Business Context and Reporting Period
Company: Hawaiian Electric Industries, Inc. (HEI) and principal subsidiary Hawaiian Electric Company, Inc. (HECO).
Reporting Period: Quarter and nine months ended September 30, 2004.
Operations: HEI operates through three primary segments: Electric Utility (HECO, HELCO, MECO), Bank (American Savings Bank, F.S.B. or ASB), and Other. The company serves the Hawaiian market with regulated electric utility services and banking operations.
Key Financial Metrics (Nine Months Ended Sept 30, 2004)
| Metric | 2004 (in millions) | 2003 (in millions) |
|---|---|---|
| Total Revenues | $1,405.7 | $1,327.1 |
| Operating Income | $216.5 | $188.8 |
| Net Income | $84.8 | $76.7 |
| Diluted EPS | $1.07 | $1.03 |
| Cash from Operating Activities | $234.4 | $226.3 |
| Long-Term Debt (Net) | $1,167.1 | $1,064.4 |
| Stockholders' Equity | $1,212.2 | $1,089.0 |
Segment Performance (Nine Months):
- Electric Utility: Revenues $1,127.3M; Net Income $67.9M.
- Bank: Revenues $269.5M; Net Income $24.4M (significantly impacted by tax charges).
- Other: Revenues $8.8M; Net Loss $(9.4)M.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 6% year-over-year, driven by higher kilowatthour (KWH) sales (up 3.4%) and higher fuel costs passed through to customers in the utility segment.
- Bank Segment Tax Charge: The Bank segment reported a net charge of $24 million due to an adverse tax ruling regarding the dividends received deduction for its REIT subsidiary. This included a $21 million cumulative charge for bank franchise taxes and $3 million in interest.
- Discontinued Operations: HEI recorded a $1.9 million gain on the disposal of a China joint venture interest in the third quarter, compared to a $3.9 million loss in the same period of 2003.
- Stock Split: A 2-for-1 stock split was effected in June 2004; all share and per-share data have been adjusted retroactively.
Guidance, Outlook, and Risks
Management Commentary:
- Utility Outlook: Management expects Hawaii's economy to grow moderately, supported by tourism, military presence, and real estate. KWH sales are projected to increase due to economic strength and weather patterns.
- Capital Expenditures: Net capital expenditures for the electric utilities are estimated at $194 million for 2004 and $760 million for the 2004-2008 period.
- Dividends: The quarterly dividend of $0.31 per share was maintained. Management targets a sustainable payout ratio of 65%.
Key Risks and Contingencies:
- Regulatory: Pending PUC decisions on rate cases, competitive bidding for new generation, and distributed generation (DG) policies could impact future revenues.
- HELCO Keahole Project: Ongoing legal challenges and permitting delays regarding the Keahole power plant expansion (CT-4 and CT-5) pose risks to cost recovery and reliability.
- Pension Liability: Lower-than-expected returns on pension assets may require a significant non-cash charge to Accumulated Other Comprehensive Income (AOCI) at year-end, potentially affecting financial ratios and credit ratings.
- Interest Rate Risk: The Bank segment is sensitive to interest rate changes; rising rates could reduce the market value of mortgage-related securities.
Investor Verification Checklist
- Tax Ruling Impact: Verify the final status of the Hawaii Tax Appeal Court decision regarding the $24 million bank franchise tax charge and potential future accruals.
- HELCO Project Status: Monitor the resolution of legal proceedings regarding the Keahole power plant expansion and the PUC's decision on cost recovery for CT-4 and CT-5.
- Pension Funding: Review year-end actuarial assumptions and the potential magnitude of any minimum pension liability charge to AOCI.
- Rate Case Filings: Track the timing and outcome of HECO's general rate increase application expected in late 2004.
- Discontinued Operations: Confirm the final net proceeds from the disposition of HEI Power Corp. assets and the resolution of the China joint venture transfer.