Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2004, for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI operates primarily through two segments: electric utilities (HECO, Maui Electric Company, and Hawaii Electric Light Company) and banking (American Savings Bank, F.S.B. or ASB). The company serves the State of Hawaii and is subject to regulation by the Hawaii Public Utilities Commission (PUC) and federal banking regulators.
Key Financial Metrics
Consolidated Results (Six Months Ended June 30, 2004):
- Total Revenues: $898.9 million (up 3% from prior year).
- Net Income: $42.2 million (down 9% from prior year).
- Basic EPS (Continuing Operations): $0.54 (down 19% from prior year).
- Operating Cash Flow: $155.5 million provided by operating activities.
- Capital Structure: Total assets of $9.27 billion; Long-term debt of $1.17 billion; Common stock equity of $1.17 billion.
- Dividends: $0.62 per share paid for the six-month period.
Segment Performance (Six Months Ended June 30, 2004):
- Electric Utility: Revenues of $717.2 million; Net income of $41.8 million (up 15%). Growth driven by higher kilowatthour sales and fuel costs passed to customers.
- Bank (ASB): Revenues of $179.2 million; Net income of $9.0 million (down 67%). Results significantly impacted by a tax charge (see below).
- Other: Operating loss of $4.4 million.
Material Changes vs. Prior Period
The most significant material change was a $24 million net charge recorded in the second quarter of 2004 related to an adverse tax ruling concerning ASB Realty Corporation. The Hawaii Tax Appeal Court ruled against ASB regarding a dividends received deduction on income from its REIT subsidiary. This resulted in a cumulative charge of $21 million for bank franchise taxes and $3 million for interest.
Excluding this non-recurring tax charge, HEI's income from continuing operations would have increased by 36% for the six months ended June 30, 2004, compared to the same period in 2003. Additionally, the company completed a 2-for-1 stock split in June 2004, and all share data has been adjusted accordingly.
Discontinued operations (HEI Power Corp.) showed no loss in the current period, compared to a $3.9 million loss in the prior year due to writedowns of international investments.
Guidance, Outlook, and Risks
Management Commentary:
- Electric Utility: Management expects Hawaii's economy to grow moderately, supported by tourism, military presence, and real estate. KWH sales are projected to increase. A rate increase application is expected to be filed in the second half of 2004.
- Banking: ASB's results are sensitive to interest rate environments. Management expects interest rates to rise in 2004 and 2005. The bank remains well-capitalized with a Tier-1 risk-based capital ratio of 14.2%.
- Capital Expenditures: Net capital expenditures for the electric utilities are estimated at $194 million for 2004, with a five-year forecast (2004-2008) totaling $760 million.
Risks and Contingencies:
- Regulatory: Pending PUC decisions on rate cases, competitive bidding for new generation, and distributed generation policies could impact future revenues.
- Legal/Environmental: Ongoing litigation regarding the HELCO Keahole power plant expansion (noise mitigation, land use permits) and environmental remediation at Honolulu Harbor.
- Market Risk: ASB is exposed to interest rate risk; rising rates could compress net interest margins and reduce the market value of mortgage-related securities.
Investor Verification Checklist
- Tax Ruling Impact: Verify the finality of the Hawaii Supreme Court appeal regarding the $24 million ASB tax charge and potential future accruals.
- Rate Case Timing: Monitor the filing and approval of HECO's general rate increase application expected in late 2004.
- HELCO Keahole Project: Track the status of noise mitigation installation and regulatory approvals required for full-time operation of CT-4 and CT-5 units.
- Interest Rate Sensitivity: Review ASB's interest rate risk profile, specifically the impact of rising rates on net interest income and unrealized losses on available-for-sale securities.
- Capital Expenditure Execution: Confirm that the $760 million five-year capital plan is being executed within budget, particularly regarding transmission and distribution projects.