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1、 Hawaiian Electric Industries,Inc.2004 Annual Report to Shareholders Appendix A 1 Hawaiian Electric Industries,Inc.2004 Annual Report to Shareholders Contents 2 Cautionary Statements and Risk Factors that May Affect Future Results 3 Selected Financial Data 4 Managements Discussion and Analysis of Fi
2、nancial Condition and Results of Operations 41 Quantitative and Qualitative Disclosures about Market Risk 45 Annual Report of Management on Internal Control Over Financial Reporting 46 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting 47 Report of I
3、ndependent Registered Public Accounting Firm 48 Consolidated Financial Statements 97 Directors,Executive Officers and Subsidiary Presidents 98 Shareholder Information 2 Cautionary Statements and Risk Factors that May Affect Future Results This report and other presentations made by Hawaiian Electric
4、 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
5、,”“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
6、.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(collectively,the Company),the performance of the industries in which they do business and econo
7、mic 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 ar
8、e 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 lo
9、ans 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
10、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 ser
11、vices and market acceptance risks;increasing competition in the electric utility and banking industries;capacity and supply constraints or difficulties,especially if measures such as demand-side management(DSM),distributed generation,combined heat and power or other firm capacity supply-side resourc
12、es fall short of achieving their forecast benefits or are otherwise insufficient to reduce or meet forecast peak demand;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 clau
13、ses;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 o
14、perations and prospects of HEIs 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,environm
15、ental laws and regulations and governmental fees and assessments);decisions by the Public Utilities Commission of the State of Hawaii(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 wit
16、h respect to environmental conditions,capital adequacy and business practices);the risks associated with the geographic concentration of HEIs businesses;the effects of changes in accounting principles applicable to HEI,HECO and their subsidiaries,including continued regulatory accounting under State
17、ment 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 secur
18、ities 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 ASBs loan portfolio cre
19、dit profile and asset quality 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;
20、the ability of consolidated HEI to execute strategies to generate capital gains and utilize capital loss carryforwards on future tax returns;the risks of suffering losses that are uninsured;and other risks or uncertainties described elsewhere in this report and in other periodic reports previously a
21、nd 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 n
22、o obligation to publicly update or revise any forward-looking statements,whether as a result of new information,future events or otherwise.3 Selected Financial Data Hawaiian Electric Industries,Inc.and Subsidiaries Years ended December 31 2004 2003 2002 2001 2000(dollars in thousands,except per shar
23、e amounts)Results of operations Revenues$1,924,057$1,781,316$1,653,701$1,727,277$1,732,311 Net income(loss)Continuing operations$107,739$118,048$118,217$107,746$109,336 Discontinued operations 1,913 (3,870)(24,041)(63,592)$109,652$114,178$118,217$83,705$45,744 Basic earnings(loss)per common share Co
24、ntinuing operations$1.36$1.58$1.63$1.60$1.68 Discontinued operations 0.02 (0.05)(0.36)(0.98)$1.38$1.53$1.63$1.24$0.70 Diluted earnings per common share$1.38$1.52$1.62$1.23$0.70 Return on average common equity 9.5%10.7%12.0%9.5%5.4%Return on average common equity-continuing operations*9.4%11.1%12.0%1
25、2.2%13.0%Financial position*Total assets$9,610,627$9,201,158$8,933,553$8,552,041$8,532,780 Deposit liabilities 4,296,172 4,026,250 3,800,772 3,679,586 3,584,646 Securities sold under agreements to repurchase 811,438 831,335 667,247 683,180 596,504 Advances from Federal Home Loan Bank 988,231 1,017,0
26、53 1,176,252 1,032,752 1,249,252 Long-term debt,net 1,166,735 1,064,420 1,106,270 1,145,769 1,088,731 HEI-and HECO-obligated preferred securities of trust subsidiaries 200,000 200,000 200,000 200,000 Preferred stock of subsidiaries not subject to mandatory redemption 34,405 34,406 34,406 34,406 34,4
27、06 Stockholders equity 1,210,945 1,089,031 1,046,300 929,665 839,059 Common stock Book value per common share*$15.01$14.36$14.21$13.06$12.72 Market price per common share High 29.55 24.00 24.50 20.63 18.97 Low 22.96 19.10 17.28 16.78 13.85 December 31 29.15 23.69 21.99 20.14 18.60 Dividends per comm
28、on share 1.24 1.24 1.24 1.24 1.24 Dividend payout ratio 90%81%76%100%176%Dividend payout ratio-continuing operations 91%78%76%78%74%Market price to book value per common share*194%165%155%154%146%Price earnings ratio*21.4x 15.0 x 13.5x 12.6x 11.1x Common shares outstanding(thousands)*80,687 75,838 7
29、3,618 71,200 65,982 Weighted-average 79,562 74,696 72,556 67,508 65,090 Shareholders*35,292 34,439 34,901 37,387 38,372 Employees*3,354 3,197 3,220 3,189 3,126*Net income from continuing operations divided by average common equity.At December 31.Calculated using December 31 market price per common s
30、hare divided by basic earnings per common share from continuing operations.At December 31.Registered shareholders plus participants in the HEI Dividend Reinvestment and Stock Purchase Plan who are not registered shareholders.At February 16,2005,HEI had 35,408 registered shareholders and participants
31、.The Company discontinued its international power operations in 2001 and its residential real estate operations in 1998.See Note 14,“Discontinued operations,”of the“Notes to Consolidated Financial Statements.”Also see“Commitments and contingencies”in Note 3 of the“Notes to Consolidated Financial Sta
32、tements”and Managements Discussion and Analysis of Financial Condition and Results of Operations for discussions of certain contingencies that could adversely affect future results of operations.On April 20,2004,the HEI Board of Directors approved a 2-for-1 stock split in the form of a 100%stock div
33、idend with a record date of May 10,2004 and a distribution date of June 10,2004.All share and per share information has been adjusted to reflect the stock split for all periods presented.4 Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion s
34、hould be read in conjunction with HEIs consolidated financial statements and accompanying notes.The general discussion of HEIs consolidated results should be read in conjunction with the segment discussions that follow.Executive overview and strategy The Companys three strategic objectives are to op
35、erate the electric utility and bank subsidiaries for long-term growth,maintain the annual dividend and increase the Companys financial flexibility by strengthening the balance sheet and maintaining credit ratings.HEI,through its electric utility subsidiaries,supplies power to 93%of the Hawaii electr
36、ic public utility market.HEI also provides a wide array of banking and other financial services to consumers and businesses through its bank subsidiary,ASB,Hawaiis third largest financial institution based on asset size.In 2004,income from continuing operations was$108 million,compared to$118 millio
37、n in 2003.Basic earnings per share from continuing operations were$1.36 per share in 2004,down 14%from 2003 due primarily to an after-tax charge of$20 million,or$0.25 per share,due to a June 2004 tax ruling and subsequent settlement(see“Bank franchise taxes”sections below),and a 7%increase in weight
38、ed average common shares outstanding due primarily to a March 2004 common stock offering.Partially offsetting the tax charge were lower financing costs at HEI Corporate and the electric utilities and a reduction in ASBs allowance for loan losses of$5 million(after-tax)in 2004,compared with an increa
39、se of$2 million(after-tax)in 2003.The future success of the Company will be heavily influenced by Hawaiis economy,which is driven by tourism,the federal government(including the military),real estate and construction.Real gross state product grew by an estimated 2.6%in 2004 and is projected by the S
40、tate of Hawaii Department of Business,Economic Development and Tourism(DBEDT)to grow by 2.7%in 2005.Shareholder dividends are declared and paid quarterly by HEI at the discretion of HEIs Board of Directors.HEI and its predecessor company,HECO,have paid dividends continuously since 1901.The dividend
41、has been stable at$1.24 per share annually since 1998(split-adjusted).The indicated dividend yield at December 31,2004 was 4.3%.HEIs Board and management believe that HEI should achieve a 65%payout ratio on a sustainable basis before it considers increasing the common stock dividend above its curren
42、t level.The dividend payout ratios based on net income for 2004,2003 and 2002 were 90%,81%and 76%(payout ratios of 91%,78%and 76%based on income from continuing operations),respectively.The high payout ratio for 2004 was primarily due to the charge to net income of$20 million due to a June 2004 adve
43、rse tax ruling and subsequent settlement and an increased number of shares outstanding from the sale of 2 million shares(pre-split)of common stock in March 2004.Without the bank franchise tax charge,the payout ratio for 2004 would have been 76%(77%based on income from continuing operations).In the f
44、irst half of 2004,HEI strengthened its balance sheet through a common stock sale and repayment and refinancing of debt,which significantly reduced financing costs.HEIs subsidiaries from time to time consider various strategies designed to enhance their competitive positions and to maximize sharehold
45、er value.These strategies may include the formation of new subsidiaries or the acquisition or disposition of businesses.The Company may from time to time be engaged in preliminary discussions,either internally or with third parties,regarding potential transactions.Management cannot predict whether a
46、ny of these strategies or transactions will be carried out or,if so,whether they will be successfully implemented.Electric utility The electric utilities are vertically integrated and regulated by the PUC.The island utility systems are not interconnected,which requires that additional reliability be
47、 built into the systems,but also doesnt expose the utilities to the problems of inter-ties.The electric utilities strategic focus has been to meet Hawaiis growing energy needs through a combination of diverse activitiesmodernizing and adding needed infrastructure through capital investment,placing e
48、mphasis on energy efficiency and conservation,pursuing technology opportunities such as combined heat and power and taking the necessary steps to secure regulatory support for their plans.5 Reliability projects,including projects to increase generation reserves to meet growing peak demand,remain a p
49、riority for HECO and its subsidiaries.On Oahu,HECO is in the early permitting stages for a new generating unit,which is projected to be placed in service by 2009,and is making progress with plans to build the East Oahu Transmission Project(EOTP),a needed alternative route to move power from the west
50、 side of the island.The two phases of the EOTP are scheduled to be completed in 2007 and 2009.The PUC has approved HECOs plans for a new Energy Management System and a new Dispatch Center on Oahu,which are scheduled to be completed in 2006 and 2007,respectively,and are estimated to cost$23 million.I
51、f further PUC approvals are obtained,new Outage Management and Customer Information Systems will also be integrated.On the island of Hawaii,after years of delay,the two 20 megawatt(MW)combustion turbines at Keahole are operating.On the island of Maui,a necessary air permit was received,effective Sep
52、tember 8,2004,for the installation of an 18 MW steam turbine at its Maalaea power plant site.Further,the utilities are seeking PUC approval for additional DSM rebate programs and pursuing combined heat and power agreements for onsite generation with specific customers,subject to PUC approval.Major i
53、nfrastructure projects can have a pronounced impact on the communities in which they are located.The electric utilities continue to expand their community outreach and consultation process so they can better understand and evaluate community concerns early in the process.With large power users in th
54、e electric utilities service territories,such as the U.S.military,hotels and state and local government,management believes that retaining customers by maintaining customer satisfaction is a critical component in achieving kilowatthour(KWH)sales and revenue growth over time.The electric utilities ha
55、ve established programs that offer these customers specialized services and energy efficiency audits to help them save on energy costs.In November 2004,HECO filed a request with the PUC to increase base rates 9.9%,or$98.6 million in annual base revenues,based on an 11.5%return on average common equi
56、ty.See“Most recent rate requestsHawaiian Electric Company,Inc.”below.The final decision and order for the last rate case on Oahu was issued in 1995.The requested increase amount includes transferring the cost of existing energy conservation and efficiency programs from a surcharge to base rates,so t
57、he requested net increase to customers is 7.3%,or$74.2 million.Approximately$20.4 million of the$74.2 million net request is for the costs of new residential and commercial energy conservation and efficiency programs.The balance of the request is largely for recovery of(1)the costs of capital improv
58、ement projects,(2)the proposed purchase of additional firm capacity and energy from Kalaeloa Partners,L.P.,(3)other measures taken to address peak load increases,and(4)increased operation and maintenance expenses(see“Most recent rate requests”below).An interim decision is expected in the fourth quar
59、ter of 2005.The electric utilities long-term plan to meet Hawaiis future energy needs includes their support of a range of energy choices,including renewable energy and new power supply technologies such as distributed generation.HECOs subsidiary,Renewable Hawaii,Inc.(RHI),has initial approval from
60、the HECO Board of Directors to fund investments by RHI of up to$10 million in selected renewable energy projects to advance the long-term development of renewable energy in Hawaii.Net income for HECO and its subsidiaries was$81 million in 2004 compared to$79 million in 2003.The increase was primaril
61、y due to higher KWH sales and lower financing costs,partly offset by higher expenses.KWH sales growth was 2.9%for 2004.Assuming continuing strength in the U.S.and Hawaii economies,management expects higher KWH sales again in 2005.Bank When ASB was acquired by HEI in 1988,it was a traditional thrift
62、with assets of$1 billion and net income of about$13 million.ASB has grown by both acquisition and internal growth since 1988 and finished 2004 with assets of$6.8 billion and net income of$41 million,including a$20 million after-tax charge for franchise taxes for prior years due to an adverse tax rul
63、ing.Excluding the$20 million charge,net income would have been$61 million in 2004,compared to an adjusted$52 million in 2003(see“Bank franchise taxes”below).The quality of ASBs assets,the interest rate environment and the strategic transformation of ASB have impacted and will continue to impact its
64、financial results.Due to improved asset quality resulting from the strength in the Hawaii economy and the real estate market,ASB was able to recognize a$5 million after-tax negative provision for loan losses during 2004.ASBs allowance as a percentage of average loans was 1.08%at the end of 2004.This
65、 ratio falls between the benchmark ratios for 6national banks and thrifts,which is appropriate because ASBs large residential mortgage portfolio is typical of a thrift and ASB has added business and commercial real estate loans typical of commercial banks.The allowance is adjusted continuously throu
66、gh the provision for loan losses to reflect factors such as charge-offs;outstanding loan balances;loan grading;external factors affecting the national and Hawaii economy,specific industries and sectors and interest rates;and historical and estimated loan losses.The bank has been facing a challenging
67、 interest rate environment that has compressed margins.The Federal Reserve Banks rate increases since mid-2004 have led to higher short-term interest rates,while during the same period,long-term interest rates have remained low or fallen,resulting in a flatter yield curve.The higher short-term inter
68、est rates have put upward pressure on deposit rates,while the low long-term interest rates have held down asset yields,putting downward pressure on net interest margins.If the flattening persists,or the yield curve becomes flatter,the potential for further compression of ASBs margins will continue t
69、o be a concern.As part of its interest rate risk management process,ASB uses simulation analysis to measure net interest income sensitivity to changes in interest rates(see“Quantitative and Qualitative Disclosures about Market Risk”).ASB then employs strategies to limit the impact of changes in inte
70、rest rates on net interest income.ASBs key strategies include:(1)attracting and retaining low cost deposits,which lowers funding costs(as of December 31,2004,core deposits as a percentage of total liabilities were 50%,compared to 47%and 44%as of December 31,2003 and 2002,respectively);(2)diversifyin
71、g its loan portfolio with higher yielding,shorter maturity loans or variable rate loans such as business,commercial real estate and consumer loans,which also creates a broader income stream for the bank;(3)investing in mortgage-related securities with short average lives;and(4)taking advantage of th
72、e lower interest-rate environment by lengthening the maturities of interest-bearing liabilities.ASB has been undergoing a transformation,involving four major lines of business,to become a full service community bank serving both individual and business customers.Two have been completedcommercial rea
73、l estate and mortgage banking,and a third has made significant progresscommercial banking.The retail banking transformation has begun and is the most significant transformation due to the systems and processing improvements needed to move from a product-centric to a customer-centric focus.The transf
74、ormation project will require continued investment in people and technology.ASBs ongoing challenge is to manage expenses in order to keep increasing costs and increasing revenues in balance.Economic conditions Because its core businesses provide local electric utility and banking services,HEIs opera
75、ting results are significantly influenced by the strength of Hawaiis economy,which has been growing modestly.Growth in real gross state product was an estimated 2.6%in 2003 and 2004.Tourism is widely acknowledged as the largest component of the Hawaii economy.Visitor daysvisitor arrivals multiplied
76、by length of stayis a key indicator of the trend in kilowatthour sales.In 2004,visitor days hit a record 63 million,exceeding the record set in 2003 of 59 million by 7%.Other key tourism statistics that indicate the general health of the industry and Hawaii economy include hotel occupancy and visito
77、r expenditures.Hotel occupancy rates averaged 78%for the 11 months ended November 30,2004,6%higher than for the same period in 2003.Visitor expenditures totaled$10.3 billion for 2004,increasing 5%compared with 2003.Key non-tourism sectors in Hawaii,particularly the military and residential real esta
78、te,are also fueling economic growth.There has been a surge in defense spending over the last two years with a 13%,or$520 million,increase from 2002 to 2003.While 2004 statistics are not yet available,continued growth is expected with several key military developments projected to bring$3.8 billion i
79、n construction projects into the state over the next several years.These projects include preparations for an Army Stryker Brigade,the arrival of eight C-17 Air Force cargo planes and military housing renewal projects.For 2005,nearly$865 million in federal defense dollars have been earmarked for Haw
80、aii,including$368 million for military construction projects,in addition to payroll and daily operation funds.Although mortgage rates have been fluctuating recently,they are still low and continue to support real estate activity.In 2004,single-family dwelling and condominium resale volumes on Oahu w
81、ere up 6%and 14%,7respectively,while the December 2004 median sales prices were up 24%and 21%,respectively,compared with December 2003.In December 2004,the median price of a single-family dwelling on Oahu was$495,000,on the island of Hawaii was$350,500 and on Maui was$594,500.In general,the construc
82、tion industry in Hawaii has been doing well.Private building permits were up 15%overall for the 10 months ended October 31,2004 compared with same period in 2003,and were also up in the residential(up 36%)and additions and alterations(up 27%)categories,but down in the commercial and industrial(down
83、45%)category.Local economists anticipate 6%growth in construction in 2004 and a 14%increase for 2005.Hawaiis improving economy is also reflected in other general economic statistics.Total salary and wage jobs increased by 2.5%for the 11 months ended November 30,2004 compared with the same period in
84、2003.Hawaiis unemployment rate of 3.3%was well below the national average of 5.4%as of November 30,2004.DBEDT also estimates real personal income growth of 2.5%in 2004 compared to 2003.Given these positive trends in key economic indicators,DBEDT expects Hawaiis economy to grow moderately by 2.7%in 2
85、005,excluding inflation.Future growth in Hawaiis economy is expected to be tied primarily to the rate of expansion in the mainland U.S.and Japan economies and continued growth in military spending,but remains vulnerable to uncertainties in the worlds geopolitical environment.Results of Operations Co
86、nsolidated(in millions,except per share amounts)2004%change 2003%change 2002 Revenues$1,924 8$1,781 8$1,654 Operating income 271 3 264(1)266 Income from continuing operations$108(9)$118$118 Loss from discontinued operations 2 NM(4)NM Net income$110(4)$114(3)$118 Electric utility$81 3$79(13)$90 Bank
87、41(27)56 56 Other(14)15(17)39(28)Income from continuing operations$108(9)$118$118 Basic earnings(loss)per share Continuing operations$1.36(14)$1.58(3)$1.63 Discontinued operations 0.02 NM(0.05)NM$1.38(10)$1.53(6)$1.63 Dividends per share$1.24$1.24$1.24 Weighted-average number of common shares outsta
88、nding 79.6 7 74.7 3 72.6 Dividend payout ratio 90%81%76%Dividend payout ratio continuing operations 91%78%76%NM Not meaningful.Stock split On April 20,2004,HEI announced a 2-for-1 stock split in the form of a 100%stock dividend with a record date of May 10,2004 and a distribution date of June 10,200
89、4.All share and per share information above,in the accompanying financial statements and notes and elsewhere in this report have been adjusted to reflect the stock split(unless otherwise noted).See Note 1 of the“Notes to Consolidated Financial Statements.”8Bank franchise taxes(consolidated HEI)The 2
90、004 results of operations include an after-tax charge of$20 million,or$0.25 per share,due to a June 2004 tax ruling and subsequent settlement as discussed in Note 10 of the“Notes to Consolidated Financial Statements”under“ASB state franchise tax dispute and settlement.”The following table presents a
91、 reconciliation of HEIs consolidated net income to net income excluding this$20 million charge in 2004 and including additional bank franchise taxes in prior periods as if the Company had not taken a dividends received deduction on dividends paid by its real estate investment trust(REIT)subsidiary.M
92、anagement believes the adjusted information below presents results from continuing operations on a more comparable basis for the periods shown.However,net income,or earnings per share,including these adjustments is not a presentation in accordance with accounting principles generally accepted in the
93、 United States of America(GAAP)and may not be comparable to presentations made by other companies or more useful than the GAAP presentation included in HEIs consolidated financial statements.Years ended December 31 2004 2003 2002(in thousands,except per share amounts)Income from continuing operation
94、s$107,739$118,048$118,217 Basic earnings per share-continuing operations$1.36$1.58$1.63 Cumulative bank franchise taxes,net of taxes,through December 31,2003$20,340$Additional bank franchise taxes,net of taxes(if recorded in prior periods)$(3,793)$(4,237)As adjusted Income from continuing operations
95、$128,079$114,255$113,980 Basic earnings per share-continuing operations$1.61$1.53$1.57 Return on average common equity 1 11.2%10.9%11.7%1 Calculated using adjusted income from continuing operations divided by the simple average adjusted common equity.Taking into account the adjustments in the table
96、above,HEIs consolidated income from continuing operations would have increased 12%for 2004,compared to 2003.Pension and other postretirement benefits For 2004,the Companys pension and other postretirement benefit(collectively,retirement benefit)plans assets generated a total return of 10.5%,resultin
97、g in realized and unrealized gains of$82 million.Realized and unrealized gains were$154 million for 2003 and realized and unrealized losses were$112 million for 2002.The market value of the retirement benefit plans assets as of December 31,2004 was$893 million.The Company made cash contributions to
98、the retirement benefit plans totaling$37 million in 2004,$48 million in 2003 and$10 million in 2002.Contributions are expected to total$17 million in 2005,but actual contributions may differ depending on the performance of the retirement benefit plans assets and the status of interest rates.Based on
99、 various assumptions(e.g.,discount rate and expected return on plan assets,which are noted below)and assuming no further changes in retirement benefit plan provisions,consolidated HEIs,consolidated HECOs and ASBs accumulated other comprehensive income(AOCI)balance,net of tax benefits,related to the
100、minimum pension liability at December 31,2004 and 2003 and retirement benefits expense,net of income taxes,for 2005(estimated)will be,and 2004 and 2003 were,as follows:9 Years ended December 31(Estimated)2005 2004 2003($in millions)Consolidated HEI AOCI balance,net of tax benefits,December 31 NA$(1.
101、1)$(1.4)Retirement benefits expense,net of income tax benefits 1$11.4 6.8 12.1 Consolidated HECO AOCI balance,net of tax benefits,December 31 NA (0.2)Retirement benefits expense,net of income tax benefits 1 7.8 3.8 8.4 ASB AOCI balance,net of tax benefits,December 31 NA(0.2)(0.2)Retirement benefits
102、expense,net of income tax benefits 1 2.6 2.0 2.7 Assumptions Discount rate,January 1 6.00%6.25%6.75%Expected return on plan assets 9.00%9.00%9.00%1 Does not include impact of the Medicare Prescription Drug,Improvement and Modernization Act of 2003.NA Not available.The 2005 estimated retirement benef
103、its expenses,net of income tax benefits,are forward-looking statements subject to risks and uncertainties,including the impact of plan changes during the year,if any,and the impact of actual information when received(e.g.,actual participant demographics as of January 1,2005).If the Company and conso
104、lidated HECO are required to record substantially greater charges to AOCI in the future,the electric utilities returns on average rate base(RORs)could increase and exceed the PUC authorized RORs,which may ultimately result in reduced revenues and lower earnings.Further,if required to record signific
105、ant charges to AOCI,the Companys and consolidated HECOs financial ratios may deteriorate,which could result in security ratings downgrades and difficulty(or greater expense)in obtaining future financing.There also may be possible financial covenant violations(although there are no advances currently
106、 outstanding under any credit facility subject to financial covenants)as certain bank lines of credit of the Company and HECO require that HECO maintain a minimum ratio of consolidated equity to consolidated capitalization,excluding short-term borrowings,of 35%(actual ratio of 56%as of December 31,2
107、004);the Company maintain a consolidated net worth,exclusive of intangible assets,of at least$900 million(actual net worth,exclusive of intangible assets,of$1.1 billion as of December 31,2004);and HEI,on a non-consolidated basis,maintain a ratio of indebtedness to capitalization of not more than 50%
108、(actual ratio of 27%as of December 31,2004).10 Following is a general discussion of revenues,expenses and net income or loss by business segment.Additional segment information is shown in Note 2 of the“Notes to Consolidated Financial Statements.”Electric utility($in millions,except per barrel amount
109、s)2004%change 2003%change 2002 Revenues 1$1,551 11$1,397 11$1,257 Expenses Fuel oil 483 24 389 25 311 Purchased power 399 8 368 13 326 Other 495 7 463 9 425 Operating income 174(2)177(9)195 Allowance for funds used during construction 8 35 6 6 6 Net income 81 3 79(13)90 Return on average common equi
110、ty 8.3%8.5%10.0%Average price per barrel of fuel oil 1$42.67 18$36.23 25$29.10 Kilowatthour sales(millions)10,063 3 9,775 2 9,544 Cooling degree days(Oahu)5,107 2 5,010 4 4,798 Number of employees(at December 31)2,013 8 1,862(2)1,894 1 The rate schedules of the electric utilities contain energy cost
111、 adjustment clauses through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers.In 2004,the electric utilities revenues increased by 11%,or$154 million,from 2003 primarily due to higher energy prices($114 million)and a 2.9%increase in KWH sale
112、s of electricity($41 million).The increase in 2004 KWH sales from 2003 was primarily due to higher customer usage due in part to the strength in Hawaiis economy(including higher real personal income,lower unemployment,higher visitor days,increased military activity and stronger real estate market)an
113、d warmer weather(probably resulting in more air conditioning usage).Cooling degree days were 1.9%higher in 2004 compared to 2003.The higher energy prices are also reflected in the higher amount of customer accounts receivable and accrued unbilled revenues.Operating income was$3 million lower than in
114、 2003 mainly due to higher other expenses,primarily higher maintenance expenses.Fuel oil and purchased power expenses in 2004 increased by 24%and 8%,respectively,due primarily to higher fuel prices,which are generally passed on to customers,and more KWHs generated and purchased.Other expenses increa
115、sed 7%in 2004 due to a 1%(or$2 million)increase in“other operation”expense;a 20%(or$13 million)increase in maintenance expense;a 4%(or$4 million)increase in depreciation expense due to additions to plant in service in 2003;and a 10%(or$13 million)increase in taxes,other than income taxes,primarily d
116、ue to the increase in revenues.“Other operation”expenses increased 1%in 2004 when compared to 2003 due primarily to higher administrative and general expenses,including increases in general liability reserves and workers compensation claims,and higher transmission and distribution line inspection ex
117、pense,largely offset by lower retirement benefits expense and emission fees.Pension and other postretirement benefit expenses for the electric utilities were$8 million lower than 2003 due primarily to the increase in plan assets as of December 31,2003 compared to December 31,2002 resulting from mark
118、et performance and contributions of the electric utilities of$34 million during 2004.Maintenance expenses increased 20%due to greater scope of generating unit overhauls,higher production corrective maintenance,and higher transmission and distribution maintenance work.In 2003,the electric utilities r
119、evenues increased by 11%,or$140 million,from 2002 primarily due to higher energy prices($111 million),a 2.4%increase in KWH sales of electricity($32 million)and higher DSM lost margins and shareholder incentives($4 million),partly offset by lower DSM program and Integrated Resource Plan(IRP)costs to
120、 be recovered($5 million).The increase in 2003 KWH sales from 2002 was primarily due to increases in the number of residential customers and residential and commercial usage resulting in part from an improving Hawaii economy(higher visitor days and stronger real estate market)and warmer weather(prob
121、ably resulting in more air 11conditioning usage).The growth in sales was achieved despite the impact on tourism of concerns over the Japanese economy,the war in Iraq,terrorism and Severe Acute Respiratory Syndrome(SARS).Cooling degree days were 4.4%higher in 2003 compared to 2002.Operating income wa
122、s$18 million lower than in 2002 mainly due to higher other expenses,primarily higher retirement benefit expenses.Fuel oil expense and purchased power expense in 2003 increased by 25%and 13%,respectively,due primarily to higher fuel prices,which are generally passed on to customers,and more KWHs gene
123、rated and purchased.Other expenses were up 9%in 2003 due to an 18%(or$24 million)increase in“other operation”expense;a 5%(or$5 million)increase in depreciation expense due to additions to plant in service in 2002,including HECOs Kewalo-Kamoku 138 kilovolt line;a 9%(or$11 million)increase in taxes,ot
124、her than income taxes,primarily due to the increase in revenues;partly offset by a 3%(or$2 million)decrease in maintenance expense due in part to less underground distribution line corrective maintenance.As the electric utilities focused on capital expenditures to ensure reliability,ducted cables we
125、re installed to replace,rather than repair,direct buried cables when cable problems occurred.“Other operation”expense increased 18%primarily due to higher retirement benefits expense and environmental expenses(including higher emission fees).Pension and other postretirement benefit costs,net of amou
126、nts capitalized,for the electric utilities swung$24 million over 2002($14 million expense in 2003 versus a$10 million credit in 2002),partly due to revised assumptions(decreasing the discount rate 50 basis points to 6.75%and the long-term rate of return on assets 100 basis points to 9.0%as of Decemb
127、er 31,2002 compared to December 31,2001).“Other operation”expense for 2003 also included$3.1 million of charges related to a settlement reached in November 2003 involving the expansion of the existing plant at Keahole on the island of Hawaii(see Note 3 of the“Notes to Consolidated Financial Statemen
128、ts”),offset by lower DSM and IRP costs.In January 2004,the Department of Health of the State of Hawaii(DOH)waived 2003 emissions fees;thus,2003 emissions fees of$1.5 million,which were accrued in 2003,were reversed in the first quarter of 2004.Most recent rate requests HEIs electric utilities initia
129、te PUC proceedings from time to time to request electric rate increases to cover rising operating costs(e.g.,higher energy conservation and efficiency program costs and higher purchased power capacity charges)and the cost of plant and equipment,including the cost of new capital projects to maintain
130、and improve service reliability.As of February 16,2005,the return on average common equity(ROACE)found by the PUC to be reasonable in the most recent final rate decision for each utility was 11.40%for HECO(decision and order(D&O)issued on December 11,1995,based on a 1995 test year),11.50%for Hawaii
131、Electric Light Company,Inc.(HELCO)(D&O issued on February 8,2001,based on a 2000 test year)and 10.94%for Maui Electric Company,Limited(MECO)(amended D&O issued on April 6,1999,based on a 1999 test year).For 2004,the simple average ROACEs(calculated under the rate-making method and reported to the PU
132、C)for HECO,HELCO and MECO were 8.49%,6.98%and 10.45%,respectively.HELCOs actual 6.98%ROACE for 2004,which is substantially less than its allowed ROACE of 11.50%,reflects in part HELCOs decision to discontinue accruing an allowance for funds used during construction(AFUDC),effective December 1,1998,o
133、n its CT-4 and CT-5 generating units that were installed at the Keahole power plant.Although CT-4 and CT-5 are currently in-service,HELCOs ROACE will continue to be negatively impacted by CT-4 and CT-5 as electric rates will not change for the unit additions until HELCO files a rate increase applica
134、tion and the PUC grants HELCO rate relief.As of February 16,2005,the return on average rate base(ROR)found by the PUC to be reasonable in the most recent final rate decision for each utility was 9.16%for HECO,9.14%for HELCO and 8.83%for MECO(D&Os noted above).For 2004,the simple average RORs(calcula
135、ted under the rate-making method)for HECO,HELCO and MECO were 7.13%,7.25%and 8.83%(after reduction of MECOs revenues from shareholder incentives and lost margins in 2004),respectively.If required to record significant charges to AOCI related to a minimum liability for retirement benefits,the electri
136、c utilities RORs could increase and exceed the PUC authorized RORs,which may ultimately result in reduced revenues and lower earnings.12Hawaiian Electric Company,Inc.The final D&O for the last rate case on Oahu was issued in 1995.In November 2004,HECO filed a request with the PUC to increase base ra
137、tes 9.9%,or$98.6 million in annual base revenues,based on a 2005 test year,a 9.11%return on rate base and an 11.5%return on average common equity.The requested increase includes transferring the cost of existing energy conservation and efficiency programs from a surcharge line item on electric bills
138、 into base electricity charges.Excluding this surcharge transfer amount,the requested net increase to customers is 7.3%,or$74.2 million.Approximately$20.4 million of the$74.2 million net request is for the costs of new residential and commercial energy conservation and efficiency programs.The balanc
139、e of the request is largely for recovery of(1)the costs of capital improvement projects completed since the last rate case,(2)the proposed purchase of up to an additional 29 MW of firm capacity and energy from Kalaeloa Partners,L.P.,which is subject to PUC review and approval,(3)other measures taken
140、 to address peak load increases arising out of economic growth and increasing electricity use,and(4)increased operation and maintenance expenses.The PUC held a public hearing in January 2005 and evidentiary hearings are expected in the third quarter of 2005.An interim decision is expected in the fou
141、rth quarter of 2005.In October 2002,HECO filed an application with the PUC for approval to change its depreciation rates based on a study of depreciation expense for 2000 and to change to vintage amortization accounting for selected plant accounts.In March 2004,HECO and the Consumer Advocate reached
142、 an agreement and the PUC approved the agreement in September 2004.In accordance with the agreement,HECO changed its depreciation rates and changed to vintage amortization accounting for selected plant accounts effective September 1,2004.Under vintage amortization accounting,additions to electric ut
143、ility plant in each year are grouped together in a vintage account for that year,as opposed to tracking each asset separately.Each vintage account is amortized over its average service life as determined in the depreciation study and,when fully amortized,the original cost of that vintage account is
144、retired from utility plant in service.If the new rates and accounting had been in effect from the beginning of 2004,depreciation expense for the first eight months of 2004 would have been an estimated$1.3 million lower.Hawaii Electric Light Company,Inc.The timing of a future HELCO rate increase requ
145、est to recover costs,including cost for the installation of two combustion turbines(CT-4 and CT-5)at Keahole,will depend on future circumstances.See“HELCO power situation”in Note 3 of the“Notes to Consolidated Financial Statements.”Other regulatory matters Demand-side management programs-lost margin
146、s and shareholder incentives.HECO,HELCO and MECOs energy efficiency DSM programs,currently approved by the PUC,provide for the recovery of lost margins and the earning of shareholder incentives.Lost margins are accrued and collected prospectively based on the programs forecast levels of participatio
147、n,and are subject to two adjustments based on(1)the actual level of participation and(2)the results of impact evaluation reports.The difference between the adjusted lost margins and the previously collected lost margins are subject to refund or recovery,with any over-or under-collection accruing int
148、erest at HECO,HELCO or MECOs authorized rate of return on rate base.HECO,HELCO and MECO filed the impact evaluation report for the 2000-2003 period with the PUC in November 2004 and plan to adjust the lost margin recovery as required in the second quarter of 2005.Past adjustments required for lost m
149、argins have not had a material effect on HECO,HELCO or MECOs financial statements.Shareholder incentives are accrued currently and collected retrospectively based on the programs actual levels of participation for the prior year.Beginning in 2001,shareholder incentives collected are subject to retro
150、active adjustment based on the results of impact evaluation reports,similar to the adjustment process for lost margins.Demand-side management programs agreements with the Consumer Advocate.In October 2001,HECO and the Consumer Advocate finalized agreements,subject to PUC approval,for the continuatio
151、n of HECOs three commercial and industrial DSM programs and two residential DSM programs until HECOs next rate case.These agreements were in lieu of HECO continuing to seek approval of new 5-year DSM programs and provided that DSM programs to be in place after HECOs next rate case are to be determin
152、ed as part of the case.Under the agreements,HECO agreed to cap the recovery of lost margins and shareholder incentives if such recovery would cause HECO to exceed its current“authorized return on rate base”(i.e.the rate of return on rate base found by the PUC to be reasonable in the most recent rate
153、 case for HECO).HECO also agreed it will not pursue the continuation of lost margins recovery and shareholder incentives through a surcharge mechanism in future rate cases.In 13October 2001,HELCO and MECO reached similar agreements with the Consumer Advocate and filed requests to continue their four
154、 existing DSM programs.In November 2001,the PUC issued orders(one of which was later amended)that,subject to certain reporting requirements and other conditions,approved(1)the agreements regarding the temporary continuation of HECOs five existing DSM programs until HECOs next rate case and(2)the agr
155、eements regarding the temporary continuation of HELCOs and MECOs DSM programs until one year after the PUC makes a revenue requirements determination in HECOs next rate case.Under the orders,however,HELCO and MECO are allowed to recover only lost margins and shareholder incentives accrued through th
156、e date that interim rates are established in HECOs next rate case,but may request to extend the time of such accrual and recovery for up to one additional year.In 2002,MECOs revenues from shareholder incentives were$0.7 million lower than the amount that would have been recorded if MECO had not agre
157、ed to cap such incentives when its authorized ROR was exceeded.Also in 2002,HELCO slightly exceeded its authorized ROR resulting in a reduction of revenues from shareholders incentives for 2002 by$31,000(recorded in January 2003).In 2002,HECO did not exceed its authorized ROR.In 2003,none of the ele
158、ctric utilities exceeded their respective authorized RORs.In 2004,HECO and HELCO did not exceed their respective authorized RORs,but MECO exceeded its authorized ROR,resulting in a reduction of revenues from shareholders incentives and lost margins for 2004 by$1.0 million(recorded in December 2004).
159、One of the conditions to the temporary continuation of the DSM programs requires the utilities and the Consumer Advocate to review,every six months,the economic and rate impacts resulting from implementing the agreement.In reviewing HELCOs ROR for 2003,the Consumer Advocate raised an issue regarding
160、 Keahole settlement expenses and HELCO agreed to refund,with interest,all of the lost margins and shareholder incentives it had earned in 2003.In June 2004,HELCO recorded reduced revenues of$1.1 million to reflect the lost margins and shareholder incentives for 2003 that were refunded to customers i
161、n August 2004.No issues were raised regarding the lost margins and shareholder incentives earned by HECO or MECO in 2003.In 2004,HECO and the Consumer Advocate reached agreement on a residential load management program and a commercial and industrial load management program and the PUC approved HECO
162、s programs.Implementation of these programs began in early 2005.The residential load management program includes a monthly electric bill credit for eligible customers who participate in the program,which allows HECO to disconnect the customers residential electric water heaters from HECOs system to
163、reduce system load when deemed necessary by HECO.The commercial and industrial load management program provides an incentive on the portion of the demand load that eligible customers allow to be controlled or interrupted by HECO.In addition,if HECO interrupts the load,an incentive is paid on the kil
164、owatthours interrupted.Customer incentives for the programs are expected to be approximately$1 million for the first full year and total$7 million over 5 years.Avoided cost generic docket.In May 1992,the PUC instituted a generic investigation including all of Hawaiis electric utilities to examine th
165、e proxy method and the proxy method formula used by the electric utilities to calculate their avoided energy costs and Schedule Q rates.In general,Schedule Q rates are available to customers with cogeneration and/or small power production facilities with a capacity of 100 kilowatthours or less who b
166、uy/sell power from/to the electric utility.In addition to the electric utilities,the parties to the 1992 docket include the Consumer Advocate,the Department of Defense,and representatives of existing or potential independent power producers(IPPs).In March 1994,the parties entered into and filed a St
167、ipulation to Resolve Proceedings,which is subject to PUC approval.The parties could not reach agreement with respect to certain of the issues,which are addressed in Statements of Position filed in March 1994.No further action was taken in the docket until July 2004,at which time the PUC ordered the
168、parties to review and update,if necessary,the agreements,information and data contained in the stipulation and file such information and stated that further action will follow.The requested information will be submitted by the end of March 2005.Collective bargaining agreements Each of the electric u
169、tilities entered into a new four-year collective bargaining agreement in 2003 with the union which represents 59%of electric utility employees.See“Collective bargaining agreements”in Note 3 of the“Notes to Consolidated Financial Statements.”14Legislation and regulation Congress and the Hawaii legisl
170、ature periodically consider legislation that could have positive or negative effects on the utilities and their customers.For example,although it is currently stalled in a House-Senate conference committee,comprehensive energy legislation is still before Congress that could increase the domestic sup
171、ply of oil as well as increase support for energy conservation programs and mandate the use of renewables by utilities.The 2001 Hawaii Legislature adopted a law which required the utilities to meet a renewable portfolio standard of 7%by December 31,2003.The Company met this standard with over 8%of t
172、he utilities consolidated electricity sales for 2003 from renewable resources(as defined under the renewable portfolio standards(RPS)law).The 2004 Hawaii Legislature amended the RPS law to require electric utilities to meet a renewable portfolio standard of 8%by December 31,2005,10%by December 31,20
173、10,15%by December 31,2015,and 20%by December 31,2020.The definition of“renewable energy”as amended in 2004,includes not only electrical energy savings brought about by the use of solar and heat pump water heating(which were already included in the definition),but also such savings brought about by s
174、eawater air-conditioning district cooling systems,solar air conditioning and ice storage,quantifiable energy conservation measures,and use of rejected heat from co-generation and combined heat and power systems(excluding fossil-fueled qualifying facilities that sell electricity to electric utility c
175、ompanies,and central station power projects).HECO,HELCO and MECO are permitted to aggregate their renewable portfolios in order to achieve these standards.The PUC has to determine if an electric utility is not able to meet the standard in a cost-effective manner or due to circumstances beyond its co
176、ntrol.If such a determination is made,the utility is relieved of its responsibility to achieve the standard for that period of time.The PUC also may provide incentives to encourage electric utility companies to exceed their RPS or to meet their RPS ahead of time,or both.The law also requires partici
177、pation by the State to support and facilitate achievement of the RPS.An independent,peer-reviewed study will be conducted by the Hawaii Natural Energy Institute.The study will look at the electric utilities capability of achieving the standards based on a number of factors,including impact on custom
178、er rates,utility system reliability and stability,costs and availability of appropriate renewable energy resources and technologies,permitting approvals,and impacts on the economy,culture,community and environment.The RPS law also directs the PUC,by December 31,2006,to develop and implement a utilit
179、y ratemaking structure,which may include,but is not limited to performance-based ratemaking(PBR),to provide incentives that encourage Hawaiis electric utility companies to use cost-effective renewable energy resources found in Hawaii to meet the RPS,while allowing for deviation from the standards in
180、 the event that the standards cannot be met in a cost-effective manner,or as a result of circumstances beyond the control of the utility which could not have been reasonably anticipated or ameliorated.On November 1,2004,the PUC transmitted an Initial Concept Paper,entitled“Electric Utility Rate Desi
181、gn in Hawaii,”describing the PUCs intended methodology for fulfilling the legislative mandate,and requested comments.As summarized in the paper,the PUC has a legislative mandate to formulate an electric utility rate design,by December 31,2006 that(1)enables the achievement of RPS requiring that rene
182、wable energy resources are to have a specific share in the power generation mix by a particular period of time,(2)encourages investments in renewable energy facilities,(3)conforms to the existing regulatory regime,which is cost-of-service regulation,or to alternative regulatory regimes,such as PBR,a
183、nd(4)provides utilities an opportunity to earn a reasonable rate of return.The overall process envisioned by the PUC is the conduct of three sets of workshops,and the creation of a document leading to rulemaking.Comments were submitted on behalf of the electric utilities,as well as 12 other persons
184、and organizations.The first workshop was held in November 2004,and involved comments by the PUCs modeling consultant,Economists Incorporated,and many of those who submitted written comments.According to the Initial Concept Paper,the PUC,employing a collaborative approach,plans to hold three workshop
185、s encouraging public discussion of its work-in-progress.The goal of the first workshop was to describe and gather comments on the PUCs methodology as a whole.The goal of the second workshop,planned for March 2005,is to describe and gather comments on the key factors driving successful RPS schemes an
186、d PBR regimes as well as on their use as inputs to the design of electric utility rates in Hawaii.The goal of the third workshop,planned for May or June 2005,is to describe and gather comments on the simulation of the power market in Hawaii incorporating,as discussed in the prior workshops,the lesso
187、ns learned on electric utility rate design under various RPS schemes and PBR regimes,as well as on its use as a tool for electric utility rate design in Hawaii.The PUC envisions that the end result of all the analysis will be a document that forms the basis of a set of rules to be adopted in a conve
188、ntional 15rulemaking process to follow,providing input to the PUCs decisions on electric utility ratemaking.Management cannot predict the outcome of this process.The electric utilities continue to pursue a three-prong renewable energy strategy:a)promote the development of cost-effective,commercially
189、 viable renewable energy projects,b)facilitate the integration of intermittent renewable energy resources,and c)encourage renewable energy research,development,and demonstration projects(e.g.,photovoltaic energy).They are also conducting integrated resource planning to evaluate the increased use of
190、renewables within the electric utilities service territories.Among the various ways that the electric utilities support renewable energy are solar water heating and heat pump programs and the negotiation and execution of purchased power contracts with nonutility generators using renewable sources(e.
191、g.,refuse-fired,geothermal,hydroelectric and wind turbine generating systems).In December 2003,HELCO signed an approximate 10.6 MW as-available wind power contract with Hawi Renewable Development,and the contract was approved by the PUC in May 2004.In October 2004,a contract with Apollo Energy Corpo
192、ration to repower an existing 7 MW windfarm to 20 MW was signed and an application for PUC approval was submitted in November 2004.In December 2004,MECO signed an approximately 30 MW as-available wind power contract with Kaheawa Wind Power,LLC and submitted an application for PUC approval.In Decembe
193、r 2002,HECO formed an unregulated subsidiary,RHI,with initial approval to invest up to$10 million in selected renewable energy projects.RHI is seeking to stimulate renewable energy initiatives by prospecting for new projects and sites,and taking a passive,minority interest in third party renewable e
194、nergy projects.In 2003 and 2004,RHI solicited competitive proposals for investment opportunities in qualified projects.To date,RHI has signed a memorandum of understanding(MOU)and project agreement for a small-scale municipal solid waste-to-energy project and a MOU for a small-scale landfill gas-to-
195、energy project,both situated on Oahu.Project investments by RHI will generally be made only after developers secure the necessary approvals and permits and independently execute a power purchase agreement with HECO,HELCO or MECO,approved by the PUC.Hawaii has a net energy metering law,which requires
196、 that electric utilities offer net energy metering to eligible customer generators(i.e.a customer generator may be a net user or supplier of energy and will make payment to or receive credit from the electric utility accordingly).The 2004 Legislature amended the net energy metering law by expanding
197、the definition of“eligible customer generator”to include government entities,increasing the maximum size of eligible net metered systems from 10 kilowatts(kw)to 50 kw,and limiting exemptions from additional requirements for systems meeting safety and performance standards to systems of 10 kw or less
198、.These amendments could have a negative effect on electric utility sales.However,based on experience under the 10 kw limit and assessment of market opportunity for 50 kw applications,management does not expect any such effect to be material.The 2004 legislature also passed legislation that clarifies
199、 that the accepting agency or authority for an environmental impact statement is not required to be the approving agency for the permit or approval and also requires an environmental assessment for proposed waste-to-energy facilities,landfills,oil refineries,power-generating facilities greater than
200、5 MW and wastewater facilities,except individual wastewater systems.This legislation could result in an increase in project costs.For a discussion of environmental legislation and regulations,see“Environmental matters”below.Other developments HECO has completed a small-scale technical feasibility tr
201、ial of the“Broadband over Power Line”(BPL)technology in Honolulu,and is now proceeding with a medium-scale pilot in an expanded residential/commercial area in Honolulu.The purpose of this pilot is to continue to evaluate the technical feasibility of the BPL technology and its applications in a varie
202、ty of configurations and environments.BPL-enabled utility applications to be evaluated include distribution system monitoring and control,advanced remote metering,and direct residential load control.Although its evaluation will be focused primarily on utility applications of BPL,HECO will also be ev
203、aluating broadband information services that might potentially be provided by other service providers.The pilot will involve 100 residential subscribers in overhead,underground,and multi-dwelling unit electric distribution environments,as well as 5 units in a hotel.The pilot is expected to commence
204、in 2005 and run for approximately 6 to 12 months.In October 2004,the Federal Communications Commission(FCC)released a Report and Order In the Matter of Amendment of Part 15 Regarding New Requirements and Measurement Guidelines for Access Broadband Over 16Power Line Systems and In the Matter of Carri
205、er Current Systems,Including Broadband Over Power Line Systems.The Report and Order amends and adopts new rules for Access Broadband over Power Line systems(Access BPL)and states that the FCCs goals in developing the rules for Access BPL“are therefore to provide a framework that will both facilitate
206、 the rapid introduction and development of BPL systems and protect licensed radio services from harmful interference.”Currently,there are no PUC regulations for electric utility applications of BPL systems.Bank(in millions)2004%change 2003%change 2002 Revenues$364(2)$371(7)$399 Net interest income 1
207、94 3 190(2)193 Operating income 105 13 93 93 Net income 41(27)56 56 Return on average common equity 1 8.0%12.1%12.9%Interest-earning assets Average balance 2$6,162 3$5,980 4$5,745 Weighted-average yield 4.98%(5)5.23%(13)6.03%Interest-bearing liabilities Average balance 2$5,934 3$5,739 5$5,488 Weight
208、ed-average rate 1.90%(12)2.15%(23)2.79%Interest rate spread 3.08%3.08%(5)3.24%1 In late December 2004,ASBs capital structure changed when ASB redeemed its preferred stock held by HEIDI($75 million)and HEIDI infused common equity into ASB($75 million).If ASBs reported common equity as of December 31,
209、2004 was reduced by$75 million for the calculation,ASBs ROACE would have been 8.7%.2 Calculated using the average daily balances.Bank franchise taxes(ASB)The results of operations for 2004 include a net charge of$20 million due to a June 2004 tax ruling and subsequent settlement as discussed in Note
210、 10 of the“Notes to Consolidated Financial Statements”under“ASB state franchise tax dispute and settlement.”The following table presents a reconciliation of ASBs net income to net income excluding the$20 million charge in 2004 and including additional bank franchise taxes in prior periods as if ASB
211、had not taken a dividends received deduction on dividends paid by its REIT subsidiary.Management believes the adjusted information below presents ASBs net income on a more comparable basis for the periods shown.However,net income,including these adjustments,is not a presentation in accordance with G
212、AAP and may not be comparable to presentations made by other companies or more useful than the GAAP presentation included in HEIs consolidated financial statements.Years ended December 31 2004 2003 2002(in thousands)Net income$41,062$56,261$56,225 Cumulative bank franchise taxes,net of taxes,through
213、 December 31,2003 20,340 Additional bank franchise taxes,net of taxes(if recorded in prior periods)(3,793)(4,237)Net income as adjusted$61,402$52,468$51,988 ROACE as adjusted 1 13.3%11.7%12.3%1 Calculated using adjusted net income divided by the simple average adjusted common equity(excluding the$75
214、 million common equity infusion in December 2004).Taking into account the adjustments in the table above,ASBs 2004 net income would have increased 17%compared to 2003.17Bank operations Earnings of ASB depend primarily on net interest income,which is the difference between interest earned on interest
215、-earning assets and interest paid on interest-bearing liabilities.ASBs loan volumes and yields are affected by market interest rates,competition,demand for financing,availability of funds and managements responses to these factors.At December 31,2004,ASBs loan portfolio mix consisted of 74%residenti
216、al loans,10%business loans,7%consumer loans and 9%commercial real estate loans.At December 31,2003,ASBs loan portfolio mix consisted of 77%residential loans,9%business loans,7%consumer loans and 7%commercial real estate loans.ASBs mortgage-related securities portfolio consists primarily of shorter-d
217、uration assets and is affected by market interest rates and demand.Deposits continue to be the largest source of funds and are affected by market interest rates,competition and managements responses to these factors.Advances from the Federal Home Loan Bank(FHLB)of Seattle and securities sold under a
218、greements to repurchase continue to be significant sources of funds.At December 31,2004,ASBs costing liabilities consisted of 51%core deposits,20%term certificates and 29%FHLB advances and other borrowings.At December 31,2003,ASBs costing liabilities consisted of 48%core deposits,20%term certificate
219、s and 32%FHLB advances and other borrowings.Other factors primarily affecting ASBs operating results include gains or losses on sales of securities available-for-sale,fee income,provision for loan losses,changes in the value of mortgage servicing rights and expenses from operations.Low interest rate
220、s and high mortgage refinancing volume in 2003 and the first half of 2004 have put pressure on ASBs interest rate spread as the loan portfolio repriced upon refinancing at lower interest rates,while at the same time deposit rates were already at low levels in 2003.The Federal Reserve Banks rate incr
221、eases since mid-2004 have led to higher short-term interest rates,while during the same period,long-term interest rates have remained low or fallen,resulting in a flatter yield curve.The higher short-term interest rates have put upward pressure on deposit rates,while the low long-term interest rates
222、 have held down asset yields,putting downward pressure on net interest margins.If the flattening persists,or the yield curve becomes flatter,the potential for further compression of ASBs margins will continue to be a concern.Although higher long-term interest rates could reduce the market value of m
223、ortgage-related securities and reduce stockholders equity through a balance sheet charge to AOCI,this reduction in the market value of mortgage-related securities would not result in a charge to net income in the absence of an“other-than-temporary”impairment in the value of the securities.At Decembe
224、r 31,2004 and 2003,the unrealized losses,net of tax benefits,on available-for-sale mortgage-related securities(including securities pledged for repurchase agreements)in AOCI was$7 million and$1 million,respectively,reflecting the impact of higher interest rates in 2004.See“Quantitative and qualitati
225、ve disclosures about market risk.”In December 2004,the FHLB of Seattle signed an agreement with its regulator,the Federal Housing Finance Board,under which it will review and strengthen its risk management,capital structure,governance and business plan.Pending the approval of a final business and ca
226、pital management plan by its regulator,the FHLB of Seattles Board of Directors deferred declaring a dividend based on its fourth quarter 2004 earnings until the first quarter of 2005(as of December 31,2004,ASB had an investment in FHLB stock of$97 million),and has indicated that dividends on its sto
227、ck will not exceed the lower of the daily average Federal Funds effective rate during the prior quarter or 50%of the FHLB of Seattles earnings during the prior quarter,subject additionally to the FHLB of Seattles retained earnings policy.In March 2005,the FHLB of Seattle indicated that the strategie
228、s under consideration to improve the FHLB of Seattles long-term financial position will negatively impact its earnings and retained earnings in the interim,and thus potentially limit its ability to pay dividends and accommodate stock repurchases.In the first three quarters of 2004,the FHLB of Seattl
229、e had paid total dividends on ASBs investment in FHLB of Seattle stock of$2.7 million.18 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-bear
230、ing liabilities for the years indicated.Average balances for each year have been calculated using the daily average balances during the year.Years ended December 31,(in thousands)2004 2003 2002 Loan Average balances 1$3,121,878$3,071,877$2,844,341 Interest income 2 184,773 198,948 203,082 Weighted-a
231、verage yield 5.92%6.48%7.14%Mortgage-related securities Average balances$2,799,303$2,707,395$2,654,302 Interest income 116,471 107,496 135,252 Weighted-average yield 4.16%3.97%5.10%Investments 3 Average balances$240,466$200,891$246,321 Interest and dividend income 5,876 6,384 7,896 Weighted-average
232、yield 2.44%3.18%3.21%Total interest-earning assets Average balances$6,161,647$5,980,163$5,744,964 Interest and dividend income 307,120 312,828 346,230 Weighted-average yield 4.98%5.23%6.03%Deposits Average balances$4,114,070$3,888,145$3,717,553 Interest expense 47,184 53,808 73,631 Weighted-average
233、rate 1.15%1.38%1.98%Borrowings Average balances$1,819,598$1,851,258$1,770,831 Interest expense 65,603 69,516 79,251 Weighted-average rate 3.61%3.76%4.48%Total interest-bearing liabilities Average balances$5,933,668$5,739,403$5,488,384 Interest expense 112,787 123,324 152,882 Weighted-average rate 1.
234、90%2.15%2.79%Net balance,net interest income and interest rate spread Net balance$227,979$240,760$256,580 Net interest income 194,333 189,504 193,348 Interest rate spread 3.08%3.08%3.24%1 Includes nonaccrual loans.2 Includes interest accrued prior to suspension of interest accrual on nonaccrual loan
235、s,together with loan fees of$6.1 million,$8.6 million and$4.2 million for 2004,2003 and 2002,respectively.3 Includes stock in the FHLB of Seattle.Net interest income before provision for loan losses for 2004 increased by$5 million or 2.5%,when compared to 2003.ASB experienced margin compression from
236、 a flattening yield curve,but year-over-year net interest rate spread remained the same at 3.08%due to growth in the loan portfolio and mortgage-related securities funded by 19strong core deposit growth.The increase in average loan portfolio balance was due to a strong Hawaii real estate market and
237、low interest rates.The increase in the average investment and mortgage-related securities portfolios were due to the reinvestment into short-term investments of excess liquidity resulting from an inflow of deposits.Average deposit balances grew by$226 million as ASB continued to attract core deposit
238、s.During 2004,average core deposits increased by$293 million offset by a decrease in the average balance of term certificates of$67 million.The shift in deposit mix lowered the weighted average rate on deposits.The higher deposit balances enabled ASB to repay some of its maturing,higher costing othe
239、r borrowings.Due to considerable strength in real estate and business conditions,which resulted in lower historical loss ratios and lower net charge-offs for ASB,and other factors discussed above,ASB recorded a negative provision for loan losses of$8 million($5 million,net of tax)in 2004.This compar
240、es with a provision for loan losses of$3 million($2 million,net of tax)in 2003.Other income for 2004 decreased by$1 million,or 2.3%,when compared to 2003 due to$4 million of gains on sale of securities in 2003,partially offset by higher fee income in 2004.General and administrative expenses for 2004
241、 increased by$3 million,or 1.8%,over 2003,primarily due to costs associated with Sarbanes-Oxley Act of 2002(SOX)compliance efforts.On January 19,2005,ASB became aware that the methodology it was using to amortize premiums and discounts on its mortgage-related securities portfolio was not in strict c
242、onformance with Statement of Financial Accounting Standards(SFAS)No.91,“Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.”Specifically,ASB determined that its method for estimating the cumulative impact of revised effective
243、 yield following the provisions of paragraph 19 of SFAS No.91 when considering prepayments no longer approximated the results from a strict application of these provisions.This resulted in over-amortization of net premiums.Accordingly,ASB recalculated the amortization of premiums and discounts on it
244、s December 31,2004 mortgage-related securities portfolio in strict accordance with SFAS No.91 and recognized$1.5 million in additional net income($2.5 million pre-tax interest income)in the fourth quarter of 2004 for an adjustment for net premium overamortization.Net interest income before provision
245、 for loan losses for 2003 decreased by$4 million,or 2.0%,when compared to 2002.Margin compression throughout most of 2003 lowered net interest spread from 3.24%for 2002 to 3.08%in 2003 as the low interest rate environment and significant refinancing activity in the mortgage and mortgage-related secu
246、rities portfolios lowered the yield on earning assets.These lower yields coupled with an inability to lower the interest rates paid on deposits to a commensurate degree reduced the interest rate spread.The average loan portfolio balance increased by$228 million as the very low interest rate environm
247、ent and continued strength in the Hawaii real estate market spurred record loan production.ASBs average residential mortgage portfolio as of year-end 2003 grew by$194 million,or 8.5%,over 2002 year-end.ASB increased its average business portfolio by$52 million,or 23.5%,during 2003 as its transformat
248、ion to a full service community bank continued.Average deposit balances grew by$171 million as ASB continued to attract core deposits.During 2003,average core deposit balances increased by$269 million offset by a decrease in the average balance of term certificates of$98 million.The shift in deposit
249、 mix lowered the weighted average rate on deposits.In response to pressure on interest rate spreads as a result of the low interest rate environment,ASB restructured a total of$389 million of FHLB advances during 2003.The restructurings involved paying off existing,higher rate FHLB advances with adv
250、ances that have lower rates and longer maturities.The restructurings resulted in a reduction of interest expense on these FHLB advances of approximately$5 million for 2003.ASBs provision for loan losses of$3 million in 2003 decreased by$7 million compared to 2002 as delinquencies continued to declin
251、e.A strong Hawaii real estate market and low interest rates gave debtors the opportunity to sell their properties or refinance before defaulting on loans.In addition,ASB improved its collections efforts.These factors contributed to the lower delinquency levels during 2003.Residential,consumer and co
252、mmercial real estate loan delinquencies have decreased during the year and lower loan loss reserves were required for those lines of business.The growth of the business loan portfolio has required additional loan loss reserves on those loans.Other income for 2003 increased by$5 million,or 10.3%,over
253、 2002,principally as a result of net gains on sales of securities totaling$4 million compared to a net loss of$1 million in 2002,higher fee income from its debit and automated teller machine(ATM)cards resulting from ASBs expansion of its debit card base and additional ATM 20services and higher fee i
254、ncome from its deposit liabilities as a result of restructuring of deposit products.Offsetting these increases were lower gains on sale of loans in 2003 compared to 2002 and a lower accrual for the costs of administering delinquent loans in 2002.ASBs general and administrative expenses for 2003 incr
255、eased by$8 million,or 5.9%,over 2002.Compensation and benefits for 2003 was$6 million higher than in 2002 primarily due to increased investment in ASBs workforce to support its transformation initiatives.During 2004 and 2003,ASBs allowance for loan losses decreased by$10 million and$1 million,respec
256、tively,compared to an increase to its allowance of$3 million in 2002.As of December 31,2004,2003 and 2002,ASBs allowance for loan losses was 1.08%,1.44%and 1.60%,respectively,of average loans outstanding.ASBs nonaccrual and renegotiated loans represented 0.4%,0.4%and 0.9%of total loans outstanding a
257、t December 31,2004,2003 and 2002,respectively.See Note 4 of the“Notes to Consolidated Financial Statements.”Legislation and regulation Congress is considering legislation to revamp oversight of government-sponsored enterprises(GSEs).The bill would abolish the Office of Federal Housing Enterprise Ove
258、rsight(regulator of Fannie Mae and Freddie Mac)and the Federal Housing Finance Board(regulator of the FHLB),create a new regulatory agency to oversee GSEs,and invest in this new agency the authority,among other things,to place limitations on“non-mission”assets,to establish prudent management and ope
259、ration standards for GSEs concerning matters such as the management of asset and investment portfolio growth,to impose“prompt-corrective action”measures on a GSE in the event of under-capitalization,and to exercise oversight enforcement powers.By possibly restricting GSE asset growth,if enacted,the
260、bill could potentially limit the availability of advances from the FHLB of Seattle to ASB and sale of loans to Fannie Mae.ASB believes,however,that if this bill is adopted and implemented in these ways,its results will not be materially adversely affected because ASB has access to other funding sour
261、ces and secondary markets to sell its loans.ASB is subject to extensive regulation,principally by the Office of Thrift Supervision(OTS)and the Federal Deposit Insurance Corporation(FDIC).Depending on its level of regulatory capital and other considerations,these regulations could restrict the abilit
262、y of ASB to compete with other institutions and to pay dividends to its shareholders.See the discussions below under“Liquidity and capital resourcesBank”and“Certain factors that may affect future results and financial conditionBank.”Other (in millions)2004%change 2003%change 2002 Revenues 1$9(32)$13
263、 NM$(2)Operating loss(8)(38)(6)73 (22)Net loss(14)15 (17)39 (28)1 Including writedowns of and net losses from investments.NM Not meaningful.The“other”business segment includes results of operations of HEI Investments,Inc.(HEIII),a company primarily holding investments in leveraged leases;Pacific Ene
264、rgy Conservation Services,Inc.,a contract services company primarily providing windfarm operational and maintenance services to an affiliated electric utility;HEI Properties,Inc.(HEIPI),a company holding passive investments;Hawaiian Electric Industries Capital Trust I and its subsidiary(HEI Preferre
265、d Funding,LP),which were deconsolidated on January 1,2004,dissolved in April 2004 and terminated in December 2004,and Hycap Management,Inc.(which is in dissolution),financing entities formed to effect the issuance of 8.36%Trust Originated Preferred Securities that were redeemed in April 2004;The Old
266、 Oahu Tug Service,Inc.(TOOTS),a maritime freight transportation company that ceased operations in 1999;HEI and HEIDI,holding companies;and eliminations of intercompany transactions.The first seven months of 2003 also includes the results of operations for ProVision Technologies,Inc.,a company formed
267、 to sell,install,operate and maintain on-site power generation equipment and auxiliary appliances in Hawaii and the Pacific Rim,which was sold for a nominal loss in July 2003;and two other inactive subsidiaries,HEI Leasing,Inc.and HEI District Cooling,21Inc.,which were dissolved in October 2003.In A
268、ugust 2004,HEI sold its investments in the income notes it had acquired from ASB in 2001 for a net gain of$5.6 million($3.6 million after-tax).HEIII recorded net income of$1.8 million in 2004,$2.3 million in 2003 and$1.5 million in 2002,primarily from leveraged leases.HEIPI recorded net losses of$0.
269、9 million in 2004,net income of$0.1 million in 2003,and net losses of$0.6 million in 2002,which amounts include income and losses from and/or writedowns of venture capital investments.As of December 31,2004,HEIPIs venture capital investments amounted to$1.5 million.HEI Corporate and the other subsid
270、iaries revenues in 2004 include a$5.6 million pretax gain on the sale of the income notes that HEI purchased in May and July 2001 in connection with the termination of ASBs investments in trust certificates.HEI Corporate and the other subsidiaries revenues in 2003 include$9.3 million from the settle
271、ment of lawsuits in the fourth quarter of 2003.HEI Corporate and the other subsidiaries revenues in 2002 include$4.5 million of pretax writedowns($2.9 million,net of taxes)of the income notes.HEI Corporate operating,general and administrative expenses(including labor,employee benefits,incentive comp
272、ensation,charitable contributions,legal fees,consulting,rent,supplies and insurance)were$14.9 million in 2004,$15.9 million in 2003 and$15.6 million in 2002.The slightly higher expenses in 2002 and 2003 were due in part to legal expenses incurred in connection with lawsuits and the settlement of law
273、suits.HEI Corporate and the other subsidiaries net loss was$15.4 million in 2004,$19.5 million in 2003 and$29.2 million in 2002,the majority of which is comprised of financing costs.The results for 2004 include a$3.6 million after-tax gain on the sale of the income notes,and the results for 2003 inc
274、lude net income of$5.7 million from the settlement of lawsuits in the fourth quarter,which amounts are not expected to be recurring.The“other”segments interest expense and preferred securities distributions of trust subsidiaries were$27.6 million in 2004,$33.3 million in 2003 and$36.4 million in 200
275、2.In 2004,these financing costs decreased 17%compared to the prior year as HEI(1)completed the sale of 2 million shares(pre-split)of common stock,the net proceeds of which were ultimately used,along with other corporate funds,to effect the redemption of$100 million aggregate principal amount of 8.36
276、%Trust Originated Preferred Securities,and(2)completed the sale of$50 million of 4.23%medium-term notes.In 2003,financing costs decreased 9%compared to the prior year due to lower rates and lower average borrowings.In 2003,the amount of outstanding medium-term notes was reduced by$37 million.Discont
277、inued operations In 2001,the HEI Board of Directors adopted a plan to exit the international power business.In 2003,HEI Power Corp.(HEIPC)wrote down its investment in Cagayan Electric Power&Light Co.,Inc.(CEPALCO)from$7 million to$2 million and increased its reserve for future expenses by$1 million,
278、resulting in a$4 million after-tax loss on disposal.In 2004,the HEIPC Group sold the company that holds its interest in CEPALCO for a nominal gain.Also in 2004,the HEIPC Group transferred its interest in a China joint venture to its partner and another entity and recorded an after-tax gain on dispos
279、al of$2 million.See Note 14 of the“Notes to Consolidated Financial Statements.”Effects of inflation U.S.inflation,as measured by the U.S.Consumer Price Index(CPI),averaged 2.7%in 2004,2.3%in 2003 and 1.6%in 2002.Hawaii inflation,as measured by the Honolulu CPI,averaged 3.3%in 2004,2.3%in 2003 and 1.
280、2%in 2002.The increase in the Honolulu CPI for 2004 was due in large part to increases in gasoline and housing prices.The rate of inflation over the last two years has been trending upward and,although relatively low throughout this period,inflation continues to have an impact on HEIs operations.Inf
281、lation increases operating costs and the replacement cost of assets.Subsidiaries with significant physical assets,such as the electric utilities,replace assets at much higher costs and must request and obtain rate increases to maintain adequate earnings.In the past,the PUC has generally approved rat
282、e increases to cover the effects of inflation.The PUC granted rate increases in 2001 and 2000 for HELCO,and in 1999 for MECO,in part to cover increases in construction costs and operating expenses due to inflation.22Recent accounting pronouncements See“Recent accounting pronouncements and interpreta
283、tions”in Note 1 of the“Notes to Consolidated Financial Statements.”Liquidity and capital resources Consolidated Selected contractual obligations and commitments The following tables present Company-aggregated information about total payments due during the indicated periods under the specified contr
284、actual obligations and commercial commitments:December 31,2004 Payment due by period (in millions)Less than 1 year 1-3 years 3-5 years More than 5 years Total Contractual obligations Deposit liabilities Commercial checking$303$303 Other checking 791 791 Savings 1,700 1,700 Money market 303 303 Term
285、certificates 730 321 115 33 1,199 Total deposit liabilities 3,827 321 115 33 4,296 Securities sold under agreements to repurchase 468 233 110 811 Advances from Federal Home Loan Bank 283 349 331 25 988 Long-term debt,net 37 120 50 960 1,167 Operating leases,service bureau contract and maintenance ag
286、reements 19 19 12 25 75 Fuel oil purchase obligations(estimate based on January 1,2005 fuel oil prices)361 722 722 1,804 3,609 Purchase power obligations minimum fixed capacity charges 118 236 229 1,378 1,961 Total(estimated)$5,113$2,000$1,569$4,225$12,907 December 31,2004 (in millions)Other commerc
287、ial commitments to ASB customers Loan commitments(primarily expiring in 2005)$42 Loans in process 132 Unused lines and letters of credit 748$922 The tables above do not include other categories of obligations and commitments,such as interest payable,trade payables,obligations under purchase orders,a
288、mounts that will become payable in future periods under collective bargaining and other employment agreements and employee benefit plans,and obligations that may arise under indemnities provided to purchasers of discontinued operations.As of December 31,2004,the fair value of the assets held in trus
289、ts to satisfy the obligations of the pension and other postretirement benefit plans exceeded the pension plans accumulated benefit obligation and the accumulated postretirement benefit obligation for retirees.Thus,no minimum funding requirements for retirement benefit plans has been included in the
290、tables above.23 See Note 3 of the“Notes to Consolidated Financial Statements”for a discussion of fuel and power purchase commitments.The Company believes that its ability to generate cash,both internally from electric utility and banking operations and externally from issuances of equity and debt se
291、curities,commercial paper and bank borrowings,is adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments in the tables above,its forecast capital expenditures and investments,its expected retirement benefit plan contributions and other cash requiremen
292、ts in the foreseeable future.The Companys total assets were$9.6 billion at December 31,2004 and$9.2 billion at December 31,2003.The consolidated capital structure of HEI(excluding ASBs deposit liabilities,securities sold under agreements to repurchase and advances from the FHLB of Seattle)was as fol
293、lows:December 31 2004 2003(in millions)Short-term borrowings$77 3%$%Long-term debt,net 1,167 47 1,065 45 HEI-and HECO-obligated preferred securities of trust subsidiaries 200 8 Preferred stock of subsidiaries 34 1 34 1 Common stock equity 1,211 49 1,089 46$2,489 100%$2,388 100%As of February 16,2005
294、,the Standard&Poors(S&P)and Moodys Investors Services(Moodys)ratings of HEI and HECO securities were as follows:S&P Moodys HEI Commercial paper A-2 P-2 Medium-term notes BBB Baa2 HECO Commercial paper A-2 P-2 Revenue bonds(senior unsecured,insured)AAA Aaa HECO-obligated preferred securities of trust
295、 subsidiary BBB-Baa2 Cumulative preferred stock(selected series)NR Baa3 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
296、 of any other rating.The rating agencies use a combination of qualitative measures(i.e.,assessment of business risk that incorporates an analysis of the qualitative factors such as management,competitive positioning,operations,markets and regulation)as well as quantitative measures(e.g.,cash flow,de
297、bt,interest coverage and liquidity ratios)in determining the ratings of HEI and HECO securities.In January 2005,S&P affirmed that its credit ratings of the Company are considered stable.On March 16,2004,HEI completed the sale of 2 million shares(pre-split)of common stock.The shares were issued under
298、 an omnibus shelf registration statement registering up to$200 million of debt,equity and/or other securities.The net proceeds from the sale of approximately$100 million were ultimately used,along with other corporate funds,to effect the redemption of$100 million aggregate principal amount of 8.36%T
299、rust Originated Preferred Securities of Hawaiian Electric Industries Capital Trust I on April 16,2004,after which redemption Hawaiian Electric Industries Capital Trust I was dissolved and then terminated.At December 31,2004,an additional$96 million of debt,equity and/or other securities were availab
300、le for offering by HEI under the omnibus shelf registration.On March 17,2004,HEI completed the sale of$50 million of 4.23%notes,Series D,due March 15,2011 under its registered medium-term note program.The net proceeds from this sale were ultimately used to make short-term 24loans to HECO,to assist H
301、ECO and HELCO in redeeming the 7.30%Cumulative Quarterly Income Preferred Securities,Series 1998,in April 2004 and for other general corporate purposes.HECO has repaid those short-term loans primarily with funds saved from reducing dividends to HEI in 2004.In 2004,HECOs dividends to HEI were$11.6 mi
302、llion,compared to$57.7 million in 2003.On March 7,2003,HEI sold$50 million of its 4.00%notes,Series D,due March 7,2008,and$50 million of its 5.25%notes,Series D,due March 7,2013 under its registered medium-term note program.The net proceeds from the sales,along with other corporate funds,were ultima
303、tely used to repay$100 million of notes,Series C,(which effectively bore interest at three-month LIBOR plus 376.5 basis points after taking into account two interest rate swaps entered into by HEI with Bank of America)at maturity on April 15,2003.At December 31,2004,an additional$150 million princip
304、al amount of Series D notes were available for offering by HEI under its registered medium-term note program.From time to time,HEI and HECO each utilizes short-term debt,principally commercial paper,to support normal operations and for other temporary requirements.From time to time,HECO also borrows
305、 short-term from HEI for itself and on behalf of HELCO and MECO,and HECO may borrow from or loan to HELCO and MECO short-term.At December 31,2004,HECO had$12.0 million and$7.8 million of short-term borrowings from HEI and MECO,respectively,and HELCO had$34.9 million of short-term borrowings from HEC
306、O.HEI had no commercial paper borrowings during 2004.HECO had an average outstanding balance of commercial paper for 2004 of$12.7 million and had$76.7 million of commercial paper outstanding at December 31,2004.Management believes that if HEIs and HECOs commercial paper ratings were to be downgraded
307、,they might not be able to sell commercial paper under current market conditions.At December 31,2004,HEI and HECO maintained bank lines of credit totaling$80 million and$110 million,respectively(all maturing in 2005).In January 2005,HECO increased its total lines of credit to$140 million(all maturin
308、g in 2005).These lines of credit are principally maintained by HEI and HECO to support the issuance of commercial paper,but also may be drawn for general corporate purposes.Accordingly,the lines of credit are available for short-term liquidity in the event a rating agency downgrade were to reduce or
309、 eliminate access to the commercial paper markets.Lines of credit to HEI totaling$30 million contain provisions for revised pricing in the event of a ratings change(e.g.,a ratings downgrade of HEI medium-term notes from BBB/Baa2 to BBB-/Baa3 by S&P and Moodys,respectively,would result in a 25 to 50
310、basis points higher interest rate;a ratings upgrade from BBB/Baa2 to BBB+/Baa1 by S&P and Moodys,respectively,would result in a 12.5 to 20 basis points lower interest rate).There are no such provisions in the other lines of credit available to HEI and HECO.Further,none of HEIs or HECOs line of credi
311、t agreements contain“material adverse change”clauses that would affect access to the lines of credit in the event of a ratings downgrade or other material adverse events.At December 31,2004,the lines were unused.To the extent deemed necessary,HEI and HECO anticipate arranging similar lines of credit
312、 as existing lines of credit mature.See S&P and Moodys ratings above and Note 5 of the“Notes to Consolidated Financial Statements.”Operating activities provided net cash of$244 million in 2004,$241 million in 2003 and$259 million in 2002.Investing activities used net cash of$540 million in 2004,$325
313、 million in 2003 and$616 million in 2002.In 2004,net cash was used in investing activities largely due to banking activities(including the purchase of mortgage-related and investment securities and the origination of loans,net of repayments and sales of such securities)and HECOs consolidated capital
314、 expenditures.Financing activities provided net cash of$187 million in 2004,$123 million in 2003 and$151 million in 2002.In 2004,net cash provided by financing activities was affected by several factors,including net increases in deposits and short-term borrowings and proceeds from the issuance of c
315、ommon stock,partly offset by a net decrease in securities sold under agreements to repurchase,advances from the FHLB and long-term debt and preferred securities of trust subsidiaries and by the payment of common stock dividends.A portion of the net assets of HECO and ASB is not available for transfe
316、r to HEI in the form of dividends,loans or advances without regulatory approval.However,in the absence of an unexpected material adverse change in the financial condition of the electric utilities or ASB,such restrictions are not expected to significantly affect the operations of HEI,its ability to
317、pay dividends on its common stock or its ability to meet its debt or other cash obligations.See Note 12 of the“Notes to Consolidated Financial Statements.”25 Forecast HEI consolidated“net cash used in investing activities”(excluding“investing”cash flows from ASB)for 2005 through 2009 consists primar
318、ily of the net capital expenditures of HECO and its subsidiaries.In addition to the funds required for the electric utilities construction program(see discussion below),approximately$0.2 billion will be required during 2005 through 2009 to repay maturing HEI long-term debt,which is expected to be re
319、paid with the proceeds from the sale of medium-term notes and issuance of common stock under the stock option and incentive plan,and dividends from subsidiaries(i.e.,operating cash flow of subsidiaries).Additional debt and/or equity financing may be required to fund unanticipated expenditures not in
320、cluded in the 2005 through 2009 forecast,such as increases in the costs of or an acceleration of the construction of capital projects of the electric utilities,unbudgeted acquisitions or investments in new businesses,significant increases in retirement benefit funding requirements that might be requ
321、ired if there were significant declines in the market value of pension plan assets or changes in actuarial assumptions and higher tax payments that would result if tax positions taken by the Company do not prevail.Existing debt may be refinanced prior to maturity(potentially at more favorable rates)
322、with additional debt or equity financing(or both).As further explained in Note 8 of the“Notes to Consolidated Financial Statements,”the Company maintains pension and other postretirement benefit plans.Funding for the pension plans is based upon actuarially determined contributions that take into acc
323、ount the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974,as amended(ERISA).The Company was not required to make any contributions to the pension plans to meet minimum funding requirements pursuant to ERISA for
324、2004 and 2003,but the Companys Pension Investment Committee chose to make tax deductible contributions in both years.Contributions to the pension and postretirement benefit plans totaled$10 million in 2002 and$48 million in 2003 of which$31 million were made by the electric utilities,$15 million by
325、ASB and$2 million by HEI Corporate.Contributions to the pension and postretirement benefit plans totaled$37 million in 2004 of which$34 million were made by the electric utilities,$1 million by ASB and$2 million by HEI Corporate.Contributions are expected to total$17 million in 2005.The electric uti
326、lities policy is to comply with directives from the PUC to fund the costs of the postretirement benefit plan.These costs are ultimately collected in rates billed to customers.The Company reserves the right to change,modify or terminate the plans.From time to time in the past,benefits have changed.De
327、pending on the performance of the assets held in the plans trusts and numerous other factors,additional contributions may be required in the future to meet the minimum funding requirements of ERISA or to pay benefits to plan participants.The Company believes it will have adequate access to capital r
328、esources to support any necessary funding requirements.26 Following is a discussion of the liquidity and capital resources of HEIs largest segments.Electric utility HECOs consolidated capital structure was as follows:December 31 2004 2003(in millions)Short-term borrowings$89 4%$6%Long-term debt,net
329、753 40 699 39 HECO-obligated preferred securities of trust subsidiaries 100 6 Preferred stock 34 2 34 2 Common stock equity 1,017 54 945 53$1,893 100%$1,784 100%In 2004,the electric utilities investing activities used$191 million in cash,primarily for capital expenditures.Financing activities provid
330、ed net cash of$22 million,including an$83 million increase in short-term borrowing,partly offset by the net repayment of$50 million of long-term debt and$13 million for the payment of common and preferred stock dividends.Operating activities provided cash of$169 million.As of December 31,2004,approx
331、imately$12 million of proceeds from the sale by the Department of Budget and Finance of the State of Hawaii of Series 2002A Special Purpose Revenue Bonds(SPRB)issued for the benefit of HECO remain undrawn.The electric utilities are seeking authorizing legislation for up to$160 million of SPRBs($100
332、million for HECO,$40 million for HELCO and$20 million for MECO)for issuance on or after July 1,2005 through June 30,2010.On March 18,2004,HECO Capital Trust III issued and sold 2 million of its 6.50%Cumulative Quarterly Income Preferred Securities($50 million aggregate liquidation preference).Also o
333、n March 18,2004,HECO,HELCO and MECO issued 6.50%Junior Subordinated Deferrable Interest Debentures to HECO Capital Trust III in the aggregate principal amount of approximately$51.5 million and directed that the proceeds from the issuance of the debentures be deposited with the trustee for HECO Capital Trust I and ultimately be used in April 2004 to redeem its 8.05%Cumulative Quarterly Income Prefe
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