a wholly owned subsidiary of Hawaiian Electric Company, Inc.

ROACE		Return on average common equity

SEC		Securities and Exchange Commission

SFAS		Statement of Financial Accounting Standards

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 Young Brothers, Limited and substantially all of HTB’s operating assets and changed its name

YB		Young Brothers, Limited, which was sold on November 10, 1999, was formerly a wholly owned subsidiary
		of Hawaiian Tug & Barge Corp.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and Hawaiian Electric Company, Inc. (HECO) and their subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates” or similar expressions. In addition, any statements concerning future financial performance (including future revenues, expenses, earnings or losses or growth rates), ongoing business strategies or prospects and possible future actions, which may be provided by management, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about HEI and its subsidiaries (including HECO and its subsidiaries), the performance of the industries in which they do business and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance.

Risks, uncertainties and other important factors that could cause actual results to differ materially from those in forward-looking statements and from historical results include, but are not limited to, the following:


	•	the effects of international, national and local economic conditions, including the condition of the Hawaii tourist and construction industries and the Hawaii and continental U.S. housing markets;


	•	the effects of weather and natural disasters;


	•	global developments, including the effects of terrorist acts, the war on terrorism, the war in Iraq, potential conflict or crisis with North Korea and Severe Acute Respiratory Syndrome (SARS);


	•	the timing and extent of changes in interest rates;


	•	the risks inherent in changes in the value of and market for securities available for sale and pension and other retirement plan assets;


	•	changes in assumptions used to calculate retirement benefits costs and changes in funding requirements;


	•	product demand and market acceptance risks;


	•	increasing competition in the electric utility and banking industries;


	•	capacity and supply constraints or difficulties;


	•	fuel oil price changes, performance by suppliers of their fuel oil delivery obligations and the continued availability to the electric utilities of their energy cost adjustment clauses;


	•	the ability of independent power producers to deliver the firm capacity anticipated in their power purchase agreements;


	•	the ability of the electric utilities to negotiate favorable collective bargaining agreements;


	•	new technological developments that could affect the operations and prospects of HEI’s subsidiaries (including HECO and its subsidiaries) or their competitors;


	•	federal, state and international governmental and regulatory actions, such as changes in laws, rules and regulations applicable to HEI, HECO and their subsidiaries (including changes in taxation and governmental fees and assessments); decisions by the Hawaii Public Utilities Commission (PUC) in rate cases and other proceedings and by other agencies and courts on land use, environmental and other permitting issues; required corrective actions (such as with respect to environmental conditions, capital adequacy and business practices);


	•	the risks associated with the geographic concentration of HEI’s businesses;


	•	the effects of changes in accounting principles applicable to HEI, HECO and their subsidiaries;


	•	the effects of changes by securities rating agencies in the ratings of the securities of HEI and HECO;


	•	the results of financing efforts;


	•	faster than expected loan prepayments that can cause an acceleration of the amortization of premiums on loans and investments and the impairment of mortgage servicing rights of American Savings Bank, F.S.B. (ASB);


	•	the ultimate net proceeds from the disposition of assets and settlement of liabilities of discontinued or sold operations;


	•	the ultimate outcome of tax positions taken by HEI and its subsidiaries, including with respect to ASB’s real estate investment trust subsidiary and HEI’s discontinued operations;


	•	the risks of suffering losses that are uninsured; and


	•	other risks or uncertainties described elsewhere in this report and in other periodic reports previously and subsequently filed by HEI and/or HECO with the Securities and Exchange Commission (SEC).

Forward-looking statements speak only as of the date of the report, presentation or filing in which they are made.

PART I - FINANCIAL INFORMATION

Item 1. Financial statements
Hawaiian Electric Industries, Inc. and Subsidiaries
Consolidated balance sheets (unaudited)


(in thousands)	June 30, 2003		December 31, 2002
Assets
Cash and equivalents	$	213,774	$	244,525
Accounts receivable and unbilled revenues, net		178,542		176,327
Available-for-sale investment and mortgage-related securities		1,791,487		1,960,288
Available-for-sale mortgage-related securities pledged for repurchase agreements		960,085		784,362
Held-to-maturity investment securities		92,227		89,545
Loans receivable, net		3,120,846		2,993,989
Property, plant and equipment, net of accumulated depreciation of $1,492,336 and $1,437,366		2,079,267		2,079,325
Regulatory assets		105,652		105,568
Other		367,017		345,002
Goodwill and other intangibles		93,947		97,572

	$	9,002,844	$	8,876,503

Liabilities and stockholders’ equity
Liabilities
Accounts payable	$	173,763	$	134,416
Deposit liabilities		3,886,842		3,800,772
Securities sold under agreements to repurchase		836,648		667,247
Advances from Federal Home Loan Bank		1,039,552		1,176,252
Long-term debt, net		1,063,464		1,106,270
Deferred income taxes		226,249		235,431
Contributions in aid of construction		220,630		218,094
Other		260,103		257,315

		7,707,251		7,595,797

HEI- and HECO-obligated preferred securities of trust subsidiaries directly or indirectly holding solely HEI and HEI-guaranteed and HECO and HECO-guaranteed subordinated debentures		200,000		200,000
Preferred stock of subsidiaries - not subject to mandatory redemption		34,406		34,406

		234,406		234,406

Stockholders’ equity
Preferred stock, no par value, authorized 10,000 shares; issued: none		—		—
Common stock, no par value, authorized 100,000 shares; issued and outstanding: 37,419 shares and 36,809 shares		864,038		839,503
Retained earnings		176,451		176,118
Accumulated other comprehensive income		20,698		30,679

		1,061,187		1,046,300

	$	9,002,844	$	8,876,503

See accompanying “Notes to consolidated financial statements.”

Hawaiian Electric Industries, Inc. and Subsidiaries
Consolidated statements of income (unaudited)


	Three months ended June 30,						Six months ended June 30,
(in thousands, except per share amounts and ratio of earnings to fixed charges)	2003			2002			2003			2002
Revenues
Electric utility	$	354,529		$	307,676		$	683,441		$	586,007
Bank		92,703			102,069			187,805			200,911
Other		1,524			(743	)		2,146			(480	)

		448,756			409,002			873,392			786,438

Expenses
Electric utility		311,944			256,723			599,881			489,450
Bank		70,342			77,700			143,018			154,371
Other		5,017			3,953			9,952			7,387

		387,303			338,376			752,851			651,208

Operating income (loss)
Electric utility		42,585			50,953			83,560			96,557
Bank		22,361			24,369			44,787			46,540
Other		(3,493	)		(4,696	)		(7,806	)		(7,867	)

		61,453			70,626			120,541			135,230

Interest expense—other than bank		(17,879	)		(18,340	)		(35,859	)		(36,867	)
Allowance for borrowed funds used during construction		446			488			889			843
Preferred stock dividends of subsidiaries		(501	)		(502	)		(1,003	)		(1,003	)
Preferred securities distributions of trust subsidiaries		(4,009	)		(4,009	)		(8,018	)		(8,018	)
Allowance for equity funds used during construction		989			1,042			1,977			1,815

Income before income taxes		40,499			49,305			78,527			92,000
Income taxes		14,739			17,847			28,440			33,670

Income from continuing operations		25,760			31,458			50,087			58,330
Discontinued operations-loss from operations, net of income taxes		(3,870	)		—			(3,870	)		—

Net income	$	21,890		$	31,458		$	46,217		$	58,330

Basic earnings per common share
Continuing operations	$	0.69		$	0.87		$	1.35		$	1.62
Discontinued operations		(0.10	)		—			(0.10	)		—

	$	0.59		$	0.87		$	1.25		$	1.62

Diluted earnings per common share
Continuing operations	$	0.69		$	0.86		$	1.34		$	1.61
Discontinued operations		(0.10	)		—			(0.10	)		—

	$	0.59		$	0.86		$	1.24		$	1.61

Dividends per common share	$	0.62		$	0.62		$	1.24		$	1.24

Weighted-average number of common shares outstanding		37,195