PROSPECTUS
[LOGO]
FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NUMBER 333-87782
$300,000,000
Hawaiian Electric Industries, Inc.
Medium-Term Notes, Series D
Due from 9 Months to 30 Years from Date of Issue
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Hawaiian Electric Industries, Inc., or HEI, may offer from time to time
up to $300,000,000 aggregate principal amount of its Medium-Term Notes, Series
D, which we refer to in this prospectus as the "Notes". Each Note will be
denominated in U.S. dollars and will include the following terms, unless
different terms are described in the applicable pricing supplement:
.. A stated maturity date from 9 months to 30 years . Interest at fixed or floating rates, or no interest at
from date of issue all. The floating interest rate may be based on one
.. Interest payments on fixed rate Notes on each or more of the following indices plus or minus a
February 10 and August 10 spread and/or multiplied by a spread multiplier:
.. Interest payments on floating rate Notes on a . CD rate
monthly, quarterly, semiannual or annual basis . Commercial paper rate
.. Minimum denominations of $1,000 and integral . Federal funds rate
multiples of $1,000 . LIBOR
.. Redemption and/or repayment provisions, whether . Prime rate
mandatory, at HEI's option, at the option of the . Treasury rate
holders or none at all . Such other interest basis or interest rate
.. Book-entry (through The Depository Trust Company) formula as may be specified in the
or certificated form applicable pricing supplement
HEI will specify final terms for each Note in the applicable pricing
supplement, which may be different from the terms described in this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus or any pricing supplement is truthful or complete. Any
representation to the contrary is a criminal offense.
See "Risk Factors" beginning on page 1 for a discussion of certain
factors you should consider before investing in the Notes.
HEI may sell the Notes to the Agents as principals for resale at varying
or fixed offering prices or through the Agents as agents using their reasonable
best efforts on HEI's behalf. Unless otherwise specified in the applicable
pricing supplement, the price to the public for the Notes will be 100% of the
principal amount. If HEI sells all of the Notes, HEI expects to receive
proceeds of between $297,750,000 and $299,625,000 after paying the Agents'
discounts and commissions of between $375,000 and $2,250,000 and before
deducting expenses payable by HEI. HEI may also sell the Notes without the
assistance of the Agents (whether acting as principal or as agent).
The address of HEI's principal executive offices is 900 Richards Street,
Honolulu, Hawaii 96813 and its telephone number is (808) 543-5662.
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Merrill Lynch & Co.
Goldman, Sachs & Co.
Robert W. Baird & Co.
Janney Montgomery Scott LLC
U.S. Bancorp Piper Jaffray Inc.
The date of this prospectus is August 16, 2002.
TABLE OF CONTENTS
Page
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Risk Factors............................................................... 1
Selected Consolidated Financial Information................................ 10
The Company................................................................ 11
Use of Proceeds............................................................ 11
Ratio of Earnings to Fixed Charges......................................... 12
Where You Can Find More Information........................................ 12
Forward-Looking Statements................................................. 13
Description of the Notes................................................... 14
United States Federal Income Tax Consequences.............................. 35
Plan of Distribution....................................................... 40
Validity of Notes.......................................................... 41
Experts.................................................................... 41
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RISK FACTORS
You should carefully consider the risk factors described below, as well
as the other information contained or incorporated by reference in this
prospectus, before purchasing Notes.
Holding Company and Company-Wide Risks
HEI is a holding company that derives substantially all of its income from its
operating subsidiaries and depends on the ability of those subsidiaries to pay
dividends or make other distributions to HEI and on its own ability to raise
capital
HEI is a legal entity separate and distinct from its various
subsidiaries. As a holding company with no significant operations of its own,
HEI's cash flows and consequent ability to service its obligations, including
the Notes, are dependent upon its receipt of dividends or other distributions
from its operating subsidiaries and its ability to issue common stock or other
equity securities and to incur additional debt. The ability of HEI's
subsidiaries to pay dividends or make other distributions to HEI is, in turn,
subject to the risks associated with those subsidiaries and their operations.
The ability of certain of HEI's subsidiaries to pay dividends or make
other distributions to HEI is subject to contractual and regulatory
restrictions, including:
. the provisions of an HEI agreement with the Hawaii Public Utilities
Commission, or PUC, which could limit the ability of HEI's principal
electric public utility subsidiary (Hawaiian Electric Company, Inc.,
or HECO) to pay dividends to HEI;
. the provisions of an HEI agreement entered into with federal bank
regulators in connection with its acquisition of its bank subsidiary,
American Savings Bank, F.S.B., or ASB, which require HEI to
contribute additional capital to ASB (up to a maximum amount at June
30, 2002 of an additional $28.3 million) in order to maintain ASB's
regulatory capital at a level of at least 6% of ASB's total
liabilities, or at such greater amount as may be required from time
to time by regulation;
. the minimum capital and capital distribution regulations of the
Office of Thrift Supervision, or OTS, that are applicable to ASB; and
. the provisions of preferred stock resolutions and debt instruments of
HEI's subsidiaries.
HEI is subject to risks associated with the Hawaii economy, volatile U.S.
capital markets and changes in the interest rate environment that could result
in declines in electric utility kilowatthour sales, higher delinquencies in
ASB's loan portfolio or restrictions on the ability of HEI or its subsidiaries
to borrow money
Because the core businesses of HEI's subsidiaries are providing local
electric public utility services (through HECO and its subsidiaries) and
banking services (through ASB and its subsidiaries) in Hawaii, HEI's operating
results are significantly influenced by Hawaii's economy, which in turn is
influenced by economic conditions in the mainland U.S. (particularly
California) and Asia (particularly Japan) as a result of the impact of those
conditions on tourism, which comprises approximately 25% of Hawaii's economy.
A decline in the Hawaii economy, or the U.S. or Asian economies, could
lead to a decline in the kilowatthour sales and an increase in uncollected
billings of HECO and its subsidiaries, higher delinquencies in ASB's loan
portfolio and other adverse effects on HEI's businesses.
Changes in the U.S. capital markets can also have significant effects on
HEI. For example:
. Volatility in U.S. capital markets or higher delinquencies in the
assets underlying the $2.8 billion of mortgage/asset-backed
securities held by ASB or the $12.4 million of income notes held by
HEI as of June 30, 2002 may significantly decrease their fair values
with resulting reductions in HEI's net income in future periods.
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. HEI's pension income or expense is affected by the market performance
of the assets in the master pension trust maintained for the pension
plans for employees of HEI and its subsidiaries, and by the discount
rate used to determine the service and interest cost components of
HEI's net periodic pension cost (returns).
After the September 11, 2001 terrorist attacks on the U.S., the ongoing
war on terrorism by the U.S. and the recent bankruptcies or reported financial
difficulties of several major U.S. companies, conditions in the financial
markets have become increasingly volatile and uncertain, even for financially
healthy companies. These events and related future events could constrain the
availability of capital to HEI's electric utility subsidiaries, which are
capital intensive. HEI periodically issues common stock and long-term debt to
meet its financing requirements (including the refinancing of short-term and
long-term debt as it becomes due). If the ability of HEI and its subsidiaries
to access capital becomes significantly constrained, HEI's interest costs could
increase substantially and, under extreme circumstances, HEI could default on
its debt obligations, including the Notes.
If Standard & Poor's or Moody's Investors Service were to downgrade HEI's
or HECO's long-term debt ratings, their ability to borrow (including through
HEI's sale of Notes) could be constrained and their future borrowing costs
would likely increase with resulting reductions in HEI's net income in future
periods. Further, if HEI's or HECO's ratings were to be downgraded, HEI and
HECO might not be able to sell commercial paper or Notes under current market
conditions and might be required to draw on more expensive bank lines of credit
or to defer capital or other expenditures.
Because the earnings of ASB depend primarily on net interest income,
interest rate risk is a significant risk of ASB's operations. HEI and its
electric utility subsidiaries are also exposed to interest rate risk primarily
due to their periodic borrowing requirements. Interest rates are sensitive to
many factors, including general economic conditions and the policies of
government and regulatory authorities. HEI cannot predict future changes in
interest rates, nor be certain that interest rate risk management strategies it
or its subsidiaries have implemented will be successful in managing interest
rate risk.
HEI is subject to the risks associated with the geographic concentration of its
businesses that could result in service interruptions at the electric utility
subsidiaries or higher default rates on real estate loans and
mortgage/asset-backed securities held by ASB
The business of HECO and its electric utility subsidiaries is
concentrated on the individual islands they serve in the State of Hawaii. The
operations of HEI's electric utility subsidiaries are more vulnerable to
service interruptions than are many U.S. mainland utilities because none of the
systems of HECO and its subsidiaries are interconnected.
Certain geographic regions of the U.S. may from time to time experience
natural disasters or weaker regional economic conditions and housing markets
and, consequently, may experience higher rates of loss and delinquency on
mortgage loans. Substantially all of the real estate underlying ASB's
residential and commercial real estate loans is located in Hawaii, and a
substantial portion of the real estate underlying the private-issue
mortgage/asset-backed securities currently owned by ASB is located in
California. These assets may be subject to a greater risk of default than other
comparable assets held by financial institutions with other geographic
concentrations in the event of adverse economic, political or business
developments or natural hazards that may affect Hawaii and California and the
ability of property owners in these regions to make payments of principal and
interest on the underlying mortgages.
Increasing competition and technological advances could cause HEI's businesses
to lose customers or render their operations obsolete
The banking industry in Hawaii, and certain aspects of the electric
utility industry, are competitive. The success of HEI's subsidiaries in meeting
competition will continue to have a direct impact on HEI's financial
performance. For example:
. ASB, which is the third largest financial institution in the state,
is in direct competition for deposits and loans not only with two
larger institutions that have substantial capital, technology and
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marketing resources, but also with smaller Hawaii institutions and
other U.S. institutions, including credit unions, mutual funds,
mortgage brokers, finance companies and investment banking firms.
Larger financial institutions may have greater access to capital at
lower costs, which could impair ASB's ability to compete effectively.
. The generation sector of the electric utility industry is becoming
increasingly competitive in Hawaii. Independent power producers,
including alternate energy providers, and customer self-generation,
with or without cogeneration, continue to be competitive factors. In
January 2000, the PUC submitted to the Hawaii Legislature a status
report on its investigation of competition, which stated that the PUC
plans to proceed with an examination of the feasibility of
competitive bidding and to review specific policies to encourage
renewable energy resources in the power generation mix. HEI is unable
to predict the ultimate outcome of the investigation and which (if
any) of the proposals advanced by participants in the investigation
will be implemented.
In addition, new technological developments, such as the commercial
development of fuel cells or distributed generation, or significant advances in
Internet banking, may render the operations of HEI's subsidiaries less
competitive or obsolete.
HEI may be subject to additional liabilities related to its discontinued
operations and asset dispositions
HEI has discontinued or sold its international power, maritime freight
transportation and real estate operations in recent years, and is completing
its exit from the international power business. Problems may be encountered or
additional unrecorded liabilities may arise in the exit from these operations,
such as if claims are asserted under indemnities provided in connection with
prior dispositions of operations. The amounts that may ultimately be realized
from the exit from the international power operations could differ
significantly from recorded amounts. This could occur, for example, if HEI's
one remaining investment in the Philippines is disposed of for less than $7.0
million or if the Internal Revenue Service does not accept HEI's treatment of
the write-off of its indirect investment in East Asia Power Corporation as an
ordinary loss for federal corporate income tax purposes. In addition, further
losses from the discontinued international power operations may be incurred
during the phase-out period if the expenses that are incurred in seeking
recovery of costs with respect to the approximate $24 million investment
previously written off in connection with the international power group's China
joint venture exceed the total of any recovery ultimately achieved and the
amount provided for in HEI's reserve for discontinued operations. The
occurrence of any of these events could result in additional expenses and
write-offs with resulting reductions in HEI's net income in future periods.
HEI's businesses could suffer losses that are uninsured due to a lack of
insurance coverage or limitations on the insurance coverage HEI does have
In the ordinary course of business, HEI and its subsidiaries purchase
insurance coverages (e.g., property and liability coverages) to protect against
loss of or damage to their properties and against claims made by third-parties
and employees for property damage or personal injuries. However, the protection
provided by such insurance is limited in significant respects and, in some
instances, there is no coverage. Certain of the insurance has substantial
deductibles or has limits on the maximum amounts that may be recovered. For
example:
. The electric utilities' overhead and underground transmission and
distribution systems (with the exception of substation buildings and
contents) have an estimated replacement cost of approximately $2
billion and are not insured against loss or damage because the amount
of transmission and distribution system insurance available is
limited and the premiums are cost prohibitive. Similarly, the
electric utilities have no business interruption insurance as the
premiums for such insurance would be cost prohibitive, particularly
since the utilities are not interconnected to other systems. If a
hurricane or other uninsured catastrophic natural disaster should
occur, and the PUC does not allow the affected electric utility to
recover from ratepayers restoration costs and revenues lost from
business interruption, the lost revenues and repair expenses could
result in a significant decrease in HEI's net income or in
significant net losses for the affected periods.
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. ASB generally does not obtain credit enhancements such as mortgagor
bankruptcy insurance or special hazard insurance for its loans, other
than standard hazard insurance. Accordingly, for loans for which no
third-party insurance is obtained, ASB will be subject to the risks
of borrower defaults and bankruptcies and special hazard losses, such
as losses from hurricanes, earthquakes or floods.
Events like the September 11, 2001 terrorist attacks have resulted
generally in a decreased availability of insurance and higher deductibles,
higher premiums and more restrictive policy terms.
Increased federal and state environmental regulation will require an increasing
commitment of resources and funds and could result in construction delays or
penalties and fines for non-compliance
HEI and its subsidiaries are subject to federal and state environmental
laws and regulations relating to air quality, water quality, waste management,
natural resources and health safety, which regulate the operation of existing
facilities, the construction and operation of new facilities and the proper
cleanup and disposal of hazardous waste and toxic substances. Compliance with
these legal requirements requires HECO and its subsidiaries to commit
significant resources and funds toward environmental monitoring, installation
of pollution control equipment and payment of emission fees. These laws and
regulations, among other things, require that certain environmental permits be
obtained in order to construct or operate certain facilities, and obtaining
such permits can entail significant expense and cause substantial construction
delays. Also, these laws and regulations may be amended from time to time,
including amendments that increase the burden and expense of compliance. For
example, emission and/or discharge limits may be tightened, more extensive
permitting requirements may be imposed and additional substances may become
regulated.
If HEI or its subsidiaries fail to comply with environmental laws and
regulations, even if caused by factors beyond their control, that failure may
result in civil or criminal penalties and fines. For example:
. HECO is a named party in the Honolulu Harbor environmental
investigation, which is an ongoing investigation to determine the
nature and extent of actual or potential releases of hazardous
substances, oil, pollutants or contaminants at or near Honolulu
Harbor. In addition, an HEI subsidiary and a former HEI subsidiary
operated tug and barge businesses and are named parties in the
Honolulu Harbor investigation. In connection with the 1999 sale of
the former subsidiary, HEI agreed to indemnify the purchaser for
specified costs attributed to that former subsidiary related to the
Honolulu Harbor environmental investigation.
. If ASB is forced to foreclose on a defaulted mortgage loan,
conditions with the underlying real property may cause ASB to be
subject to environmental liabilities exceeding the value of the
property.
Adverse tax rulings could result in significant increases in tax payments by
HEI and a resulting reduction in HEI's net income in future periods
Governmental taxing authorities could challenge a tax return position
taken by HEI or its subsidiaries and, if the taxing authorities prevail, HEI's
tax payments, including applicable penalties and interest, could increase
significantly. For example, adverse tax consequences would result if:
. ASB Realty Corporation, a subsidiary of ASB, failed to qualify as a
REIT, which would result in it becoming subject to significant income
tax liabilities because the dividends paid to ASB of substantially
all of ASB Realty Corporation's income since its inception would not
be deductible; or
. ASB does not prevail in its position, for State of Hawaii tax
purposes, that it is entitled to a dividends received deduction on
dividends paid to it by ASB Realty Corporation, which deduction has
reduced recorded Hawaii bank franchise taxes, net of federal income
taxes, by approximately $12.3 million for the period 1998 through
2001.
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HEI could be subject to the risk of uninsured losses in excess of its accruals
for litigation matters
Certain of HEI's subsidiaries are involved in routine litigation in the
ordinary course of their businesses, most of which is covered by insurance
(subject to policy limits and deductibles). However, other litigation may arise
that is not routine or involves claims that may not be covered by insurance.
For example:
. HECO and HEI are defendants in a suit, brought as a purported qui tam
and class action, which claims that the State of Hawaii and HECO's
other customers have been overcharged for electricity as a result of
allegedly excessive prices charged under a power purchase agreement
between defendants HECO and AES Hawaii, Inc. The complaint asserts
that HECO's payments to AES Hawaii, Inc. for power have been
"excessive" by over $1 billion since September 1992, and that
approval of the power purchase agreement by the PUC in 1989 was
wrongfully obtained through alleged misrepresentations or material
omissions by the defendants of the estimated future costs under the
power purchase agreement compared to the costs that would have been
incurred had HECO-owned units been constructed instead.
. ASB has filed a lawsuit against the broker through whom three issues
of trust certificates were purchased to require the broker to buy
them back from ASB and to seek recovery of any losses ASB may incur
as a result of its purchase of the trust certificates. The trust
certificates had been found by the Office of Thrift Supervision, or
OTS, to be impermissible investments for ASB. In 2002, the broker
filed a counterclaim alleging misrepresentation and fraud by ASB.
Because of the uncertainties associated with litigation, there is a risk
that litigation against HEI and its subsidiaries, even if vigorously defended,
could result in costs of defense and judgment or settlement amounts not covered
by insurance and in excess of reserves established in HEI's financial
statements.
Changes in accounting principles and estimates could affect the reported
amounts of HEI's assets and liabilities or revenues and expenses
HEI's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America.
Changes in these principles from time to time could materially affect HEI's
results of operations. Further, in preparing the consolidated financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
include the amounts reported for investment securities, allowance for loan
losses, regulatory assets, pension and other post-retirement benefit
obligations, reserves for discontinued operations, current and deferred taxes,
contingencies and litigation.
HECO and its subsidiaries' financial statements reflect assets and costs
based on cost-based rate-making regulations. Continued accounting in this
manner requires that certain criteria relating to the recoverability of such
costs through rates be met. If events or circumstances should change so that
the criteria are no longer satisfied, the regulatory assets of the electric
utilities (amounting to $108.2 million as of June 30, 2002) may need to be
charged to expense.
Holders of the Notes are subject to the risks associated with other HEI
indebtedness, including the risk of cross-default
The Notes will be unsecured obligations of HEI and will rank equally with
all other unsecured and unsubordinated indebtedness of HEI, including other
debt securities issued under the Indenture. As of June 30, 2002, the amount of
HEI's total unsecured and unsubordinated indebtedness with which the Notes
would have ranked equally was $401 million, all of which consisted of other
series of notes issued under the Indenture.
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Under the Indenture, a failure by HEI to pay when due (after the
expiration of any applicable grace period) any portion of the principal due on
indebtedness in excess of $5,000,000, or an acceleration of such indebtedness
upon another event of default, could constitute a cross-default and permit the
holders of the Notes and all other series of debt securities outstanding under
the Indenture to accelerate the maturity of the debt. HEI cannot be certain
that it will have sufficient working capital or access to external sources of
financing to satisfy in full and without delay its existing and future debt
obligations, including the Notes, in the event of an acceleration of other
indebtedness ranking equally with the Notes.
ELECTRIC UTILITY RISKS
HEI's electric utility operations are significantly influenced by weather
conditions
HECO and its subsidiaries' results of operations can be affected by
changes in the weather. Weather conditions directly influence the demand for
electricity. In addition, severe weather can be destructive, causing outages,
property damage and requiring HECO and its subsidiaries to incur additional
expenses.
HEI's electric utility operations depend heavily on third party suppliers of
fuel oil and purchased power
The electric utilities rely on fuel oil suppliers and shippers and
independent power producers to deliver fuel oil and power, respectively, in
accordance with contractual agreements. Approximately 75% of the net energy
expected to be generated or purchased by HECO and its subsidiaries in 2002 will
be generated from the burning of oil, and purchases of power by HECO and its
subsidiaries provided about 39% of their total net energy generated and
purchased in 2001. Failure or delay by oil suppliers and shippers to provide
fuel pursuant to existing contracts, or failure by a major independent power
producer to deliver the firm capacity anticipated in its power purchase
agreement, could disrupt the ability of the electric utilities to deliver
electricity and require them to incur additional expenses to meet the needs of
their customers. In addition, as these contractual agreements end, the electric
utilities may not be able to purchase fuel and power on terms equivalent to the
current contractual agreements.
Actions of the PUC are largely outside the control of HECO and its subsidiaries
and could result in rate reductions or unanticipated delay or expense in
connection with the construction of new projects
The rates that HECO and its subsidiaries are allowed to charge for its
services are one of the most important items influencing HEI's financial
position, results of operations and liquidity. The PUC has broad discretion
over the rates that the electric utilities charge their customers. Any adverse
decision by the PUC concerning the level or method of determining electric
utility rates, the authorized returns on equity or other regulatory matters, or
any prolonged delay in rendering a decision in a rate or other proceeding,
could have a material adverse effect on HEI's financial condition, results of
operations and liquidity. After not initiating a rate case for several years,
HECO committed to the PUC in 2001 that it would commence a rate case within the
following three years.
Many public utility projects require PUC approval and various permits
(e.g., environmental and land use permits) from other governmental agencies.
Difficulties in obtaining, or the inability to obtain, the necessary approvals
or permits, any adverse decision or policy made or adopted, or any prolonged
delay in rendering a decision by an agency can result in significantly
increased project costs or even cancellation of projects. If a project does not
proceed, or if the PUC disallows cost recovery for the project, the project
costs may need to be written off in amounts that could result in significant
reductions in HEI's net income. Two major capital improvement projects have
encountered substantial opposition. The Keahole power plant project, which has
been seriously delayed, involves plans of Hawaii Electric Light Company, Inc.,
or HELCO, to install combustion turbines and a heat steam recovery generator,
then to convert the units to a dual-train combined cycle unit at its Keahole
plant on the island of Hawaii. The Kamoku-Pukele transmission line project
involves HECO's plans to construct a transmission line from its Kamoku
substation to Pukele substation on the island of Oahu. As of
6
June 30, 2002, HELCO's costs incurred in its efforts to put the combustion
turbines into service and to support existing units amounted to approximately
$75 million and HECO's accumulated costs related to the transmission line
project amounted to approximately $16 million.
HECO's electric generating facilities are subject to operational risks that
could result in unscheduled plant outages, unanticipated operation and
maintenance expenses and increased power purchase costs
Operation of electric generating facilities involves certain risks which
can adversely affect energy output and efficiency levels. Included among these
risks are increased prices for fuel and fuel transportation as existing
contracts expire (particularly if the PUC were to no longer permit the electric
utilities to pass such price increases through to customers through their
energy cost adjustment clauses), facility shutdowns due to a breakdown or
failure of equipment or processes or interruptions in fuel supply, labor
disputes, inability to comply with regulatory or permit requirements,
disruptions in delivery of electricity, operator error and catastrophic events
such as fires, explosions, floods or other similar occurrences affecting the
electric generating facilities of HEI's subsidiaries.
HEI's electric utilities may be adversely affected by new legislation
Congress and the Hawaii Legislature periodically consider legislation
that could have positive or negative effects on HEI's electric utilities and
their customers. For example, Congress is still considering an energy plan that
could increase the domestic supply of oil as well as increase support for
energy conservation programs and mandate the use of renewables by utilities.
The 2002 Hawaii Legislature considered measures that would undertake a
comprehensive audit of the state's electric utility regulatory policies, energy
policies and support for reducing Hawaii's dependence on imported petroleum for
electrical generation. HEI cannot predict the likelihood that such measures
will be enacted into law or their potential effect on the electric utilities.
BANK RISKS
Fluctuations in interest rates could result in lower net interest income,
impair ASB's ability to originate new loans or impair the ability of ASB's
floating-rate borrowers to make increased payments
Interest rate risk is a significant risk of ASB's operations. ASB's net
interest income consists primarily of interest income received on fixed-rate
and adjustable-rate loans, mortgage/asset-backed securities and investments and
interest expense consisting primarily of interest paid on deposits and
borrowings. Although the Bank pursues an asset-liability management strategy
designed to control its risk from changes in market interest rates, interest
rate risk arises when an interest-earning asset matures or when its interest
rate changes in a time frame different from that of the supporting
interest-bearing liability. Changes in market interest rates, including changes
in the relationship between short-term and long-term market interest rates or
between different interest rate indices, can impact ASB's interest rate spread,
that is, the difference between the interest rates it charges on
interest-earning assets, such as loans, and the interest rates it pays on
interest-bearing liabilities, such as deposits. Unfavorable movements in
interest rates could result in lower net interest income.
Significant increases in market interest rates, or the perception that an
increase may occur, could adversely affect ASB's ability to originate new
loans, attract low-costing core deposits and grow. An increase in market
interest rates could also adversely affect the ability of ASB's floating-rate
borrowers to meet their higher payment obligations. If this occurred, it could
cause an increase in nonperforming assets and charge-offs. Conversely, a
decrease in interest rates could result in an acceleration in the prepayment of
loans and mortgage/asset-backed securities and impact the Bank's ability to
reinvest its liquidity in similar yielding assets.
ASB's operations are affected by many disparate factors beyond its control that
could result in lower net interest income or decreased demand for its products
and services
ASB's results of operations depend primarily on the level of net interest
income generated by ASB's interest-earning assets and interest-bearing
liabilities and the supply of and demand for its products and services
7
(i.e., loans and deposits). ASB's net income may also be adversely affected by
various other factors, many of which are beyond the control of ASB, such as:
. local and other economic and political conditions that could result
in declines in employment and real estate values, which in turn could
adversely affect the ability of borrowers to make mortgage payments
and the ability of ASB to recover the full amounts owing to it under
defaulted loans;
. the ability of borrowers to obtain insurance and the ability of ASB
to place insurance where borrowers fail to do so, particularly in the
event of catastrophic damage to collateral securing loans made by
ASB; and
. increases in operating costs, due to inflation and other factors,
that exceed increases in ASB's net interest income.
Banking and related regulations could result in significant restrictions being
imposed on ASB's business
ASB is subject to examination and comprehensive regulation by the
Department of Treasury, the OTS and the Federal Deposit Insurance Corporation,
and is subject to reserve requirements established by the Board of Governors of
the Federal Reserve System. By reason of the regulation of its subsidiary, ASB
Realty Corporation, ASB is also subject to regulation by the Hawaii
Commissioner of Financial Institutions. Regulation by these agencies focuses
mostly on the adequacy of ASB's capital, maintaining ASB's status as a
"qualified thrift lender", or a QTL, and the results of periodic "safety and
soundness" examinations conducted by the OTS. Because ASB and ASB Realty
Corporation are indirect subsidiaries of HEI, federal and State of Hawaii
regulatory authorities have the right to examine HEI and its respective
activities.
Under certain circumstances, including any determination that ASB's
relationship with HEI results in an unsafe and unsound banking practice, these
regulatory authorities have the authority to restrict the ability of ASB to
transfer assets and to make distributions to its stockholders (including
payment of dividends to HEI), or they could seek to require HEI to sever its
relationship with or divest its ownership of ASB. Payment by ASB of dividends
to HEI may also be restricted by the OTS under its prompt corrective action
regulations or its capital distribution regulations if ASB's capital position
deteriorates. In order to maintain its status as a QTL, ASB is required to
maintain at least 65% of its assets in "qualified thrift investments," which
include housing-related loans as well as certain small business loans,
education loans, loans made through credit card accounts and a basket (not
exceeding 20% of total assets) of other consumer loans and other assets.
Savings associations that fail to maintain QTL status are subject to various
penalties, including limitations on their activities. In ASB's case, the
activities of HEI and HEI's other subsidiaries would also be subject to
restrictions, and a failure or inability to comply with those restrictions
could effectively result in the required divestiture of ASB.
ASB's strategy to expand its business and commercial lending activities may
result in greater credit risk than residential lending activities due to the
unique characteristics of these markets
While business and commercial lending are a small part of ASB's loan
portfolio, ASB has a strategy to expand these lines of business. These types of
loans generally present greater credit risks than traditional residential
mortgages.
Generally, both business and commercial real estate loans have shorter
terms to maturity and earn higher rates than residential mortgage loans. Only
the assets of the business typically secure business loans. In such cases, upon
default, any collateral repossessed may not be sufficient to repay the
outstanding loan balance. In addition, loan collections are dependent on the
borrower's continuing financial stability and, thus, are more likely to be
affected by current economic conditions and adverse business developments.
Commercial real estate properties tend to be unique and are more
difficult to value than residential real estate properties. Commercial real
estate loans may not be fully amortizing, meaning that they may have a
8
significant principal balance or "balloon" payment due at maturity. In
addition, commercial real estate properties, particularly industrial and
warehouse properties, are generally subject to relatively greater environmental
risks than noncommercial properties and to the corresponding burdens and costs
of compliance with environmental laws and regulations. Also, there may be costs
and delays involved in enforcing rights of a property owner against tenants in
default under the terms of leases with respect to commercial properties. For
example, tenants may seek the protection of bankruptcy laws, which could result
in termination of such tenant's lease.
In addition to the inherent risk in business and commercial real estate
lending described above, the expansion of these new lines of business present
execution risks including the ability of ASB to attract personnel experienced
in underwriting such loans and the ability of ASB to appropriately evaluate
credit risk associated with such loans in determining the adequacy of the
allowance for loan losses.
9
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except per share amounts)
The following selected consolidated financial information of HEI for the
years ended December 31, 2001, 2000 and 1999 has been derived from the
consolidated financial statements of HEI and the notes thereto, which
consolidated financial statements have been audited by KPMG LLP, independent
accountants, and are incorporated by reference in this prospectus. The
following selected consolidated financial information of HEI for the six months
ended June 30, 2002 and 2001 has been derived from the unaudited consolidated
financial statements of HEI and the notes thereto incorporated by reference in
this prospectus. In the opinion of HEI's management, the unaudited financial
statements of HEI include all adjustments necessary for a fair presentation of
the results for such periods. The selected consolidated financial information
for all periods presented has been adjusted and restated to reflect the
operations and assets of the international power segment as a discontinued
operation. The financial information under "Transitional disclosures" shows the
adjustments necessary to make the financial information for all periods prior
to January 1, 2002 comparable to all 2002 periods by reason of the change in
accounting treatment of goodwill that became effective on January 1, 2002. The
results of operations for any interim periods are not necessarily indicative of
the results for the entire year, and the results for an entire year are not
necessarily indicative of results for future years. The following selected
consolidated financial information of HEI, and the other financial information
of HEI in this prospectus, are qualified in their entirety by, and should be
read in conjunction with, the financial statements and the other information
about HEI included elsewhere in this prospectus and in the incorporated
documents.
Six months ended
June 30, Years ended December 31,
----------------- ----------------------------------
2002 2001 2001 2000 1999
-------- -------- ---------- ---------- ----------
Income statement data
Revenues.......................................... $786,438 $860,676 $1,727,277 $1,732,311 $1,518,826
Operating income.................................. 133,354 129,634 256,173 257,533 238,602
Net income (loss).................................
Continuing operations............................ 57,903 53,876 107,746 109,336 96,426
Discontinued operations (1)...................... -- (543) (24,041) (63,592) 421
-------- -------- ---------- ---------- ----------
$ 57,903 $ 53,333 $ 83,705 $ 45,744 $ 96,847
======== ======== ========== ========== ==========
Basic earnings (loss) per share
Continuing operations............................. $ 1.61 $ 1.62 $ 3.19 $ 3.36 $ 3.00
Discontinued operations........................... -- (0.02) (0.71) (1.95) 0.01
-------- -------- ---------- ---------- ----------
$ 1.61 $ 1.60 $ 2.48 $ 1.41 $ 3.01
======== ======== ========== ========== ==========
Diluted earnings (loss) per share
Continuing operations............................. $ 1.60 $ 1.61 $ 3.18 $ 3.35 $ 2.99
Discontinued operations........................... -- (0.02) (0.71) (1.95) 0.01
-------- -------- ---------- ---------- ----------
$ 1.60 $ 1.59 $ 2.47 $ 1.40 $ 3.00
======== ======== ========== ========== ==========
Dividends per common share.......................... $ 1.24 $ 1.24 $ 2.48 $ 2.48 $ 2.48
Weighted-average number of common shares outstanding 36,005 33,321 33,754 32,545 32,188
Adjusted weighted-average shares.................... 36,203 33,477 33,942 32,687 32,291
Transitional disclosures (2)
Consolidated
Reported net income................................. $ 57,903 $ 53,333 $ 83,705 $ 45,744 $ 96,847
Goodwill amortization, net of tax benefits.......... -- 1,916 3,845 3,816 3,834
-------- -------- ---------- ---------- ----------
Adjusted net income................................. $ 57,903 $ 55,249 $ 87,550 $ 49,560 $ 100,681
======== ======== ========== ========== ==========
Reported basic earnings per common share............ $ 1.61 $ 1.60 $ 2.48 $ 1.41 $ 3.01
Goodwill amortization, net of tax benefits.......... -- 0.06 0.11 0.12 0.12
-------- -------- ---------- ---------- ----------
Adjusted basic earnings per common share............ $ 1.61 $ 1.66 $ 2.59 $ 1.53 $ 3.13
======== ======== ========== ========== ==========
Adjusted diluted earnings per common share.......... $ 1.60 $ 1.65 $ 2.58 $ 1.52 $ 3.12
======== ======== ========== ========== ==========
Bank
Reported net income................................. $ 28,163 $ 22,082 $ 48,531 $ 40,630 $ 35,412
Goodwill amortization, net of tax benefits.......... -- 1,916 3,845 3,816 3,834
-------- -------- ---------- ---------- ----------
Adjusted net income................................. $ 28,163 $ 23,998 $ 52,376 $ 44,446 $ 39,246
======== ======== ========== ========== ==========
--------
(1)In 2000, HEI incurred losses and write-offs totaling $75.7 million pretax
($36.8 million after tax) relating to the international power group's
investment in the electric generation business in the Philippines. In the
third quarter of 2001, HEI adopted a formal plan to discontinue the
remaining international power operations and incurred losses and write-offs
totaling $36 million pretax ($23 million after tax).
(2)HEI adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets" on January 1, 2002. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. HEI's $83.2 million of
goodwill is in the bank segment and was tested for impairment as of January
1, 2002 and will be tested for impairment annually in the third quarter. As
of January 1, 2002, there was no impairment of goodwill. The fair value of
the bank was estimated using a valuation method based on a market approach,
which takes into consideration market values of comparable publicly traded
companies and recent transactions of companies in the industry. Application
of the provisions of SFAS No. 142 has affected the comparability of current
period results of operations with prior periods because the goodwill in the
bank segment is no longer being amortized over a 25 year period. Thus, the
"Transitional disclosures" present net income and earnings per common share
"adjusted" as shown.
10
THE COMPANY
HEI was incorporated in 1981 under the laws of the State of Hawaii and is
a holding company whose principal subsidiaries engage in the electric public
utility and bank businesses in the State of Hawaii. HEI's predecessor, HECO,
was incorporated in 1891 under the laws of the Kingdom of Hawaii (now the State
of Hawaii). As a result of a 1983 corporate reorganization, HECO became an HEI
subsidiary and the common shareholders of HECO became common shareholders of
HEI. By virtue of its ownership of utility subsidiaries, HEI is a holding
company under the Public Utility Holding Company Act of 1935, but claims
exemption from all provisions thereof, except Section 9(a)(2), through the
required annual filing of a report on SEC Form U-3A-2. HEI's executive offices
are located at 900 Richards Street, Honolulu, Hawaii 96813, and its telephone
number is (808) 543-5662.
HECO is a regulated electric public utility company engaged in the
production, purchase, transmission, distribution and sale of electric energy on
the island of Oahu, in the State of Hawaii. HECO's subsidiaries, Hawaii
Electric Light Company, Inc., or HELCO, incorporated on December 5, 1894, and
Maui Electric Company, Limited, or MECO, incorporated on April 28, 1921, are
also regulated electric public utilities, and provide electric service on the
islands of Hawaii, Maui, Lanai and Molokai in the State of Hawaii. HECO and its
subsidiaries serve approximately 400,000 customers in a service area of
approximately 5,766 square miles.
HEI's other principal subsidiary is ASB, with branches throughout the
State of Hawaii. ASB, acquired in 1988, is a federally chartered savings bank
with 71 branches as of June 30, 2002, providing a wide range of banking
services to individual and corporate customers within Hawaii. As of June 30,
2002, ASB was the third largest financial institution in Hawaii based on total
assets of $6.2 billion and deposits of $3.7 billion.
HEI's subsidiary, HEI Power Corp., or HEIPC, was formed in 1995 to pursue
independent power and integrated energy service projects in Asia and the
Pacific through direct and indirect subsidiaries formed in connection with
those projects, known as the HEIPC Group. In October 2001, the HEI Board of
Directors adopted a final plan to exit this international power business, which
was reported as a discontinued operation in the third quarter of 2001. In
connection with exiting the international power business, the HEIPC Group has
sold a subsidiary that had repaired and operated a generating plant in Guam and
has written off all of its investments in China and the Philippines except for
the investment in approximately 22% of the outstanding common stock of Cagayan
Electric Power Light Co., Inc., an electric distribution company in the
Philippines. As of June 30, 2002, the remaining net assets of the discontinued
international power operations, after writeoffs and writedowns, amounted to $7
million.
For additional information concerning HEI's and its subsidiaries'
businesses and affairs, including their capital requirements and external
financing plans, pending legal and regulatory proceedings, descriptions of
certain laws and regulations to which those companies are subject, and possible
restrictions on the ability of certain of HEI's subsidiaries to pay dividends
or make other distributions to HEI, prospective purchasers should refer to the
documents incorporated by reference that are listed under the caption "Where
You Can Find More Information."
USE OF PROCEEDS
HEI expects to use the net proceeds from the sale of the Notes to reduce
its short-term debt, to repay other indebtedness (including refinancing
previously issued Notes), to make investments in and loans to subsidiaries
(principally to help finance their capital expenditure programs and their
investments in subsidiaries and to retire debt) and for its working capital and
general corporate purposes. The use of proceeds in connection with a particular
issuance of Notes will be set forth in the applicable pricing supplement.
11
RATIO OF EARNINGS TO FIXED CHARGES
The following tables set forth the ratio of earnings to fixed charges for
HEI and its subsidiaries for the periods indicated.
Years Ended December 31,
------------------------ Six Months Ended
1997 1998 1999 2000 2001 June 30, 2002
---- ---- ---- ---- ---- ----------------
Ratio of Earnings to Fixed Charges,
excluding interest on ASB deposits.... 1.91 1.88 1.83 1.76 1.82 2.03
==== ==== ==== ==== ==== ====
Ratio of Earnings to Fixed Charges,
including interest on ASB deposits.... 1.59 1.48 1.50 1.49 1.52 1.71
==== ==== ==== ==== ==== ====
For purposes of calculating the ratio of earnings to fixed charges,
"earnings" represent the sum of (i) pretax income from continuing operations
(excluding undistributed net income or net loss from
less-than-fifty-percent-owned persons) and (ii) fixed charges (excluding
capitalized interest). "Fixed charges" are calculated both excluding and
including interest on ASB's deposits during the applicable periods and
represent the sum of (i) interest, whether capitalized or expensed, but
excluding interest on nonrecourse debt from leveraged leases which is not
included in interest expense in HEI's consolidated statements of income, (ii)
amortization of debt expense and discount or premium related to any
indebtedness, whether capitalized or expensed, (iii) the interest factor in
rental expense, (iv) the preferred stock dividend requirements of HEI's
subsidiaries, increased to an amount representing the pretax earnings required
to cover such dividend requirements and (v) the preferred securities
distribution requirements of trust subsidiaries.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-3 filed
with the SEC under the Securities Act of 1933. The registration statement
contains additional information and exhibits not included in this prospectus
and refers to documents that are filed as exhibits to other SEC filings. HEI is
subject to the informational requirements of the Securities Exchange Act of
1934 and, therefore, files annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy the
registration statement and any document that HEI files at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can call
the SEC's toll-free telephone number at 1-800-SEC-0330 for further information
on the public reference room. The SEC maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding companies (such as HEI) that file documents with
the SEC electronically. The documents can be found by searching the EDGAR
Archives at the SEC's web site. HEI's SEC filings, and other information with
respect to HEI, may also be obtained on the Internet at HEI's web site at
http://www.hei.com. This information on HEI's website is not incorporated by
reference in this prospectus.
The SEC allows HEI to "incorporate by reference" the information that it
files with the SEC, which means that HEI can disclose important information to
you by referring you to those documents. The information incorporated by
reference is considered to be a part of this prospectus and should be read with
the same care. Later information that HEI files with the SEC will automatically
update and supersede information in this prospectus or an earlier filed
document. HEI has filed with the SEC (File No. 1-8503) and incorporates by
reference the following documents: (1) HEI's Annual Report on Form 10-K for the
year ended December 31, 2001; (2) HEI's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2002 and June 30, 2002; (3) HEI's Current Reports on
Form 8-K dated January 17, 2002, January 23, 2002, January 25, 2002, February
8, 2002, March 5, 2002, March 25, 2002, April 22, 2002, May 1, 2002, June 10,
2002, July 1, 2002, July 22, 2002, July 25, 2002 and August 16, 2002; and (4)
all reports and other documents subsequently filed by HEI pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act between the date of this
prospectus and the time that all the Notes are sold.
12
You may request a free copy of any of these incorporated documents by
writing or telephoning HEI at the following address or telephone number:
Treasurer, Hawaiian Electric Industries, Inc., P.O. Box 730, Honolulu, Hawaii
96808-0730, telephone: (808) 543-5641.
You should rely only on the information contained or incorporated by
reference in this prospectus and any pricing supplement. HEI has not, and the
Agents have not, authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. HEI is not, and the Agents are not, making an offer
to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus,
any pricing supplement or the documents incorporated by reference is accurate
only as of the date of those documents. HEI's business, financial condition,
results of operations and prospects may have changed since those dates.
FORWARD-LOOKING STATEMENTS
This prospectus, which includes documents incorporated by reference,
contains "forward-looking statements" as that term is defined in the Private
Securities Litigation Reform Act of 1995. The safe harbor provisions of the
Exchange Act and the Securities Act apply to forward-looking statements made by
HEI. Forward-looking statements, which include statements that are predictive
in nature, depend upon or refer to future events or conditions, and usually
include words such as "expects", "anticipates", "intends", "plans", "believes",
"predicts", "estimates" or similar expressions. In addition, any statements
concerning future financial performance (including future revenues, earnings or
losses or growth rates), ongoing business strategies or prospects and possible
future actions, which may be provided by management, are also forward-looking
statements.
Forward-looking statements are based on current expectations and
projections about future events and are subject to risks and uncertainties
about HEI and its subsidiaries, the performance of the industries in which they
do business and economic and market factors, among other things. These factors
include the risks and uncertainties identified in this prospectus and in the
incorporated documents. Forward-looking statements are not guarantees of future
performance and the actual results that HEI achieves may differ materially. In
addition, forward-looking statements speak only as of the date of the document
in which they are made and, except for its ongoing obligations to disclose
material information under the federal securities laws, HEI assumes no
obligation to update these statements.
13
DESCRIPTION OF THE NOTES
HEI will issue Notes under an Indenture, dated as of October 15, 1988, as
supplemented by a Third Supplemental Indenture (collectively, the "Indenture"),
between HEI and Citibank, N.A., as trustee (the "Trustee"). This prospectus
briefly outlines some of the Indenture provisions. If you would like more
information about the Indenture, you should review the Indenture as filed with
the SEC. See "Where You Can Find More Information" on how to locate the
Indenture and the supplements to the Indenture. You may also review the
Indenture and its supplements at the Trustee's offices at 399 Park Avenue, New
York, New York 10043.
HEI provides information to you about the Notes in two separate
documents. The first document is this prospectus, which provides general
information concerning the Notes, some of which may not apply to a particular
Note. The second document is a pricing supplement, which will provide final
details about the terms of a specific Note and is filed with the SEC about the
time the Note is sold. To the extent information in a pricing supplement about
a specific Note you are purchasing differs from the information in this
prospectus, you should rely on the specific information in the pricing
supplement. This prospectus describes some, but not all, of the terms of the
Notes, all of which may be varied by a pricing supplement.
This prospectus includes summaries of the Notes and the Indenture. If the
information in this prospectus differs from the information in the Notes or the
Indenture, you should in all cases rely on the information in the Notes and the
Indenture.
General
The Notes are a single series of securities under the Indenture, except
as described below under "Defeasance". The Indenture does not limit the amount
of additional debt securities that HEI may issue in the future under additional
supplements to the Indenture. Each series of debt securities, and each specific
Note or other debt security of a series, may differ as to its terms. The Notes
and all other debt securities which HEI has issued or may issue in the future
under the Indenture will be referred to herein as the "Securities."
The Indenture contains certain limitations on the ability of HEI to incur
secured indebtedness. See "Restriction on Liens" and "Restriction on
Sale-Leaseback Transactions." The Indenture does not impose restrictions on the
ability of HEI's subsidiaries to incur any indebtedness, including secured
indebtedness. Some of HEI's subsidiaries are subject to debt instruments which
impose limitations on their ability to incur indebtedness and to grant security
interests. These limitations are applicable, however, only so long as the
related indebtedness is outstanding and, in any event, are not enforceable by
holders of the Notes.
Unless secured as described under "Restriction on Liens," the Notes will
be unsecured obligations of HEI and will rank pari passu (that is, without
priority and on the same creditor level in the event of a liquidation of HEI)
with all other unsecured and unsubordinated indebtedness of HEI, including
other Securities issued under the Indenture. As of June 30, 2002, the amount of
HEI's total unsecured and unsubordinated indebtedness with which the Notes
would have ranked pari passu was $401 million.
The rights of HEI, and consequently its creditors, to participate in any
distribution of the assets of any of its subsidiaries is subject to the prior
claims of the creditors of such subsidiaries, except to the extent that claims
of HEI in its capacity as a creditor are recognized. Accordingly, the Notes
will be effectively subordinated to all obligations of such subsidiaries. As of
June 30, 2002, $688 million of HEI's total consolidated indebtedness of $1.089
billion was indebtedness of such subsidiaries.
The Notes are currently limited to up to $300,000,000 aggregate principal
amount. Each Note will mature and be due and payable on the maturity date
stated in the Note (the "Stated Maturity"), which will be from nine months to
thirty years from the Original Issue Date. Each Note will also be due and
payable (in whole or in part) on any earlier date on which the principal or an
installment of principal of a Note becomes due and
14
payable, whether by a declaration of acceleration, call for redemption at the
option of HEI, repayment at the option of the holder or otherwise as agreed to
by the purchaser and HEI and specified in the specific Note and applicable
pricing supplement. The date upon which a Note is due and payable, whether the
Stated Maturity or such earlier date, will be referred to as the "Maturity."
Each Note will bear interest from the date of original issuance (the
"Original Issue Date") at a rate that is fixed to the maturity of the Note
("Fixed Rate Notes") or at a floating rate ("Floating Rate Notes"). The
interest rate on a Fixed Rate Note is expected to be determined through
negotiation with the Agents and, indirectly, their customers based on market
conditions, HEI's circumstances and other factors at the time of the offering.
The interest on Floating Rate Notes will be determined by reference to the
Commercial Paper Rate, the Prime Rate, the London Interbank Offered Rate
("LIBOR"), the Treasury Rate, the Certificate of Deposit ("CD") Rate, the
Federal Funds Rate or other interest rate basis, plus or minus a Spread and/or
multiplied by a Spread Multiplier, if any, applicable to such Note that is
expected to be determined through negotiation with the Agents and, indirectly,
their customers, based on market conditions, HEI's circumstances and other
factors at the time of the offering. See "Interest Rate." HEI may also issue a
Note ("Discount Notes") at a discount from the principal amount payable at its
Stated Maturity and such Discount Note will bear no interest or will bear
interest at a rate that is below market interest rates at the time of issuance.
HEI may offer different interest rates at the same time depending upon,
among other factors, the Stated Maturity of the Notes and the aggregate
principal amount of Notes purchased in any single transaction. HEI may also
offer Notes with different variable terms other than interest rates at the same
time to different investors. HEI may change interest rates, interest rate
formulas and other variable terms of the Notes from time to time, but no change
will affect any Note already issued or as to which an offer to purchase has
been accepted by HEI.
HEI will make payments of principal, premium (if any) and interest with
respect to the Notes in United States dollars. HEI will issue Notes in fully
registered book-entry form (each, a "Book-Entry Note"), except in certain
limited circumstances, in which case HEI will issue Notes in certificated form
(each, a "Definitive Note"). See "Book-Entry Notes." HEI will issue Notes in
denominations of $1,000 and integral multiples of $1,000. Book-Entry Notes may
be transferred or exchanged only through a participating member of The
Depository Trust Company (or such other depositary as is identified in an
applicable pricing supplement) (the "Depositary"). See "Book-Entry Notes."
Registration of transfers of Definitive Notes will be made at the Corporate
Trust Office of the Trustee. HEI and the Trustee will not charge any service
charge for any such registration of transfer or exchange of Definitive Notes.
HEI may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection with the transfer or exchange (other
than exchanges not involving any transfer).
HEI will make payments of principal, premium (if any) and interest on
Book-Entry Notes through the Trustee to the Depositary. See "Book-Entry Notes."
In the case of Definitive Notes, HEI will pay principal and premium (if any) at
the Maturity of each Definitive Note in immediately available funds upon
presentation and surrender of the Definitive Note at the Corporate Trust Office
of the Trustee in the Borough of Manhattan, The City of New York, or at such
other place as HEI is entitled to designate. In the case of a permitted
repayment on an Optional Repayment Date, HEI will make payment upon submission
of a duly completed election form in accordance with the provisions described
below. HEI will pay any interest due at the Maturity of a Definitive Note to
the person to whom payment of the principal thereof and premium, if any,
thereon shall be made. HEI will pay interest due on Definitive Notes other than
at Maturity at the Corporate Trust Office of the Trustee or, at HEI's option,
by check mailed to the address of the Person entitled thereto as such address
shall appear in the Security Register. A holder of $10,000,000 or more in
aggregate principal amount of Definitive Notes having the same Interest Payment
Dates will be entitled to receive interest payments (other than at Maturity) by
wire transfer of immediately available funds if the Trustee has received
appropriate wire transfer instructions from the holder not less than 15
calendar days prior to the applicable Interest Payment Date. Any such wire
transfer instructions received by the Trustee shall be effective until revoked
by the holder.
15
Reference is made to the pricing supplement applicable to each Note for
the following terms:
. the principal amount and purchase price of such Note (the "Issue
Price"), which may be expressed as a percentage of the principal
amount at which such Note will be issued;
. the Original Issue Date of such Note;
. the Stated Maturity of such Note;
. whether such Note is a Fixed Rate Note, a Floating Rate Note and/or a
Discount Note;
. if such Note is a Fixed Rate Note, the annual interest rate, if any;
. if such Note is a Floating Rate Note, the Base Rate or Rates, the
Initial Interest Rate, the Interest Determination Date or Dates, the
Interest Reset Date or Dates, the Interest Payment Dates, the Index
Maturity, the Maximum Interest Rate and/or Minimum Interest Rate, if
any, and the Spread and/or Spread Multiplier, if any, and the
Calculation Agent (if other than the Trustee), and any other terms
relating to the particular method of calculating the interest rate
for such Note;
. if such Note is a Discount Note, the issue price and the annual
interest rate, if any;
. the date or dates from which any such interest shall accrue, if other
than the Original Issue Date;
. the terms for redemption, repayment or a sinking fund, if any; and
. any other terms of such Note consistent with the provisions of the
Indenture.
Interest Rate
General
Each interest-bearing Note will bear interest from its Original Issue
Date at the rate per annum, in the case of a Fixed Rate Note, or pursuant to
the interest rate formula, in the case of a Floating Rate Note, specified in
the Note and in the applicable pricing supplement, until the principal thereof
is paid or made available for payment. Interest payments on the Notes will be
in an amount equal to the interest accrued from and including the immediately
preceding Interest Payment Date (as defined below) in respect of which interest
has been paid or duly made available for payment (or from and including the
Original Issue Date, if no interest has been paid or duly made available for
payment since that date) to but excluding the applicable Interest Payment Date
or Maturity (each, an "Interest Period"). Interest will be payable in arrears
to the holders of such Notes (which, in the case of Book-Entry Notes, will be a
nominee of the Depositary) on the Regular Record Date (as defined below) for
each Interest Payment Date and, in the case of interest payable at Maturity, to
the person to whom principal shall be payable at Maturity.
HEI will make the first payment of interest on any Note originally issued
between a Regular Record Date and the related Interest Payment Date to the
holder of the Note on the next Regular Record Date. The payment will be made on
the Interest Payment Date following such next Regular Record Date. The "Regular
Record Date" with respect to any Note shall be the date (whether or not a
Business Day) that is 15 calendar days prior to the related Interest Payment
Date. However, any interest not punctually paid or duly provided for will no
longer be payable to the holder of the Note on the Regular Record Date and
instead will be paid either (a) to the holder of record on a special record
date to be fixed by the Trustee in accordance with the Indenture or (b) in such
other lawful manner that is selected by HEI and deemed practicable by the
Trustee.
Fixed Rate Notes
HEI will pay interest on Fixed Rate Notes semiannually on February 10 and
August 10 of each year (each, an "Interest Payment Date" with respect to Fixed
Rate Notes), and at Maturity with respect to the principal then maturing.
Interest on Fixed Rate Notes will be computed on the basis of a 360-day year of
twelve 30-day months. If any Interest Payment Date or the Maturity of a Fixed
Rate Note falls on a day that is not a Business Day, the applicable payments
may be made on the next Business Day. In such case, no interest will accrue on
the amount so payable for such period of delay.
16
Floating Rate Notes
Each Floating Rate Note will bear interest at a rate determined by
reference to one or more interest rate bases (each, a "Base Rate"), which may
be adjusted by a Spread and/or Spread Multiplier (each as described below). The
applicable pricing supplement will designate one or more of the following Base
Rates as applicable to each Floating Rate Note:
. the Commercial Paper Rate (such Note being a "Commercial Paper Rate
Note");
. the Prime Rate (such Note being a "Prime Rate Note");
. LIBOR (such Note being a "LIBOR Note");
. the Treasury Rate (such Note being a "Treasury Rate Note");
. the CD Rate (such Note being a "CD Rate Note");
. the Federal Funds Rate (such Note being a "Federal Funds Rate Note");
or
. such other Base Rate or interest rate formula as is set forth in such
pricing supplement and in such Floating Rate Note.
If the Base Rate for a Note is LIBOR, the applicable pricing supplement
and Note will also specify the Designated LIBOR Page, as explained below.
The interest rate on each Floating Rate Note will be calculated by
reference to the specified Base Rate or Rates (a) plus or minus the Spread, if
any, and/or (b) multiplied by the Spread Multiplier, if any. The "Spread" is
the number of basis points (one one-hundredth of a percentage point) specified
in the pricing supplement to be added to or subtracted from the Base Rate for
such Note to calculate the interest rate for such Floating Rate Note. The
"Spread Multiplier" is the percentage specified in the pricing supplement to be
multiplied by the Base Rate (or by the Base Rate increased or decreased by the
Spread) to calculate the interest rate for such Floating Rate Note. The "Index
Maturity" for any Floating Rate Note is the period to maturity of the
instrument or obligation from which the Base Rate or Rates is calculated.
The interest rate with respect to each Base Rate will be determined in
accordance with the applicable provisions below. Except as set forth above or
in an applicable pricing supplement, the interest rate in effect on each day
shall be (a) if such day is an Interest Reset Date, the interest rate
determined as of the Interest Determination Date immediately preceding such
Interest Reset Date, or (b) if such day is not an Interest Reset Date, the
interest rate determined as of the Interest Determination Date immediately
preceding the most recent Interest Reset Date.
Interest Reset Dates. The rate of interest on each Floating Rate Note
will be reset daily, weekly, monthly, quarterly, semiannually or annually
(each, an "Interest Reset Date"), as specified in the applicable Note and
pricing supplement. The Interest Reset Date will be as follows:
Type of Floating Rate Note Interest Reset Date
-------------------------------------------- -------------------------------------------
Notes which reset daily..................... Each Business Day
Notes (other than Treasury Rate Notes) which
reset weekly.............................. Wednesday of each week
Treasury Rate Notes which reset weekly...... Tuesday of each week
Notes which reset monthly................... Third Wednesday of each month
Notes which reset quarterly................. Third Wednesday of January, April, July and
October of each year
Notes which reset semi-annually............. Third Wednesday of the two months of each
year specified in the applicable Note and
pricing supplement
Notes which reset annually.................. Third Wednesday of the one month of each
year specified in the applicable Note and
pricing supplement
17
Notwithstanding the foregoing, the interest rate in effect from the
Original Issue Date to the first Interest Reset Date with respect to a Floating
Rate Note will be the Initial Interest Rate (as set forth in the applicable
Note and pricing supplement). Any Interest Reset Date that does not fall on a
Business Day will be postponed to the next Business Day. In the case of a LIBOR
Note, however, if such next succeeding Business Day falls in the next calendar
month, the Interest Reset Date will be the preceding Business Day. The term
"Business Day" means any day other than a Saturday or Sunday or any other day
on which banks in The City of New York are generally authorized or obligated by
law or executive order to close and, with respect to LIBOR Notes, is also a
London Business Day. As used herein, "London Business Day" means any day on
which dealings in deposits in U.S. dollars are transacted in the London
interbank market.
Interest Payment Dates. Except as provided below or in an applicable
pricing supplement, interest will be payable on the following dates ("Interest
Payment Dates" with respect to Floating Rate Notes):
Type of Floating Rate Note Interest Payment Date
------------------------------------------ ----------------------------------------------
Notes which reset daily, weekly or monthly Third Wednesday of each month or the third
Wednesday of January, April, July and
October of each year, as specified in the
applicable Note and pricing supplement
Notes which reset quarterly............... Third Wednesday of January, April, July and
October of each year
Notes which reset semi-annually........... Third Wednesday of the two months of each
year specified in the applicable Note and
pricing supplement
Notes which reset annually................ Third Wednesday of the one month of each
year specified in the applicable Note and
pricing supplement
All Notes................................. At Maturity with respect to the principal then
maturing
If any Interest Payment Date other than the Maturity Date for any
Floating Rate Note would otherwise be a day that is not a Business Day, such
Interest Payment Date will be postponed to the next succeeding Business Day,
and interest will continue to accrue in respect of the payment made on that
next succeeding Business Day, except that in the case of a Floating Rate Note
as to which LIBOR is an applicable Base Rate and that Business Day falls in the
next succeeding calendar month, the particular Interest Payment Date will be
the immediately preceding Business Day. If the Maturity Date of a Floating Rate
Note falls on a day that is not a Business Day, HEI will make the required
payment of principal, premium, if any, and interest on the next succeeding
Business Day, and no additional interest will accrue in respect of the payment
made on that next succeeding Business Day.
18
Interest Determination Dates. The Interest Determination Dates for
Floating Rate Notes pertaining to an Interest Reset Date will be as follows:
Type of Floating Rate Note Interest Determination Date
-------------------------------- ----------------------------------------------
Commercial Paper Rate Note...... Second Business Day preceding such
Interest Reset Date
Prime Rate Note................. Business Day preceding such Interest Reset
Date
CD Rate Note.................... Second Business Day preceding such
Interest Reset Date
Federal Funds Rate Note......... Business Day preceding such Interest Reset
Date
LIBOR Note...................... Second London Business Day preceding
such Interest Reset Date
Treasury Rate Note.............. Day of the week in which such Interest Reset
Date falls on which day Treasury bills would
normally be auctioned by the U.S.
Department of the Treasury, as described
below
Note with two or more Base Rates Most recent Business Day that is at least two
Business Days prior to the applicable Interest
Reset Date for such Floating Rate Note on
which each Base Rate is determinable
Treasury bills are generally sold at auction on Monday of each week,
unless that day is a legal holiday, in which case the auction is usually held
on the following Tuesday, except that such auction may be held on the preceding
Friday. If, as a result of a legal holiday, an auction is so held on the
preceding Friday, such Friday will be the Interest Determination Date for the
Treasury Rate Note pertaining to the Interest Reset Date occurring in the next
succeeding week.
Each Base Rate will be determined as of the Interest Determination Date,
and the applicable interest rate will take effect on the applicable Interest
Reset Date.
Maximum and Minimum Interest Rates. The pricing supplement applicable to
a Floating Rate Note may provide that such Note has either or both of (a) a
maximum limitation, or ceiling, on the rate of interest which may accrue during
any Interest Period (a "Maximum Interest Rate"), and (b) a minimum limitation,
or floor, on the rate of interest which may accrue during any Interest Period
(a "Minimum Interest Rate"). In addition to any Maximum Interest Rate that may
be applicable to any Floating Rate Note pursuant to the above provisions, the
interest rate on the Floating Rate Notes will in no event be higher than the
maximum rate permitted by New York or Hawaii law, whichever is lower, as the
same may be modified by United States law of general application.
Floating Rate Determinations and Calculations
Except as otherwise provided herein, all percentages resulting from any
calculations on any Floating Rate Notes will be rounded to the nearest one
hundred-thousandth of a percentage point (with five one-millionths of a
percentage point being rounded up, e.g., 9.876545% (or .09876545) being rounded
to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from
such calculation on any Floating Rate Notes will be rounded to the nearest cent
(with one half cent being rounded up).
19
Accrued interest on a Floating Rate Note is calculated by multiplying the
principal amount of such Floating Rate Note by an accrued interest factor. Such
accrued interest factor is computed by adding the interest factors calculated
for each day in the applicable Interest Period. The interest factor (expressed
as a decimal) for each such day is computed by dividing the interest rate
(expressed as a decimal) applicable to such date by 360, in the case of
Commercial Paper Rate Notes, Prime Rate Notes, LIBOR Notes, CD Rate Notes or
Federal Funds Rate Notes, or by the actual number of days in the year, in the
case of Treasury Rate Notes. The interest factor for Floating Rate Notes for
which the interest rate is calculated with reference to two or more Base Rates
will be calculated in each period in the same manner as if only the lowest,
highest or average of the applicable Base Rate applied, as specified in the
applicable Note and pricing supplement.
The Trustee shall be the calculation agent (the "Calculation Agent") and
shall calculate the interest rate on Floating Rate Notes on or before each
Calculation Date. Upon the request of the holder of any Floating Rate Note, the
Calculation Agent will provide the interest rate then in effect, and, if
determined, the interest rate that will become effective on the next Interest
Reset Date with respect to such Floating Rate Note. The Calculation Agent's
determination of any interest rate will be final and binding in the absence of
manifest error. The "Calculation Date," if applicable, pertaining to any
Interest Determination Date will be the earlier of (i) the tenth calendar day
after such Interest Determination Date, or, if such day is not a Business Day,
the next succeeding Business Day and (ii) the Business Day preceding the
applicable Interest Payment Date or Maturity, as the case may be.
The Calculation Agent shall determine each Base Rate in accordance with
the following provisions. To the extent a Base Rate is determined by reference
to the offered rates or quotations of dealers, banks, trust companies, brokers
or others selected by the Calculation Agent as described below, such parties
may include the Calculation Agent, the Agents and/or their respective
affiliates, as the case may be.
Commercial Paper Rate Notes. Commercial Paper Rate Notes will bear
interest at the interest rates (calculated with reference to the Commercial
Paper Rate and the Spread and/or Spread Multiplier, if any) specified in the
Commercial Paper Rate Notes and in the applicable pricing supplement.
The "Commercial Paper Rate," with respect to each Interest Reset Date,
will be determined by the Calculation Agent on the Calculation Date and will be
the Money Market Yield (as defined below) as of the Interest Determination Date
next preceding such Interest Reset Date of the rate for commercial paper having
the Index Maturity specified in the applicable Note and pricing supplement, as
such rate shall be published by the Board of Governors of the Federal Reserve
System in "Statistical Release H.15(519), Selected Interest Rates", or any
successor publication (such publication being hereinafter called "H.15(519)"),
under the heading "Commercial Paper--Nonfinancial". In the event that such rate
is not published prior to 3:00 P.M., New York City time, on the related
Calculation Date, then the Commercial Paper Rate with respect to such Interest
Reset Date will be the Money Market Yield on the applicable Interest
Determination Date of the rate for commercial paper of the Index Maturity
specified in the applicable Note and pricing supplement as published in the
daily update of H.15(519), available through the world-wide web site of the
Board of Governors of the Federal Reserve System at
http://federalreserve.gov/releases/h15/update, or any successor site or
publication (such site or publication being hereinafter called "H.15 Daily
Update"), under the heading "Commercial Paper--Nonfinancial" (with an Index
Maturity of one month or three months being deemed to be equivalent to an Index
Maturity of 30 days or 90 days, respectively). If by 3:00 P.M., New York City
time, on such Calculation Date such rate is not yet published in either
H.15(519) or H.15 Daily Update, then the Commercial Paper Rate will be
calculated by the Calculation Agent and shall be the Money Market Yield of the
arithmetic mean of the offered rates as of 11:00 A.M., New York City time, on
the applicable Interest Determination Date of three leading dealers of
commercial paper in The City of New York selected by the Calculation Agent, in
its discretion, for commercial paper of the specified Index Maturity placed for
an industrial issuer whose bond rating is "Aa," or the equivalent, from a
nationally recognized statistical rating organization. If the dealers selected
as aforesaid by the Calculation Agent are not quoting offered rates as
described in the preceding sentence, the Commercial Paper Rate with respect to
such Interest Reset Date will be the Commercial Paper Rate in effect under the
Note on such Interest Determination Date.
20
"Money Market Yield" shall be a yield (expressed as a percentage)
calculated in accordance with the following formula:
Money Market Yield = D x 360 x 100
-------------
360 - (D x M)
where "D" refers to the applicable per annum rate for commercial paper quoted
on a bank discount basis and expressed as a decimal, and "M" refers to the
actual number of days in the applicable Interest Reset Period.
Prime Rate Notes. Prime Rate Notes will bear interest at the interest
rates (calculated with reference to the Prime Rate and the Spread and/or Spread
Multiplier, if any) specified in the Prime Rate Notes and in the applicable
pricing supplement.
The "Prime Rate," with respect to each Interest Reset Date, will be
determined by the Calculation Agent on the Calculation Date and will be the
rate as of the Interest Determination Date next preceding such Interest Reset
Date as published in H.15(519) under the heading "Bank Prime Loan". In the
event that such rate is not published prior to 3:00 P.M., New York City time,
on the related Calculation Date, then the Prime Rate with respect to such
Interest Reset Date will be the applicable rate as published in H.15 Daily
Update under the heading "Bank Prime Loan." If by 3:00 P.M., New York City
time, on such Calculation Date such rate is not yet published in either
H.15(519) or H.15 Daily Update, then the Prime Rate will be calculated by the
Calculation Agent and will be the arithmetic mean of the rates of interest
publicly announced by each bank that appears on such Interest Determination
Date on the display designated as page "USPRIME1" on the Reuters Monitor Money
Rates Service (or any successor service or such other page as may replace the
USPRIME1 page on that service for the purpose of displaying prime rates or base
lending rates of major United States banks) ("Reuters Screen USPRIME1 Page") as
such bank's prime rate or base lending rate as of 11:00 A.M., New York City
time, on such Interest Determination Date. If fewer than four such rates appear
on the Reuters Screen USPRIME1 Page as of 3:00 P.M., New York City time, on the
applicable Interest Determination Date, the Prime Rate with respect to such
Interest Reset Date will be the arithmetic mean of the prime rates or base
lending rates (quoted on the basis of the actual number of days in the year
divided by a 360-day year) as of the close of business on such Interest
Determination Date as furnished in The City of New York by the major money
center banks, if any, that have provided such quotations and by a reasonable
number of substitute banks or trust companies to obtain four such prime rate
quotations, provided such substitute banks or trust companies are organized and
doing business under the laws of the United States, or any state thereof, each
having total equity capital of at least $500 million and being subject to
supervision or examination by federal or state authority, selected by the
Calculation Agent to provide such rate or rates. If the banks or trust
companies selected as aforesaid by the Calculation Agent are not quoting rates
as described in the preceding sentence, the Prime Rate with respect to such
Interest Reset Date will be the Prime Rate in effect on such Interest
Determination Date.
LIBOR Notes. Each LIBOR Note will bear interest at the interest rate
(calculated with reference to LIBOR and the Spread and/or Spread Multiplier if
any) as specified in the LIBOR Note and in the applicable pricing supplement.
"LIBOR," with respect to each Interest Reset Date, will be determined by
the Calculation Agent in accordance with the following provisions:
. With respect to an Interest Determination Date, LIBOR will be either:
(a) if "LIBOR Reuters" is specified in the applicable Note and
pricing supplement, the arithmetic mean of the offered rates (unless
the Designated LIBOR Page by its terms provides only for a single
rate, in which case such single rate shall be used) for deposits in
U.S. dollars having the Index Maturity specified in such Note and
pricing supplement, commencing on the applicable Interest Reset Date,
that appear (or, if only a single rate is required as aforesaid,
appears) on the Designated LIBOR Page as of 11:00 A.M., London time,
on such Interest Determination Date, or (b) if "LIBOR Telerate" is
specified in
21
the applicable Note and pricing supplement or if neither "LIBOR
Reuters" nor "LIBOR Telerate" is specified in the applicable Note and
pricing supplement as the method for calculating LIBOR, the rate for
deposits in U.S. dollars having the Index Maturity specified in such
Note and pricing supplement, commencing on such Interest Reset Date,
that appears on the Designated LIBOR Page as of 11:00 A.M., London
time, on such Interest Determination Date. If fewer than two such
offered rates so appear, or if no such rate so appears where the
Designated LIBOR Page provides only for a single rate, LIBOR on such
Interest Determination Date will be determined in accordance with the
provisions described in the following paragraph.
. With respect to a Interest Determination Date on which fewer offered
rates appear than are required in the preceding paragraph, the
Calculation Agent will request the principal London offices of each
of four major reference banks (which may include the Agents or their
affiliates) in the London interbank market as selected by the
Calculation Agent, to provide the Calculation Agent with its offered
quotation for deposits in U.S. dollars for the period of the Index
Maturity specified in the applicable Note and pricing supplement,
commencing on the applicable Interest Reset Date to prime banks in
the London interbank market at approximately 11:00 A.M., London time,
on such Interest Determination Date and in a principal amount that is
representative for a single transaction in U.S. dollars in such
market at such time. If at least two such quotations are so provided,
then LIBOR on such Interest Determination Date will be the arithmetic
mean of such quotations. If fewer than two such quotations are so
provided, then LIBOR on such Interest Determination Date will be the
arithmetic mean of the rates quoted at approximately 11:00 A.M., New
York City time, on such Interest Determination Date by three major
banks in The City of New York selected by the Calculation Agent for
loans in U.S. dollars to leading European banks, having the Index
Maturity specified in the applicable Note and pricing supplement and
in a principal amount that is representative for a single transaction
in U.S. dollars in such market at such time. If the banks so selected
by the Calculation Agent are not quoting rates as described in the
preceding sentence, LIBOR determined as of such Interest
Determination Date will be LIBOR in effect under the Note on such
Interest Determination Date.
"Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified in the
applicable pricing supplement, the display in the Reuter Monitor Money Rates
Service (or any successor service) on the page specified in such pricing
supplement (or any other page as may replace such page on such service) for the
purpose of displaying the London interbank rates of major banks for U.S.
dollars, or (b) if "LIBOR Telerate" is specified in the applicable pricing
supplement or neither "LIBOR Reuters" nor "LIBOR Telerate" is specified in the
applicable pricing supplement as the method for calculating LIBOR, the display
on Moneyline Telerate (or any successor service) on the page specified in such
pricing supplement (or any other page as may replace such page on such service)
for the purpose of displaying the London interbank rates of major banks for
U.S. dollars.
Treasury Rate Notes. Treasury Rate Notes will bear interest at the
interest rates (calculated with reference to the Treasury Rate and the Spread
and/or Spread Multiplier, if any) specified in the Treasury Rate Notes and in
the applicable pricing supplement.
The "Treasury Rate," with respect to each Interest Reset Date, will be
determined by the Calculation Agent on the Calculation Date and will be the
rate for the auction held on the Interest Determination Date (the "Auction")
next preceding such Interest Reset Date of direct obligations of the United
States ("Treasury bills") having the Index Maturity specified in the applicable
Note and pricing supplement as published under the heading "INVESTMENT RATE" on
the display on Moneyline Telerate (or any successor service) on page 56 (or any
other page as may replace that page on that service) or page 57 (or any other
page as may replace that page on that service). In the event that such rate is
not published prior to 3:00 P.M., New York City time, on the related
Calculation Date, then the Treasury Rate with respect to such Interest Reset
Date will be the Bond Equivalent Yield (as defined below) of the rate for the
applicable Treasury bills as published in H.15 Daily Update under the heading
"U.S. Government Securities/Treasury Bills/Auction High." In the event that the
rate
22
referred to in the preceding sentence is not published prior to 3:00 P.M., New
York City time, on the related Calculation Date, then the Treasury Rate with
respect to such Interest Reset Date will be the Bond Equivalent Yield of the
auction rate of the applicable Treasury bills as announced by the United States
Department of the Treasury. In the event that the rate referred to in the
preceding sentence is not so announced by the United States Department of the
Treasury, or if the Auction is not held, then the Treasury Rate with respect to
such Interest Reset Date will be the Bond Equivalent Yield of the rate for the
applicable Treasury bills as published in H.15(519) under the heading "U.S.
Government Securities/Treasury Bills/Secondary Market." In the event that the
rate referred to in the preceding sentence is not published prior to 3:00 P.M.,
New York City time, on the related Calculation Date, then the Treasury Rate
with respect to such Interest Reset Date will be the rate for the applicable
Treasury Bills as published in H.15 Daily Update under the heading "U.S.
Government Securities/Treasury Bills/Secondary Market." In the event that the
rate referred to in the preceding sentence is not published prior to 3:00 P.M.,
New York City time, on the related Calculation Date, then the Treasury Rate
will be calculated by the Calculation Agent and shall be the Bond Equivalent
Yield of the arithmetic mean of the secondary market bid rates, as of
approximately 3:30 P.M., New York City time, on such Interest Determination
Date, of three primary United States government securities dealers selected by
the Calculation Agent, in its discretion, for the issue of Treasury bills with
a remaining maturity closest to the Index Maturity designated in the applicable
Note and pricing supplement. If the dealers selected as aforesaid by the
Calculation Agent are not quoting bid rates as described in the preceding
sentence, the Treasury Rate with respect to such Interest Reset Date will be
the Treasury Rate in effect under the Note on such Interest Determination Date.
"Bond Equivalent Yield" means a yield (expressed as a percentage)
calculated in accordance with the following formula:
Bond Equivalent Yield = D x N x 100
-------------
360 - (D x M)
where "D" refers to the applicable per annum rate for Treasury Bills quoted on
a bank discount basis and expressed as a decimal, "N" refers to 365 or 366, as
the case may be, and "M" refers to the actual number of days in the applicable
Interest Reset Period.
CD Rate Notes. CD Rate Notes will bear interest at the interest rates
(calculated with reference to the CD Rate and the Spread and/or Spread
Multiplier, if any) specified in the CD Rate Notes and in the applicable
pricing supplement.
The "CD Rate," with respect to each Interest Reset Date, will be
determined by the Calculation Agent on the Calculation Date and will be the
rate as of the Interest Determination Date next preceding such Interest Reset
Date for negotiable United States dollar certificates of deposit having the
Index Maturity specified in the applicable Note and pricing supplement as
published in H.15(519) under the heading "CDs (secondary market)". In the event
that such rate is not published prior to 3:00 P.M., New York City time, on the
related Calculation Date, then the CD Rate with respect to such Interest Reset
Date shall be the rate on such Interest Determination Date for negotiable
United States dollar certificates of deposit having the Index Maturity
specified in the applicable Note and pricing supplement as published in H.15
Daily Update under the heading "CDs (secondary market)". If by 3:00 P.M., New
York City time, on such Calculation Date such rate is not published in either
H.15(519) or H.15 Daily Update, the CD Rate with respect to such Interest Reset
Date shall be calculated by the Calculation Agent and shall be the arithmetic
mean of the secondary market offered rates, as of 10:00 A.M., New York City
time, on such Interest Determination Date, of three leading nonbank dealers in
negotiable United States dollar certificates of deposit in The City of New York
selected by the Calculation Agent for negotiable United States certificates of
deposit of major United States money center banks with a remaining maturity
closest to the Index Maturity specified in the applicable Note and pricing
supplement in United States dollars. If the dealers selected as aforesaid by
the Calculation Agent are not quoting rates as described in the preceding
sentence, the CD Rate with respect to such Interest Reset Date will be the CD
Rate in effect under the Note on such Interest Determination Date.
23
Federal Funds Rate Notes. Federal Funds Rate Notes will bear interest at
the interest rates (calculated with reference to the Federal Funds Rate and the
Spread and/or Spread Multiplier, if any) specified in the Federal Funds Rate
Notes and in the applicable pricing supplement.
The "Federal Funds Rate," with respect to each Interest Reset Date, will
be determined by the Calculation Agent on the Calculation Date and will be the
rate as of the Interest Determination Date next preceding such Interest Reset
Date for United States dollar federal funds as published in H.15(519) under the
heading "Federal Funds (Effective)" and displayed on Moneyline Telerate (or any
successor service) on page 120 (or any other page as may replace that page on
that service). In the event that such rate does not appear on such page 120 or
is not published prior to 3:00 P.M., New York City time, on the relevant
Calculation Date, then the Federal Funds Rate with respect to such Interest
Reset Date will be the rate on such Interest Determination Date as published in
H.15 Daily Update under the heading "Federal Funds (Effective)". If by
3:00 P.M., New York City time, on such Calculation Date such rate is not
published in either H.15(519) or H.15 Daily Update, the Federal Funds Rate with
respect to such Interest Reset Date shall be calculated by the Calculation
Agent and shall be the arithmetic mean of the rates, as of 9:00 A.M., New York
City time, on the applicable Interest Determination Date, for the last
transaction in overnight United States dollar federal funds arranged by three
leading brokers of United States dollar federal funds transactions in The City
of New York selected by the Calculation Agent. If the brokers selected as
aforesaid by the Calculation Agent are not quoting rates as described in the
preceding sentence, the Federal Funds Rate with respect to such Interest Reset
Date will be the Federal Funds Rate in effect under the Note on such Interest
Determination Date.
Book-Entry Notes
Except as described below, the Notes will be issued as Book-Entry Notes
and represented by one or more global securities (each, a "Global Security")
that will be deposited with, or on behalf of, The Depository Trust Company, New
York, New York ("DTC"), or such other Depositary as is designated by HEI, and
registered in the name of a nominee of the Depositary.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC holds securities that its participants ("Participants") deposit with
DTC. DTC also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates. Direct
participants ("Direct Participants") include securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations.
DTC is owned by a number of its Direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc. and the National Association
of Securities Dealers, Inc. The Agents are Direct Participants of the
Depositary. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a Direct Participant, either directly or
indirectly ("Indirect Participants"). The rules applicable to DTC and its
Participants are on file with the SEC.
Upon issuance, all Book-Entry Notes having the same issue price, issue
date, maturity date, interest rate, redemption and repayment provisions, if
any, and interest payment dates will be represented by one or more Global
Securities and will be deposited with DTC or its custodian.
So long as the Depositary or its nominee is the registered owner of a
Global Security, the Depositary or its nominee, as the case may be, will be the
sole holder of the Book-Entry Notes represented thereby for all purposes under
the Indenture. Except as otherwise provided below, the beneficial owners of the
Global Security or Securities representing Book-Entry Notes will not be
entitled to receive physical delivery of Definitive Notes and will not be
considered the holders thereof for any purpose under the Indenture, and no
Global Security
24
representing Book-Entry Notes shall be so exchangeable or transferable.
Accordingly, each beneficial owner must rely on the procedures of the
Depositary and, if such beneficial owner is not a Participant, on the
procedures of the Participant through which such beneficial owner owns its
interest in order to exercise any rights of a holder under such Global Security
or the Indenture. The laws of some jurisdictions require that certain
purchasers of securities take physical delivery of such securities in
certificated form. Such limits and laws may impair the ability to transfer
beneficial interests in a Global Security representing Book-Entry Notes.
Purchases of Book-Entry Notes under the DTC system must be made by or
through Direct Participants, which will receive a credit for such Book-Entry
Notes on DTC's records. The ownership interest of each actual purchaser of each
Book-Entry Note ("beneficial owner") is in turn to be recorded on the Direct
and Indirect Participants' records. Beneficial owners will not receive written
confirmation from DTC of their purchase, but beneficial owners are expected to
receive written confirmations providing details of the transaction, as well as
periodic statements of their holdings, from the Direct or Indirect Participant
through which the beneficial owner entered into the transaction. Transfers of
ownership interests in a Global Security representing Book-Entry Notes are to
be accomplished by entries made on the books of Participants acting on behalf
of beneficial owners. Beneficial owners will not receive certificates
representing their ownership interests of a Global Security representing
Book-Entry Notes, except in the event that use of the book-entry system for
such Book-Entry Notes is discontinued.
To facilitate subsequent transfers, all Global Securities representing
Book-Entry Notes which are deposited with, or on behalf of, the Depositary are
registered in the name of the Depositary's nominee, Cede & Co. The deposit of
Global Securities with, or on behalf of, the Depositary and their registration
in the name of Cede & Co. will effect no change in beneficial ownership. DTC
has no knowledge of the actual beneficial owners of the Global Securities
representing the Book-Entry Notes. DTC's records reflect only the identity of
the Direct Participants to whose accounts such Book-Entry Notes are credited,
which may or may not be the beneficial owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
If applicable, redemption notices will be sent to Cede & Co. as
registered holder of the Book-Entry Notes. If less than all of the Notes within
an issue are being redeemed, DTC will determine in accordance with its usual
procedures the amount of the interest of each Direct Participant to be redeemed.
Neither DTC nor Cede & Co. will itself consent or vote with respect to
the Global Securities representing Book-Entry Notes. Under its usual
procedures, DTC mails an omnibus proxy (the "Omnibus Proxy") to HEI as soon as
possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Book-Entry Notes are credited on the record date (identified in a listing
attached to the Omnibus Proxy).
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants and by Direct
Participants and Indirect Participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
So long as the Notes are Book-Entry Notes, principal, premium (if any)
and interest payments on such Book-Entry Notes will be made by HEI in
immediately available funds through the Trustee to DTC. DTC's practice is to
credit Direct Participants' accounts on the date on which interest is payable
in accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payment on such date. Payments
by Participants to beneficial owners will be governed by standing instructions
and customary practices as is the case with securities held for the accounts of
customers in bearer form or registered in "street name" and will be the
responsibility of such Participant and not of DTC, the Agents or HEI, subject
to any statutory or regulatory requirements as may be in effect from time to
time. Payment of principal, premium (if any) and interest to DTC is the
responsibility of HEI and the Trustee. Disbursement of such payments to Direct
Participants is the responsibility of DTC and disbursement of such payments to
the beneficial owners is the responsibility of Direct and Indirect Participants.
25
A beneficial owner shall give notice of its exercise of any option it may
have to elect to have its Book-Entry Notes repaid by HEI, through its
Participant, to the Trustee, and shall effect delivery of such Book-Entry Notes
by causing the Direct Participant to transfer to the Trustee the Participant's
interest in the Global Security or Securities representing such Book-Entry
Notes on the Depositary's records. The requirement for physical delivery of
Book-Entry Notes in connection with the exercise of a beneficial owner's option
for repayment will be deemed satisfied when the ownership rights in the Global
Security or Securities representing such Book-Entry Notes are transferred by
Direct Participants to the Trustee on the Depositary's records.
Each Global Security representing Book-Entry Notes will be exchangeable
for Definitive Notes of like tenor and terms and of differing authorized
denominations in a like aggregate principal amount, only if (i) the Depositary
notifies HEI that it is unwilling or unable to continue as Depositary for the
Global Securities or HEI becomes aware that the Depositary has ceased to be a
clearing agency registered under the Exchange Act and, in either such case, HEI
shall not have appointed a successor to the Depositary within 90 days
thereafter, (ii) HEI, in its sole discretion, determines that the Global
Securities will be exchangeable for Definitive Notes or (iii) an Event of
Default will have occurred and be continuing with respect to the Notes under
the Indenture. Upon any such exchange, the Definitive Notes will be registered
in the names of the beneficial owners of the Global Security or Securities
representing Book-Entry Notes, which names will be provided by the Depositary's
relevant Participants (as identified by the Depositary) to the Trustee.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources (including DTC) that HEI believes to be
accurate, but HEI assumes no responsibility for the accuracy thereof. HEI
assumes no responsibility for the performance by DTC or its Participants of
their respective obligations as described herein or under the rules and
procedures governing their respective operations.
Redemption at the Option of HEI
The Notes will not be subject to any sinking fund. The Notes will be
redeemable at the option of HEI prior to the Stated Maturity only if a
Redemption Commencement Date and an Initial Redemption Percentage are specified
in the applicable Note and pricing supplement. If so specified, the Notes will
be subject to redemption at the option of HEI on any date on and after the
applicable Redemption Commencement Date in whole or from time to time in part
in increments of $1,000 or such other minimum denomination specified in such
pricing supplement (provided that any remaining principal amount thereof shall
be at least $1,000 or such other minimum denomination), at the applicable
Redemption Price (as defined below), together with unpaid interest accrued
thereon to the date of redemption, on written notice given to the holders
thereof not less than 30 nor more than 60 calendar days prior to the date of
redemption and in accordance with the provisions of the Indenture. "Redemption
Price", with respect to a Note, means an amount equal to the Initial Redemption
Percentage specified in the applicable Note and pricing supplement (as adjusted
by the Annual Redemption Percentage Reduction, if applicable) multiplied by the
unpaid principal amount to be redeemed. The Initial Redemption Percentage, if
any, applicable to a Note shall decline at each anniversary of the Redemption
Commencement Date by an amount equal to the Annual Redemption Percentage
Reduction (if any) specified in the applicable Note and pricing supplement,
until the Redemption Price is equal to 100% of the unpaid principal amount to
be redeemed. If any Note is redeemed in part, a new Note of like tenor for the
unredeemed portion and otherwise having the same terms as the partially
redeemed Note will be issued in the name of the holder upon presentation and
surrender of the partially redeemed Note. For a discussion of the redemption of
Discount Notes, see "Discount Notes."
Repayment at the Option of the Holder
The Notes will be repayable by HEI at the option of the holders thereof
prior to the Stated Maturity only if one or more Optional Repayment Dates are
specified in the applicable Note and pricing supplement. If so specified, the
Notes will be subject to repayment at the option of the holders thereof on any
Optional Repayment Date in whole or from time to time in part in increments of
$1,000 or such other minimum denomination as is specified in the applicable
pricing supplement (provided that any remaining principal amount thereof shall
be at
26
least $1,000 or such minimum denomination), at a repayment price equal to 100%
of the unpaid principal amount to be repaid, together with unpaid interest
accrued thereon to the date of repayment. For any Note to be repaid, such Note
must be received, together with the form entitled "Option to Elect Repayment"
duly completed, by the Trustee at its office maintained for such purpose in the
Borough of Manhattan in The City of New York, or in such other location as HEI
selects in conformity with the Indenture, not less than 30 nor more than 60
calendar days prior to the date of repayment. If any Note is repaid in part, a
new Note of like tenor for the unpaid portion and otherwise having the same
terms as the partially repaid Note will be issued in the name of the holder
upon presentation and surrender of the partially repaid Note. For a discussion
of the repayment of Discount Notes, see "Discount Notes."
Only the Depositary may exercise a repayment option in respect of Global
Securities representing Book-Entry Notes. Accordingly, beneficial owners of
Global Securities that desire to exercise their repayment option, if any, with
respect to all or any portion of the Book-Entry Notes represented by such
Global Securities, must instruct the Participant through which they own their
interest to direct the Depositary to exercise the repayment option on their
behalf by delivering the related Global Security and duly completed election
form to the Trustee as aforesaid. In order to ensure that such Global Security
and election form are received by the Trustee on a particular day, the
applicable beneficial owner must so instruct the Participant through which it
owns its interest before such Participant's deadline for accepting instructions
for that day. Participants may have different deadlines for accepting
instructions from their customers. Accordingly, a beneficial owner should
consult the Participant through which it owns an interest in a Global Security
for the Participant's deadline for receiving repayment instructions. In
addition, at the time such instructions are given, each such beneficial owner
shall cause the Participant through which it owns its interest to transfer such
beneficial owner's interest in the Global Security or Securities representing
the related Book-Entry Notes, on the Depositary's records, to the Trustee. The
exercise of an option to elect repayment shall be irrevocable. See "Book-Entry
Notes."
If applicable, HEI will comply with the requirements of Section 14(e) of
the Exchange Act and the rules promulgated thereunder, and any other securities
laws or regulations, in connection with any such repayment.
Discount Notes
HEI may offer Discount Notes from time to time that have an Issue Price
(as specified in the applicable pricing supplement) that is less than 100% of
the principal amount thereof (i.e., par) by more than a percentage equal to the
product of 0.25% and the number of full years to the Stated Maturity. Such
Discount Notes will bear no interest or will bear interest at a rate that is
below market rates at the time of issuance. The difference between the Issue
Price of a Discount Note and 100% of the principal amount of the Note is
referred to as the "Discount." In the event of redemption, repayment or
acceleration of maturity of a Discount Note, the amount payable to the holder
of such Discount Note will be equal to the sum of (i) the Issue Price
(increased by an accrual of Discount) and, in the event of any redemption of
such Discount Note (if applicable), multiplied by the Initial Redemption
Percentage (as adjusted by the Annual Redemption Percentage Reduction, if
applicable) and (ii) any unpaid interest accrued thereon to the date of such
redemption, repayment or acceleration of maturity, as the case may be.
For purposes of determining the amount of Discount that has accrued as of
any date on which redemption, repayment or acceleration of maturity occurs for
a Discount Note, such Discount will be accrued using a constant yield method.
The constant yield will be calculated using a 30-day month, 360-day year
convention, a compounding period that, except for the Initial Period (as
defined below), corresponds to the shortest period between Interest Payment
Dates for the applicable Discount Note (with ratable accruals within a
compounded period), a coupon rate equal to the initial coupon rate applicable
to such Discount Note and an assumption that the maturity of such Discount Note
will not be accelerated. If the period from the date of issue to the initial
Interest Payment Date for a Discount Note (the "Initial Period") is shorter
than the compounded period for such Discount Note, a proportionate amount of
the yield for an entire compounding period will be accrued. If the Initial
Period is longer than the compounding period, then such period will be divided
into a regular compounding period and a short period with the short period
being treated as provided above.
27
The accrual of the applicable Discount may differ from the accrual of
original issue discount, certain Discount Notes may not be treated as having
original issue discount, and Notes other than Discount Notes may be treated as
issued with original issue discount, in each case for United States federal
income tax purposes. See "Certain United States Federal Income Tax
Consequences."
Amortizing Notes
HEI may from time to time offer Notes with the amount of principal
thereof and interest thereon payable in installments over the term of such
Notes ("Amortizing Notes"). Interest on each Amortizing Note will be computed
on the basis of a 360-day year of twelve 30-day months. Payments with respect
to Amortizing Notes will be applied first to interest due and payable thereon
and then to the reduction of the unpaid principal amount thereof. Further
information concerning additional terms and provisions of Amortizing Notes will
be specified in the applicable pricing supplement, including a table setting
forth a principal repayment schedule for such Amortizing Notes.
Other Provisions; Addenda
Any provisions of a Note, including but not limited to the specification
and determination of one or more Base Rates, the calculation of the interest
rate applicable to a Floating Rate Note, the Interest Payment Dates, the Stated
Maturity and any redemption or repayment provisions, may be modified by the
terms specified under "Other Provisions" in the Note or in an Addendum to the
Note, if so specified in the Note (or any Addendum to the Note) and in the
applicable pricing supplement.
Restriction on Liens
Except as described below, HEI will not create, incur, issue, assume,
permit or suffer to exist any Indebtedness (as defined below) secured after the
date of the Indenture by any security interest on any property of HEI
(including, without limitation, property of HEI consisting of any share or
shares of capital stock or indebtedness of any subsidiary of HEI), whether such
property, shares or indebtedness are owned by HEI at the date of the Indenture
or thereafter acquired, without effectively providing concurrently therewith
that the Securities, including the Notes (together, at the option of HEI, with
any other indebtedness ranking equally with the Securities and then existing or
thereafter created), shall be secured equally and ratably with (or prior to)
the Indebtedness so created, incurred, issued, assumed, permitted or suffered
to exist.
The foregoing restrictions do not limit the ability of any subsidiary of
HEI to incur, issue, assume, permit or suffer to exist any of its own
indebtedness or to grant security interests on any of its properties. The
foregoing restrictions also do not apply to:
(1)security interests on any property acquired, constructed or improved
by HEI or on any shares of capital stock or indebtedness of any
subsidiary acquired by HEI after the date of the Indenture which
security interests are created or assumed at the time of or within
270 days after the acquisition of, or the expenditure of the costs of
construction or improvements of, and which secure the payment of all
or any part of the purchase price of, such property, shares of
capital stock or indebtedness, or which secure payment of all or any
part of the cost of any such construction or improvements, provided
that, in the case of any such acquisition, construction or
improvement, such security interest does not apply to any property or
shares of capital stock or indebtedness owned by HEI other than that
acquired, constructed or improved except, in the case of any such
construction or improvement, any real property on which the property
is so constructed or the improvement is located;
(2)security interests which exist on any property, shares of capital
stock or indebtedness at the time of acquisition of such property,
shares or indebtedness by HEI;
(3)security interests which exist on any property of a corporation or
other Person (as defined below) at the time such corporation is
merged with or into or consolidated with HEI or at the time of a sale
or
28
transfer of the properties of such corporation or other Person as an
entirety or substantially as an entirety to HEI;
(4)security interests in favor of the United States of America or any
State thereof, or any department, agency or instrumentality or
political subdivision of the United States of America or any State
thereof, or in favor of any other country or political subdivision,
(A) to secure partial progress, advance or other payments pursuant to
any contract or statute, (B) to secure any indebtedness incurred or
guaranteed for the purpose of financing or refinancing all or any
part of the purchase price of any property, shares of capital stock
or indebtedness subject to such security interests, or (C) to secure
the cost of constructing or improving any property subject to such
security interests (including, without limitation, security interests
incurred in connection with pollution control, industrial revenue or
similar financings);
(5)security interests on any property arising in connection with any
defeasance, covenant defeasance or in substance defeasance of any
Indebtedness pursuant to express contractual provisions or generally
accepted accounting principles;
(6)security interests on any capital stock of any corporation which is
registered in the name of HEI or otherwise owned by or held for the
benefit of HEI which may constitute "margin stock" as such term is
defined in Section 207.2(i) of Title 12 of the Code of Federal
Regulations (or any successor provisions); and
(7)any extension, renewal or replacement (or successive extensions,
renewals or replacements) in whole or in part of any security
interest referred to above in clauses (1)-(6), inclusive; provided,
however, that the principal amount of Indebtedness secured thereby
shall not exceed the original principal amount of Indebtedness and
that such extension, renewal or replacement shall be limited to all
or a part of the property (plus improvements and construction on such
property), shares of capital stock or indebtedness which was subject
to the security interest so extended, renewed or replaced.
Notwithstanding the foregoing, HEI may, without equally and ratably
securing the Securities, create, incur, issue, assume, permit or suffer to
exist Indebtedness secured by any security interest not excepted by the
foregoing clauses (1) through (7), inclusive, if the aggregate amount of such
Indebtedness, together with all other Indebtedness of HEI existing at such time
and secured by security interests not so excepted, does not exceed 10% of
Consolidated Net Tangible Assets (as defined below).
"Indebtedness" means (1) any indebtedness, whether or not represented by
bonds, debentures, notes or other securities, for the repayment of money
borrowed, (2) all deferred indebtedness (including, without limitation,
capitalized leases) for the payment of the purchase price of property or assets
purchased, and (3) all guaranties, endorsements, assumptions or other
contingent obligations in respect of, or to purchase or otherwise to acquire,
indebtedness of the types described in clauses (1) and (2) above.
"Consolidated Net Tangible Assets" means the total amount of assets
appearing on the consolidated balance sheet of HEI and its subsidiaries less,
without duplication: (a) all current liabilities (excluding any thereof which
are by their terms extendable or renewable at the sole option of the obligor
without requiring the consent of the obligee to a date more than 12 months
after the date of determination); (b) all reserves for depreciation and other
asset valuation reserves but excluding any reserves for deferred federal income
taxes arising from accelerated amortization or otherwise; (c) all intangible
assets such as goodwill, trademarks, trade names, patents and unamortized debt
discount and expense carried as an asset on such balance sheet; and (d) all
appropriate adjustments on account of minority interests of other persons
holding common stock in any subsidiary. The Indenture states that Consolidated
Net Tangible Assets are determined in accordance with generally accepted
accounting principles and as of a date not more than 90 days prior to the
happening of the event for which such determination is being made.
29
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any governmental agency or political subdivision.
Restriction on Sale-Leaseback Transactions
HEI may not engage in any Sale-Leaseback Transaction unless the amount of
Sale-Leaseback Debt resulting from such transaction plus the aggregate of all
other Sale-Leaseback Debt then existing, does not exceed 5% of Consolidated Net
Tangible Assets. However, if a Sale-Leaseback Transaction would result in the
amount of Sale-Leaseback Debt exceeding the foregoing limitation, then such
transaction is permitted, but only if the excess amount of Sale-Leaseback Debt,
if treated as Indebtedness secured by a security interest for the purposes of
the restrictions described under "Restriction on Liens", would be permissible
under such restrictions, and provided further that the amount of such excess
shall be treated as Indebtedness for such purpose and not as Sale-Leaseback
Debt.
"Sale-Leaseback Transaction" means any sale by HEI to any person (other
than HEI or a subsidiary) after the date of the Indenture of any property owned
by HEI, which sale occurs more than 270 days after the later of the
acquisition, completion of construction or commencement of commercial
operations of such property by HEI, if, as part of the same transaction or
series of transactions, HEI leases as lessee for a period of three years or
longer the same property or other substantially equivalent property which it
intends to use for substantially the same purposes pursuant to a lease which
contains an option or right to repurchase said property.
"Sale-Leaseback Debt" means, as to any particular lease entered into in a
Sale-Leaseback Transaction, at any date as of which the amount thereof is to be
determined, the total net amount of rent (determined in accordance with
generally accepted accounting principles) required to be paid under such lease
during the remaining term thereof, discounted from the respective due dates
thereof to such date at the rate per annum which would then be used to
determine lease classification under generally accepted accounting principles.
The net amount of rent required to be paid under any such lease for any such
period shall be the aggregate amount of the rent payable by the lessee with
respect to such period after excluding amounts required to be paid on account
of maintenance and repairs, insurance, taxes, assessments, water rates and
similar charges. The term "Sale-Leaseback Debt" excludes any part thereof
representing any extension, renewal or replacements (or successive extensions,
renewals or replacements) of Indebtedness secured by any security interest
existing at the date of the Indenture, provided that the Sale-Leaseback
Transaction resulting in such Sale-Leaseback Debt is limited to all or a part
of the property (plus improvements and construction on such property) which was
subject to the security interest securing the Indebtedness so extended, renewed
or replaced.
Restriction on Dispositions of HECO Shares
HEI currently holds 100% of the outstanding common stock of HECO. HEI
will not sell, transfer or otherwise dispose of, and will not permit HECO to
issue, sell, transfer or otherwise dispose of, any shares of capital stock of
any class or classes of HECO ordinarily having voting power for the election of
HECO's board of directors. This covenant will not restrict the issuance, sale,
transfer or other disposition of HECO's voting shares to HEI or to any of HEI's
direct or indirect wholly-owned subsidiaries. The covenant also will not
restrict (i) sales or transfers by HECO of preferred stock or other classes of
capital stock of HECO which do not ordinarily have voting power in the election
of HECO's Board of Directors or of the capital stock of its subsidiaries, (ii)
consolidations of HECO or mergers of HECO with or into HEI or any of its direct
or indirect wholly-owned subsidiaries, or (iii) consolidations or mergers of
HECO with or into any other corporation if the corporation formed by such
consolidation or merger is a direct or indirect wholly-owned subsidiary of HEI.
Consolidations, Mergers, Conveyances, Transfers or Leases
HEI will not consolidate with or merge into any other corporation or
convey, transfer or lease its properties and assets substantially as an
entirety to any Person or permit any Person to consolidate with or merge
30
into HEI or convey, transfer or lease its properties and assets substantially
as an entirety to HEI unless certain conditions are met, including the
conditions that:
. the corporation formed by such consolidation or into which HEI is
merged, or the Person which acquires by conveyance or transfer or
which leases the property and assets of HEI substantially as an
entirety, is a Person organized and existing in corporate form under
the laws of the United States of America, any State thereof or the
District of Columbia, and such Person expressly assumes, by
supplemental indenture, the due and punctual payment of the principal
of (and premium, if any) and interest (if any) on all the Securities
and the performance of all of the covenants of HEI under the
Indenture;
. immediately after giving effect to such transaction no Event of
Default, and no event which after notice and lapse of time would
become an Event of Default, has occurred and is continuing; and
. HEI has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, as provided in the Indenture.
Absence of Restrictions on Certain Transactions
Other than the restrictions on liens, sale and leaseback transactions and
consolidations, mergers, conveyances, transfers and leases described above, the
Indenture and the Notes do not contain any covenants or other provisions
designed to afford holders of the Notes protection in the event of a highly
leveraged transaction involving HEI or in the event of a recapitalization,
merger or other transaction (leveraged or otherwise) involving HEI, its
affiliates or its management.
Events of Default
Each of the following is an Event of Default under the Indenture with
respect to the Notes as a series of Securities under the Indenture:
. failure to pay any interest on any Note when due and payable and
continuation of such failure for 30 days;
. failure to pay any principal of (or premium, if any, on) any Note
when due and payable and continuance of such failure for a period of
three Business Days;
. failure to deposit any sinking fund payment, when and as due by the
terms of a Note, and continuance of such failure for a period of
three Business Days;
. failure to perform or the breach of any covenant or warranty of HEI
made in or pursuant to the Indenture (other than a covenant or
warranty of HEI made in or pursuant to the Indenture solely for the
benefit of one or more series of Securities other than the Notes),
continued for 60 days after written notice to HEI by the Trustee, or
to HEI and the Trustee by the holders of at least 10% in principal
amount of the Notes or of the Securities of another series
outstanding under the Indenture as provided in the Indenture;
. failure to pay when due and payable after the expiration of any
applicable grace period, any portion of the principal of indebtedness
of HEI pursuant to a bond, debenture, note or other evidence of
indebtedness in excess of $5,000,000 (including a default with
respect to Securities of any series other than the Notes), or
acceleration of such indebtedness for other default thereunder,
without such Indebtedness having been discharged, or such
acceleration having been rescinded or annulled, within 10 days after
written notice to HEI by the Trustee or to HEI and the Trustee by the
holders of at least 10% in principal amount of the Notes outstanding
under the Indenture (provided that this Event of Default shall be
inapplicable if and so long as HEI is contesting in good faith such
payment obligation or such acceleration and HEI has received the
written opinion of counsel that it has a meritorious position with
respect thereto);
31
. certain events of bankruptcy, insolvency or reorganization; and
. any other Event of Default specified with respect to the Notes.
An Event of Default with respect to any other series of Securities issued under
the Indenture will not necessarily constitute an Event of Default with respect
to the Notes.
The Trustee must, within 90 days after a default occurs with respect to
the Notes, transmit by mail to all holders of the Notes, notice of such
default, unless it has been cured or waived (default is defined to include the
events specified above without the grace periods or notice). The Trustee may
withhold notice of a default, except a default in the payment of principal,
premium, if any, or interest, if and so long as the Trustee determines in good
faith (through its board, executive committee, trust committee or certain
officers specified in the Indenture) that the withholding of such notice is in
the interest of such holders. In the case of any default or breach of any
covenant or warranty, except for a default or breach that is specifically
addressed in the Indenture, no notice of such default or breach shall be given
to holders for at least 30 days after the occurrence of such default or breach.
If an Event of Default with respect to the outstanding Notes issued under
the Indenture shall occur and be continuing, then either the Trustee or the
holders of not less than 25% in principal amount of the outstanding Notes may
declare the principal amount (or if any of the Notes are Discount Notes or
similar securities, such portion of the principal amount as may be specified
thereon) of all of the Notes to be due and payable immediately; provided,
however, that at any time after a declaration of acceleration of the Notes and
before a judgment or decree for payment has been obtained, the holders of a
majority in principal amount of the outstanding Notes may, under certain
circumstances, rescind and annul such acceleration and its consequences if all
Events of Default with respect to the Notes, other than the nonpayment of the
principal of the Notes which has become due solely by such declaration of
acceleration, have been cured or waived as provided in the Indenture. Any money
collected by the Trustee pursuant to the exercise of its rights upon an Event
of Default shall be applied first to amounts owing to the Trustee under the
Indenture.
No holder of any Note will have any right to institute any proceeding
with respect to the Indenture, or for the appointment of a receiver or trustee
or for any remedy thereunder, unless such holder shall have previously given to
the Trustee written notice of a continuing Event of Default and the holders of
at least 25% in aggregate principal amount of the outstanding Notes shall have
made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as trustee, and the Trustee shall not have received
from the holders of a majority in aggregate principal amount of the outstanding
Notes a direction inconsistent with such request and shall have failed to
institute such proceeding within 60 days. However, such limitations do not
apply to a suit instituted by a holder of a Note for enforcement of payment of
the principal of and premium, if any, or interest on such Note on or after the
respective due dates expressed in such Note.
For purposes of the preceding two paragraphs the Notes will not deemed to
be outstanding if HEI takes certain steps to discharge its obligations relating
to the Notes. See "Defeasance".
HEI will be required to furnish to the Trustee annually a statement as to
the performance by HEI of certain of its obligations under the Indenture and as
to any default in such performance.
Defeasance
Defeasance and Discharge
Subject to election by HEI, which election HEI has made with respect to
the Notes, the Indenture provides that HEI will be discharged from any and all
obligations in respect of a series of Securities (except for certain
obligations to register the transfer or exchange of Securities of such series,
to replace stolen, lost or mutilated Securities, to maintain paying agencies
and to hold monies for payment in trust) upon the deposit with the Trustee or
any other trustee, in trust, of money and/or U.S. Government Obligations which
through the
32
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of (and
premium, if any) and each installment of interest on such Securities at least
one day prior to the dates on which such payments are due in accordance with
the terms of the Indenture and such Securities. Such a trust may only be
established if, among other things required by the Indenture, HEI delivers to
the Trustee an opinion of counsel to the effect that HEI has received from, or
there has been published by, the Internal Revenue Service a ruling or there has
been a change in applicable federal income tax laws and regulations (including
a change in the official interpretation by the Internal Revenue Service) to the
effect that holders of such Securities will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to federal income tax on the same amounts and in
the same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred.
Defeasance of Certain Covenants and Certain Events of Default
Subject to election by HEI, which election HEI has made with respect to
the Notes, the Indenture provides that with respect to a series of the
Securities HEI may omit to comply with certain restrictive covenants, including
those described under "Restrictions on Liens" and "Restriction on
Sale-Leaseback Transactions" above, and the Event of Default described in the
fourth bullet point under "Events of Default" above, shall be inapplicable to
Securities of such series, upon the deposit with the Trustee, in trust, of
money and/or U.S. Government Obligations which through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of (and premium, if any) and
each installment of interest on such Securities at least one day prior to the
date on which such payments are due in accordance with the terms of the
Indenture and such Securities. The obligations of HEI under the Indenture and
such Securities other than with respect to the covenants referred to above and
the Events of Default other than the Event of Default referred to above shall
remain in full force and effect. Such a trust may only be established if, among
other things required by the Indenture, HEI has delivered to the Trustee an
opinion of counsel to the effect that the holders of such Securities will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and defeasance of certain obligations and will be subject to
federal income tax on the same amounts and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
Designation of a Portion of a Series as a New Series
It is contemplated that a single series of the Securities, such as the
Notes, will be created which would include Securities with sufficiently
different terms that some of them (e.g., fixed rate Securities), but not others
of them (e.g., floating rate Securities), would readily be the subject of
defeasance and discharge or covenant defeasance, as described below. In order
to facilitate such defeasance or covenant defeasance, HEI acting by board
resolution of its Board of Directors shall have the right, at any time or from
time to time, unilaterally to designate a portion of the Securities of any
series, which is to be the subject of such defeasance or covenant defeasance,
as a separate series under the Indenture, with the remainder to be unaffected
as to series designation by such action, and to assign a new series designation
thereto to distinguish the Securities of such new series from all other
Securities. Thereafter, the Securities included in such new series, on the one
hand, and the remainder of such Securities, on the other hand, shall be of
different series for all purposes under the Indenture, and provisions in the
Indenture or in any Security which apply to each series separately or otherwise
depend upon or relate to series designation, shall give effect to such action
by HEI, but the provisions of the Indenture and of any Security shall otherwise
be unaffected thereby.
Covenant Defeasance and Certain Other Events of Default
In the event that HEI exercises its option to omit compliance with
certain covenants of the Indenture with respect to the Notes as described above
and the Notes are declared due and payable prior to the Stated Maturity because
of the occurrence of any then-applicable Event of Default, the amount of money
and U.S. Government Obligations on deposit with the Trustee will be sufficient
to pay amounts due on the Notes at their
33
Stated Maturity but may not be sufficient to pay amounts due on the Notes at
the time of the acceleration resulting from such Event of Default. However, HEI
shall remain liable for such payments.
Modification of Indenture and Waiver
Without the consent of any holders of Securities, HEI and the Trustee may
enter into one or more supplemental indentures for certain purposes enumerated
in the Indenture, such as to evidence succession to HEI of another corporation,
to cure ambiguities in the Indenture or to make any other provisions that shall
not adversely affect the interests of the holders of Securities of any series
in any material respect. The consent of the holders of not less than 66 2/3 %
in principal amount of the Securities of each series affected by a supplemental
indenture is required for the purpose of adding any provisions to, or changing
in any manner or eliminating any of the provisions of, the Indenture pursuant
to such supplemental indenture. No such supplemental indenture will, however,
without the consent of the holders of each outstanding Security under the
Indenture of each such series directly affected thereby:
. change the Stated Maturity of, or any installment of, principal of or
interest on, any Security, or reduce the principal thereof or the
rate of interest thereon or redemption premium payable thereon, or
shorten the time period during which such Security may not be
redeemed at the option of HEI, or reduce the amount of principal of a
Discount Note that would be due and payable upon a declaration of
acceleration of the Stated Maturity, or otherwise modify the terms of
payment of or the place of payment for the principal thereof or
interest or redemption premium thereon;
. reduce the percentage of principal amount of the outstanding
Securities of such series required to consent to any supplemental
indenture or to any waiver provided for in the Indenture;
. change any obligation of HEI to maintain an office or agency at the
place or places where the principal of and premium, if any, and
interest, if any, on the Securities of such series are payable; or
. modify certain of the provisions in the Indenture relating to
supplemental indentures, waivers of certain covenants and waivers of
past defaults.
A supplemental indenture which changes or eliminates any covenant or
other provision of the Indenture which has expressly been included solely for
the benefit of one or more particular series of Securities, or which modifies
the rights of the holders of Securities of such series with respect to such
covenant or other provision, shall be deemed not to affect the rights under the
Indenture of the holders of any other Securities.
The holders of 66 2/3 % in aggregate principal amount of the outstanding
Securities of a series may waive compliance by HEI with the provisions of the
Indenture restricting liens and sale-leaseback transactions insofar as they
relate to the Securities of such series. The holders of a majority in aggregate
principal amount of the outstanding Securities of a series may waive any past
default under the Indenture, except a default in the payment of principal,
premium, if any, or interest or in respect of any covenant or provision of the
Indenture referred to in the second preceding paragraph above.
Regarding the Trustee
HEI and its affiliates may, from time to time, enter into commercial
banking and other transactions with the Trustee in the ordinary course of
business.
Listing
The Notes will not be listed on any national or regional securities
exchange.
Governing Law
The Indenture and the Notes will be governed by the laws of the State of
New York.
34
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
General
The following summary describes the material United States federal income
tax consequences of the purchase, ownership and disposition of Notes. Except
where noted, it deals only with Notes held as capital assets by holders that
are United States Persons ("U.S. Holders") and that purchased Notes at their
original issuance, and assumes that the holder is the beneficial owner of the
Note. For this purpose, "United States Person" means a citizen or resident of
the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political
subdivision thereof, an estate the income of which is subject to United States
federal income taxation regardless of its source, or a trust the administration
of which is subject to the primary jurisdiction of a court within the United
States and with respect to which one or more United States persons have
authority to control all substantial decisions.
This summary does not deal with special situations, such as those of
dealers in securities, financial institutions, insurance companies, individual
retirement or other tax-deferred accounts, tax exempt organizations, persons
who hold Notes as a hedge against currency risk, persons who have otherwise
hedged the risk of ownership of a Note or persons who hold Notes as part of a
straddle with other investments or whose "functional currency" is not the U.S.
dollar. Finally, it does not purport to cover any foreign, state or local tax
consequences associated with the purchase, ownership or disposition of Notes or
all of the possible United States federal income tax consequences of the
purchase, ownership or disposition of Notes.
The discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), including the regulations, rulings and judicial decisions
thereunder as of the date hereof. Such authorities may be repealed, revoked or
modified so as to result in United States federal income tax consequences
different from those discussed below. There is no assurance that the Internal
Revenue Service ("IRS") will not take a contrary view.
Payments of Interest
Interest on a Note will generally be taxable to a U.S. Holder as ordinary
interest income from domestic sources at the time it is paid or accrued in
accordance with the holder's method of accounting for United States federal
income tax purposes. However, different rules apply with respect to Original
Issue Discount Notes (as defined below).
Original Issue Discount
An "Original Issue Discount Note" is a Note whose stated redemption price
at maturity (i.e., the sum of its principal amount plus all other payments to
be made on the Note other than "qualified stated interest") exceeds its issue
price (i.e., the first price at which a substantial amount of the Notes in the
issuance is sold, excluding sales to bond houses, brokers and others acting as
underwriters, placement agents or wholesalers) by more than 0.25 percent of the
stated redemption price at maturity multiplied by the number of complete years
to maturity. The term "Original Issue Discount Note" does not necessarily
include all Notes identified as Discount Notes, and may include Notes that are
not otherwise Discount Notes but that have been issued with original issue
discount ("OID") for United Sates federal income tax purposes. "Qualified
stated interest" is stated interest that is unconditionally payable in cash or
in property (other than debt instruments of the issuer) at least annually at a
single fixed rate, provided that the rate appropriately takes into account the
length of intervals between payments, or at certain variable rates of interest
or certain combinations thereof.
U.S. Holders of Original Issue Discount Notes with maturities of more
than one year will be required to include OID in gross income as interest
income before receiving cash to which such interest income is attributable. The
amount of OID annually includible in income by a U.S. Holder is the sum of the
daily portions of OID with respect to each Original Issue Discount Note held by
such U.S. Holder for each day during the taxable year or portion of a taxable
year that the U.S. Holder holds such Original Issue Discount Note. The daily
35
portion is determined by allocating to each day of any accrual period a pro
rata portion of an amount equal to the "adjusted issue price" of the Original
Issue Discount Note at the beginning of the accrual period multiplied by the
yield to maturity of the Original Issue Discount Note less the amount, if any,
of qualified stated interest allocable to the accrual period. The "accrual
period" for an Original Issue Discount Note may be of any length and may vary
in length over the term of the Original Issue Discount Note, provided that each
accrual period is no longer than one year and each scheduled payment of
principal or interest occurs on either the first or final day of an accrual
period. The "adjusted issue price" is the issue price of the Original Issue
Discount Note increased by the accrued OID for all prior accrual periods (and
decreased by the amount of all payments previously made on the Original Issue
Discount Note, other than qualified stated interest payments). Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
provide detailed rules for computing OID.
Under the OID Regulations, a Floating Rate Note will qualify as a
"variable rate debt instrument" if (a) its issue price does not exceed the
total noncontingent principal payments due under the Floating Rate Note by more
than a specified de minimis amount, (b) it does not provide for any principal
payments that are contingent, and (c) it provides for stated interest, paid or
compounded at least annually, at current values of (i) one or more qualified
floating rates, (ii) a single fixed rate and one or more qualified floating
rates, (iii) a single objective rate, or (iv) a single fixed rate and a single
objective rate that is a qualified inverse floating rate. Any qualified
floating rate or objective rate must be set at current value. The meanings of
the terms "qualified floating rates," "single objective rate," "qualified
inverse floating rate," "current value" and other terms are contained in the
OID Regulations.
If a Floating Rate Note that provides for stated interest at a single
qualified floating rate (or a single objective rate) throughout the term
thereof qualifies as a "variable rate debt instrument" under the OID
Regulations, then any stated interest on such Note which is unconditionally
payable in cash or property (other than debt instruments of the issuer) at
least annually during the term of the Note will constitute qualified stated
interest and will be taxed accordingly. Thus, such a Floating Rate will
generally not be treated as having been issued with OID unless the Floating
Rate Note is issued at a "true" discount (i.e., at a price below the Note's
stated principal amount) in excess of a specified de minimis amount. OID on
such a Floating Rate Note arising from "true" discount is allocated to an
accrual period using the constant yield method described above by assuming that
the variable rate is a fixed rate equal to, in the case of a qualified floating
rate or qualified inverse floating rate, the value as of the issue date of the
qualified floating rate or qualified inverse floating rate.
In general, any other Floating Rate Note that qualifies as a "variable
rate debt instrument" will be converted into an "equivalent" fixed rate debt
instrument for purposes of determining the amount and accrual of OID and
qualified stated interest on the Floating Rate Note. The OID Regulations
generally require that such a Floating Rate Note be converted into an
"equivalent" fixed rate debt instrument by substituting any qualified floating
rate or qualified inverse floating rate provided for under the terms of the
Floating Rate Note with a fixed rate equal to the value of the qualified
floating rate or qualified inverse floating rate, as the case may be, as of the
Floating Rate Note's issue date.
Once the Floating Rate Note is converted into an "equivalent" fixed rate
debt instrument pursuant to the foregoing rules, the amount of OID and
qualified stated interest, if any, are determined for the "equivalent" fixed
rate debt instrument by applying the general OID rules to the "equivalent"
fixed rate debt instrument. A U.S. Holder of the Floating Rate Note will
account for such OID and qualified stated interest as if the U.S. Holder held
the "equivalent" fixed rate debt instrument. In each accrual period,
appropriate adjustments will be made to the amount of qualified stated interest
or OID assumed to have been accrued or paid with respect to the "equivalent"
fixed rate debt instrument in the event that such amounts differ from the
actual amount of interest accrued or paid on the Floating Rate Note during the
accrual period.
If a Floating Rate Note does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Floating Rate Note would be
treated as a contingent payment debt obligation (a "CP Note").
36
U.S. Holders of CP Notes would be required to take amounts treated as
interest into income, under the noncontingent bond method, as described in the
OID Regulations, whether or not any payment thereon is fixed or determinable in
the taxable year. HEI would be required to determine the "comparable yield" for
the CP Note, which is the yield at which HEI would issue a fixed rate
instrument with similar terms and conditions, such as the level of
subordination. In no event may this yield be less than the applicable federal
rate, which is periodically published in IRS revenue rulings.
In addition, HEI would be required to construct a projected payment
schedule, including the amount of all noncontingent payments and each
contingent payment. These scheduled payments must produce the comparable yield
for the CP Note. A U.S. Holder will be required to use this projected payment
schedule to determine its interest (all of which is accrued as OID, as
described above) and adjustments thereto with respect to a CP Note, unless it
determines its own schedule and explicitly discloses that fact to the IRS. In
such an event, HEI would provide the projected payment schedule for any CP Note
with the relevant pricing supplement.
If the amount of a contingent payment on a CP Note is more than the
projected amount of the contingent payment, as reflected in the projected
payment schedule, the excess constitutes a positive adjustment, generally on
the date of payment. If the amount of the contingent payment is less than the
projected amount thereof, the difference is a negative adjustment.
The amount by which the positive adjustments on a CP Note in a taxable
year exceeds the negative adjustments in that year constitutes a net positive
adjustment, which is treated as additional interest for the taxable year.
The amount by which negative adjustments on a CP Note in a taxable year
exceed the positive adjustments in that year constitutes a net negative
adjustment. A U.S. Holder's net negative adjustment for a taxable year first
reduces the U.S. Holders' amount otherwise includible as interest on the CP
Note for the taxable year. Second, to the extent the negative adjustment
exceeds the U.S. Holder's amount of interest for the taxable year, the excess
constitutes an ordinary loss, limited to the amount of interest on the CP Note
included by the U.S. Holder in prior taxable years reduced by any amount of net
negative adjustments from prior taxable years which were previously treated as
ordinary losses. Third, any remainder of net negative adjustments is a
carryforward to the extent of the U.S. Holder's interest on the CP Note in
subsequent taxable years or, if the U.S. Holder has a negative adjustment
carryforward in the year of retirement, sale or disposition, it reduces the
amount realized on such retirement, sale or disposition.
In general, any gain recognized by a U.S. Holder on the sale, exchange or
retirement of a CP Note will be treated as ordinary income and all or a portion
of any loss recognized will be treated as ordinary loss.
Short-Term Notes
In the case of Original Issue Discount Notes having a term of one year or
less ("Short-Term Notes"), all payments (including stated interest) are
included in the stated redemption price at maturity. The excess of the stated
redemption price at maturity over the issue price of a Short-Term Note
generally constitutes OID.
In general, individuals and certain other cash-method U.S. Holders of
Short-Term Notes are not required to include OID in income as it accrues unless
they elect to do so. However, accrual-method taxpayers and certain other
holders are required to include OID in income. Unless such holder makes an
election to accrue OID according to a constant yield method based on daily
compounding, it must be included on a straight-line basis. In the case of a
U.S. Holder who is not required (and does not elect) to include OID in income
currently, any gain realized on the sale, exchange or retirement of a
Short-Term Note will be ordinary income to the extent of the OID accrued
through the date of sale, exchange or retirement. In addition, U.S. Holders who
do not elect to currently include OID may be required to defer deductions for a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry the Short-Term Notes in an amount not exceeding the deferred
interest income, until such deferred interest income is recognized.
37
In addition, U.S. Holders may elect to determine the amount of discount,
referred to as acquisition discount, to be included in gross income by using
their tax basis instead of the issue price. If such an election is made, it
applies to all obligations acquired in or after the first taxable year to which
the election applies, which election may be revoked only with the consent of
the IRS. This acquisition discount constitutes ordinary income and not capital
gain.
Market Discount
If a U.S. Holder purchases a Note, other than an Original Issue Discount
Note, for an amount that is less than its stated redemption price at maturity
or, in the case of an Original Issue Discount Note, for an amount that is less
than its adjusted issue price, such U.S. Holder will be treated as having
purchased such Note at a "market discount," unless such market discount is less
than a specified de minimis amount.
Under the market discount rules, a U.S. Holder will be required to treat
any partial principal payment (or, in the case of an Original Issue Discount
Note, any payment that does not constitute qualified stated interest) on, or
any gain realized on the sale, exchange, retirement or other disposition of, a
Note as ordinary income to the extent of the lesser of (i) the amount of such
payment or realized gain or (ii) the market discount which has not previously
been included in income and is treated as having accrued on such Note at the
time of such payment or disposition. Market discount will be considered to
accrue ratably during the period from the date of acquisition to the maturity
date of the Note, unless the U.S. Holder elects to accrue market discount under
a constant yield method.
A U.S. Holder may be required to defer the deduction of all or a portion
of the interest paid or accrued on any indebtedness incurred or maintained to
purchase or carry a Note with market discount until the maturity of the Note or
certain earlier dispositions. A U.S. Holder may elect to include market
discount in income currently as it accrues (either ratably or under a constant
yield method), in which case the rules described above regarding the treatment
as ordinary income of gain upon the disposition of the Note and upon the
receipt of certain cash payments and regarding the deferral of interest
deductions will not apply. Generally, such currently included market discount
is treated as ordinary interest for United States federal income tax purposes.
Such an election will apply to all debt instruments acquired by the U.S. Holder
on or after the first day of the first taxable year to which such election
applies and may be revoked only with the consent of the IRS.
Amortizable Bond Premium
A U.S. Holder who purchases a Note for an amount in excess of the sum of
all amounts, other than qualified stated interest, payable on the Note after
the purchase date will be considered to have purchased the Note at a "premium"
and, in the case of an Original Issue Discount Note, will not be required to
include any OID in income. A U.S. Holder generally may elect to amortize the
premium over the remaining term of the Note under a constant yield method. For
any Floating Rate Note that is a "variable rate debt instrument" under the OID
Regulations, that method is implemented by constructing an "equivalent fixed
rate instrument," as provided in the OID Regulations. The amount amortized in
any year reduces both the U.S. Holder's adjusted basis in the Note and interest
income from the Note. Any excess bond premium allocable to an accrual period is
deductible by the holder for that accrual period. The amount deductible,
however, is limited by the amount of the holder's prior income inclusions on
the instrument, and any excess is carried forward to the next accrual period.
In addition, in the case of instruments that have alternative payment schedules
that are predicated on the unilateral exercise of an option by the issuer or
the holder, the amount of bond premium that is amortizable in an accrual period
is calculated by assuming that both the issuer and the holder will exercise or
not exercise options in a manner that maximizes the holder's yield. Thus, a
holder may be required to amortize bond premium by reference to the Stated
Maturity, even if it appears likely that the Note will be called. The final
regulations also contain rules applicable if such contingency occurs or fails
to occur contrary to the assumption utilized.
38
U.S. Holders not making an election to amortize bond premium are not
required to reduce the adjusted basis of their Notes and consequently may
recognize less gain or more loss upon their disposition. The election to
amortize premium, once made, applies to all debt instruments held or
subsequently acquired by the electing U.S. Holder on or after the first day of
the taxable year to which the election applies and may not be revoked without
the consent of the IRS. Holders should consult with their own tax advisors
about this election.
Election to Treat All Interest as OID
Subject to certain limitations, U.S. Holders may elect to treat all
interest and discount on Notes as OID and calculate the amount includible in
gross income under the constant yield method described above. For purposes of
this election, interest includes stated interest, OID, de minimis OID, market
discount, acquisition discount and other unstated interest, as adjusted by any
amortizable bond premium. If a U.S. Holder makes this election for a Note with
amortizable bond premium, the election is treated also as an election under the
amortizable bond premium provisions, described above, and the electing U.S.
Holder will be required to amortize bond premium currently for all of the U.S.
Holder's other debt instruments with amortizable bond premium. The election is
to be made for the taxable year in which the U.S. Holder acquired the Note, and
may not be revoked without the consent of the IRS.
Sale, Exchange and Retirement of Notes
A U.S. Holder's tax basis of a Note will, in general, be the U.S.
Holder's cost thereof, increased by OID previously included in income of the
U.S. Holder but reduced by any amortizable bond premium to the extent amortized
and any payments, other than qualified stated interest, while held by the U.S.
Holder. Upon the sale, exchange, retirement or other taxable disposition of a
Note, gain or loss will be recognized equal to the difference between (i) the
amount of cash and fair market value of property received (excluding an amount
attributable to accrued and unpaid stated interest not previously included in
income, which will be taxed as ordinary income) and (ii) the U.S. Holder's tax
basis in the Note. Except as described above with respect to Short-Term Notes
and the OID, market discount and amortizable bond premium rules, the gain or
loss will be capital gain or loss and will be long-term capital gain or loss if
the Note was held for more than one year. Net capital gains of individuals are,
under certain circumstances, taxed at lower rates than items of ordinary
income, and the deductibility of capital losses of U.S. Holders is subject to
limitations.
Backup Withholding and Information Reporting
In general, information reporting requirements will apply to certain
payments of principal, interest, OID and premium on Notes and the proceeds of a
sale of a Note made to U.S. Holders other than certain exempt recipients (such
as corporations). A 30 percent backup withholding tax (subject to phased-in
rate reductions) will apply to such payments if the holder fails to provide its
taxpayer identification number or certification of its exempt status or fails
to report in full dividend and interest income.
The amount of accrued OID on Original Issue Discount Notes held of record
by persons other than corporations and other exempt holders will be reported to
the extent required by applicable law.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against a U.S. Holder's federal income tax
liability provided the required information is furnished to the IRS.
39
PLAN OF DISTRIBUTION
The Notes are being offered on a continuing basis for sale by HEI, to or
through the Agents, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Goldman, Sachs & Co., Robert W. Baird & Co. Incorporated, Janney Montgomery
Scott LLC, U.S. Bancorp Piper Jaffray Inc. or one or more other Agents
appointed from time to time by HEI pursuant to the terms of the Distribution
Agreement relating to the offering of the Notes. The Agents, individually or in
a syndicate, may purchase Notes, as principal, from HEI from time to time for
resale to investors and other purchasers at varying prices relating to
prevailing market prices at the time of resale as determined by the applicable
Agent, or, if so specified in the applicable pricing supplement, for resale at
a fixed offering price. If agreed to by HEI and the applicable Agent, such
Agent may utilize its reasonable efforts on an agency basis to solicit offers
to purchase the Notes at 100% of the principal amount thereof, unless the
applicable pricing supplement states otherwise. HEI will pay a commission to
each such Agent, ranging from .125 % to .750% of the principal amount of a
Note, depending upon its Stated Maturity, sold through such Agent, as agent.
The following table describes the potential proceeds HEI will receive if it
sells all of the Notes but does not include expenses payable by HEI, which are
estimated to be $240,000:
Price to Public Agents' Commissions and Discounts Proceeds to HEI
--------------- --------------------------------- ----------------------------
Per Note.... 100% .125% to .750% 99.250% to 99.875%
Total....... $300,000,000 $375,000 to $2,250,000 $297,750,000 to $299,625,000
HEI may also sell the Notes directly to purchasers in those jurisdictions
in which it is permitted to do so. No commission or discount will be payable by
HEI on Notes sold directly by HEI.
Any Note sold to an Agent as principal will be purchased by such Agent at
a price equal to 100% of the principal amount thereof less a percentage of the
principal amount equal to the commission applicable to an agency sale of a Note
of identical maturity. An Agent may sell Notes it has purchased from HEI as
principal to certain dealers less a concession equal to all or any portion of
the discount it received in connection with such purchase. Such Agent may
allow, and such dealers may reallow, any portion of the discount received in
connection with such purchase. After the initial offering of Notes, the
offering price (in the case of Notes to be resold on a fixed offering price
basis), the concession and the reallowance may be changed.
HEI reserves the right to withdraw, cancel or modify the offer made
hereby without notice and may reject orders in whole or in part (whether placed
directly with HEI or through an Agent). Each Agent will have the right, in its
discretion, reasonably exercised, to reject in whole or in part any offer to
purchase Notes received by it on an agency basis.
Payment of the purchase price of the Notes will be required to be made in
immediately available funds in New York City on the date of settlement.
No Note will have an established trading market when issued. The Notes
will not be listed on any securities exchange. Each of the Agents may from time
to time purchase and sell Notes in the secondary market, but no Agent is
obligated to do so, and there can be no assurance that there will be a
secondary market for the Notes or liquidity in the secondary market if one
develops. From time to time, each of the Agents may make a market in the Notes,
but no Agent is obligated to do so and the Agents may discontinue any such
market-making activity at any time.
In connection with an offering of Notes purchased by one or more Agents
as principal on a fixed price basis, each such Agent will be permitted to
engage in certain transactions that stabilize the price of such Notes. Such
transactions may consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of such Notes. If an Agent creates a short
position in such Notes (i.e., if it sells Notes in an aggregate principal
amount exceeding that set forth in the applicable pricing supplement), such
Agent may reduce that short position by purchasing Notes in the open market.
40
In general, purchases of Notes for the purpose of stabilization or to
reduce a short position could cause the price of Notes to be higher than it
might be in the absence of such purchases.
Neither HEI nor any of the Agents makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the Notes. In addition, neither HEI nor any of
the Agents makes any representation that the Agents will engage in any such
transactions or that such transactions once commenced will not be discontinued
without notice.
Each Agent may be deemed to be an "underwriter" within the meaning of the
Securities Act. HEI has agreed to indemnify the Agents against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Agents may be required to make in respect thereof. HEI has
agreed to reimburse each of the Agents for certain other expenses.
The Agents from time to time provide investment banking services to HEI
and may from time to time engage in transactions with and perform other
services for HEI in the ordinary course of business.
VALIDITY OF NOTES
The validity of the Notes will be passed upon for HEI by Goodsill
Anderson Quinn & Stifel LLP, Honolulu, Hawaii, and for the Agents by Pillsbury
Winthrop LLP, New York, New York. The opinions of counsel will be delivered at
the commencement date for HEI's Series D medium-term note program (and under
certain circumstances at intervals thereafter) and will assume that each future
issuance of the Notes complies with the Indenture and laws, agreements and
instruments then binding on HEI. Goodsill Anderson Quinn & Stifel LLP will rely
as to all matters of New York law upon the opinion of Pillsbury Winthrop LLP,
and Pillsbury Winthrop LLP will rely as to all matters of Hawaii law upon the
opinion of Goodsill Anderson Quinn & Stifel LLP.
EXPERTS
The consolidated financial statements and schedules of HEI and
subsidiaries as of December 31, 2001 and 2000, and for each of the years in the
three-year period ended December 31, 2001, have been incorporated by reference
herein in reliance upon the reports of KPMG LLP, independent accountants,
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing. The audit reports covering the December 31,
2001 consolidated financial statements and schedules refer to a change to the
accounting method for derivative instruments and hedging activities.
41
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$300,000,000
[LOGO]
Hawaiian Electric Industries, Inc.
Medium-Term Notes, Series D
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PROSPECTUS
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Merrill Lynch & Co.
Goldman, Sachs & Co.
Robert W. Baird & Co.
Janney Montgomery Scott LLC
U.S. Bancorp Piper Jaffray Inc.
August 16, 2002
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