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, 2004

¨	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 ¨

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 ¨

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 ¨ 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 2, 2004
Hawaiian Electric Industries, Inc. (Without Par Value)		80,520,051 Shares
Hawaiian Electric Company, Inc. ($6²/3 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, 2004

INDEX


		Page No.
Glossary of terms		ii
Forward-looking statements and risk factors		v

PART I. FINANCIAL INFORMATION
Item 1.	Financial statements	1
	Hawaiian Electric Industries, Inc. and Subsidiaries
	Consolidated balance sheets (unaudited)—June 30, 2004 and December 31, 2003	1
	Consolidated statements of income (unaudited)—three and six months ended June 30, 2004 and 2003	2
	Consolidated statements of changes in stockholders’ equity (unaudited)—six months ended June 30, 2004 and 2003	3
	Consolidated statements of cash flows (unaudited)—six months ended June 30, 2004 and 2003	4
	Notes to consolidated financial statements (unaudited)	5

	Hawaiian Electric Company, Inc. and Subsidiaries
	Consolidated balance sheets (unaudited)—June 30, 2004 and December 31, 2003	16
	Consolidated statements of income (unaudited)—three and six months ended June 30, 2004 and 2003	17
	Consolidated statements of retained earnings (unaudited)—three and six months ended June 30, 2004 and 2003	17
	Consolidated statements of cash flows (unaudited)—six months ended June 30, 2004 and 2003	18
	Notes to consolidated financial statements (unaudited)	19
Item 2.	Management’s discussion and analysis of financial condition and results of operations	41
Item 3.	Quantitative and qualitative disclosures about market risk	65
Item 4.	Controls and procedures	66

PART II. OTHER INFORMATION
Item 1.	Legal proceedings	66
Item 2.	Changes in securities, use of proceeds and repurchases of equity securities	66
Item 5.	Other information	67
Item 6.	Exhibits and reports on Form 8-K	70
Signatures		72

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended June 30, 2004

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 (dissolved in January 2004), AdCommunications, Inc., American Savings Mortgage Co., Inc. (dissolved in July 2003), 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 (dissolved in April 2004), HECO Capital Trust II (dissolved in April 2004), HECO Capital Trust III, Renewable Hawaii, Inc., HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, Pacific Energy Conservation Services, Inc., HEI District Cooling, Inc. (dissolved in October 2003), ProVision Technologies, Inc. (sold in July 2003), HEI Properties, Inc., HEI Leasing, Inc. (dissolved in October 2003), Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I (dissolved in April 2004), Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III, HEI Preferred Funding, LP (dissolved in April 2004), The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.), HEI Power Corp. and its subsidiaries* and Malama Pacific Corp.** (unconsolidated subsidiaries as of January 1, 2004; *discontinued operations)

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

GLOSSARY OF TERMS, continued


Terms		Definitions
DRIP		HEI Dividend Reinvestment and Stock Purchase Plan

EIS		Environmental Impact Statement

EITF		Emerging Issues Task Force

EPA		Environmental Protection Agency—federal

FASB		Financial Accounting Standards Board

Federal		U.S. Government

FHLB		Federal Home Loan Bank

FIN		FASB Interpretation No.

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 (dissolved in April 2004), HECO Capital Trust II (dissolved in April 2004), HECO Capital Trust III* and Renewable Hawaii, Inc. (*unconsolidated subsidiaries as of January 1, 2004)

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. (dissolved in October 2003), ProVision Technologies, Inc. (sold in July 2003), HEI Properties, Inc., HEI Leasing, Inc. (dissolved in October 2003), Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I (dissolved in April 2004), 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.** (unconsolidated subsidiaries as of January 1, 2004; *discontinued operations)

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 numerous subsidiaries, several of which were dissolved or otherwise wound up in 2002 and 2003 pursuant to a formal plan to exit the international power business (engaged in by HEIPC and its subsidiaries) adopted by the HEI Board of Directors in October 2001

HEIPC Group		HEI Power Corp. and its subsidiaries

HEIRSP		Hawaiian Electric Industries Retirement Savings Plan

HEI’s 2003 Annual Report		Hawaiian Electric Industries, Inc.’s 2003 Annual Report to Shareholders (HEI Exhibit 13.1 to HEI’s Current Report on Form 8-K dated February 26, 2004, File No. 1-8503)

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

iii

GLOSSARY OF TERMS, continued


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

IPP		Independent power producer

IRP		Integrated resource plan

kV		Kilovolt

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

PPA		Power purchase agreement

PRPs		Potentially responsible parties

PUC		Public Utilities Commission of the State of Hawaii

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

SPRB		Special Purpose Revenue Bonds

TOOTS		The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.), a wholly owned subsidiary of Hawaiian Electric Industries, Inc. On November 10, 1999, HTB sold the stock of YB and substantially all of HTB’s operating assets and changed its name.

VIE		Variable interest entity

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 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 the accuracy of assumptions concerning 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 state of the Hawaii tourist and construction industries, the strength or weakness of the Hawaii and continental U.S. real estate markets (including the fair value of collateral underlying loans and mortgage-related securities) and the military presence in Hawaii;

•

the effects of weather and natural disasters;

•

global developments, including the effects of terrorist acts, the war on terrorism, continuing U.S. presence in Iraq and Afghanistan and potential conflict or crisis with North Korea;

•

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;

•

demand for services 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, periodically, favorable fuel supply and 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, including continued regulatory accounting under Statement of Financial Accounting Standards No. 71 and the possible effects of applying new accounting principles applicable to variable interest entities (VIEs) to power purchase arrangements with independent power producers;

•

the effects of changes by securities rating agencies in their 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);

•

changes in ASB’s loan portfolio credit profile which may increase or decrease the required level of allowance for loan losses;

•

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

•

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

•

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. Except to the extent required by the federal securities laws, HEI and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I—FINANCIAL INFORMATION

Item 1. Financial statements

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated balance sheets (unaudited)


(dollars in thousands)	June 30, 2004			December 31, 2003
Assets
Cash and equivalents	$	192,481		$	223,310
Federal funds sold		20,087			56,678
Accounts receivable and unbilled revenues, net		184,300			187,716
Available-for-sale investment and mortgage-related securities		1,870,117			1,787,177
Available-for-sale mortgage-related securities pledged for repurchase agreements		1,000,681			941,571
Held-to-maturity investment securities		96,516			94,624
Loans receivable, net		3,096,010			3,121,979
Property, plant and equipment, net of accumulated depreciation of $1,416,847 and $1,367,538		2,344,396			2,311,888
Other		376,486			382,228
Goodwill and other intangibles		93,200			93,987

	$	9,274,274		$	9,201,158

Liabilities and stockholders’ equity
Liabilities
Accounts payable	$	153,071		$	132,780
Deposit liabilities		4,078,228			4,026,250
Short-term borrowings		14,197			—
Securities sold under agreements to repurchase		870,098			831,335
Advances from Federal Home Loan Bank		965,052			1,017,053
Long-term debt, net		1,166,602			1,064,420
Deferred income taxes		209,805			226,590
Regulatory liabilities, net		77,191			71,882
Contributions in aid of construction		231,551			233,969
Other		304,072			273,442

		8,069,867			7,877,721

Minority interests
HEI- and HECO-obligated preferred securities of trust subsidiaries		—			200,000
Preferred stock of subsidiaries—not subject to mandatory redemption		34,406			34,406

		34,406			234,406

Stockholders’ equity
Preferred stock, no par value, authorized 10,000,000 shares; issued: none		—			—
Common stock, no par value, authorized 100,000,000 shares; issued and outstanding: 80,373,804 shares and 75,837,588 shares		1,004,329			888,431
Retained earnings		191,464			197,774
Accumulated other comprehensive income (loss)		(25,792	)		2,826

		1,170,001			1,089,031

	$	9,274,274		$	9,201,158

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)		2004		2003		2004		2003
Revenues
Electric utility		$	370,605	$	354,529	$	717,218	$	683,441
Bank			89,982		92,703		179,240		187,805
Other			1,211		1,524		2,450		2,146

			461,798		448,756		898,908		873,392

Expenses
Electric utility			324,691		311,944		627,164		599,881
Bank			66,971		70,342		130,121		143,018
Other			3,190		5,017		6,840		9,952

			394,852		387,303		764,125		752,851

Operating income (loss)
Electric utility			45,914		42,585		90,054		83,560
Bank	&n

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents