Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2002, for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI is a holding company with operations primarily in Hawaii, consisting of regulated electric utilities (HECO, Maui Electric Company, and Hawaii Electric Light Company) and a banking subsidiary, American Savings Bank, F.S.B. (ASB). The electric utilities provide the only public utility service on the islands of Oahu, Maui, Lanai, Molokai, and Hawaii. ASB was the third-largest financial institution in Hawaii as of year-end.
Key Financial Metrics
Specific consolidated revenue, net income, and cash flow figures for HEI are incorporated by reference to the Annual Report and are not explicitly detailed in the provided text. However, the following segment-specific data is available:
- Electric Utility Revenues: Total electric sales revenues for 2002 were $1,248.2 million, a decrease from $1,279.4 million in 2001.
- HECO: $865.6 million
- MECO: $191.0 million
- HELCO: $191.6 million
- Banking Segment (ASB):
- Total Assets: $6.3 billion
- Deposits: $3.8 billion
- Return on Assets: 0.92%
- Return on Common Equity: 12.7%
- Net Interest Income: Increased by $7.3 million compared to 2001.
- Capitalization: HEI's aggregate market value of voting common equity held by nonaffiliates was approximately $1.55 billion as of June 30, 2002. HEI had 37,024,258 shares of common stock outstanding as of March 10, 2003.
- Debt and Liquidity: HEI's parent company long-term debt totaled $401 million. ASB maintained an unused FHLB borrowing capacity of approximately $1.0 billion.
Material Changes Versus Prior Period
- Electric Sales: Total electric sales revenues declined by approximately 2.4% in 2002 compared to 2001. This was driven by lower average fuel costs passed through to customers and a slight decrease in sales volumes in some categories, despite a 1.1% increase in total customer accounts.
- Fuel Costs: The average cost of fuel oil per MBtu decreased to 466.4 cents in 2002 from 539.3 cents in 2001. However, prices trended higher during 2002 compared to the end of 2001.
- Banking Portfolio: ASB's loan portfolio saw a decrease in average loans receivable due to high prepayments in a low-interest-rate environment and an exchange of loans for mortgage-related securities. Conversely, mortgage-related securities increased significantly.
- Discontinued Operations: HEI had no loss from discontinued operations in 2002, compared to losses of $24.0 million in 2001 and $63.6 million in 2000, following the exit from international power and residential real estate businesses.
Guidance, Outlook, Risks, and Contingencies
Outlook and Capital Projects:
- HECO plans to add a 107 MW simple-cycle combustion turbine by 2009 and a dual-train combined-cycle unit by 2016.
- MECO plans to add approximately 150 MW of generation on Maui by 2020.
- HELCO faces delays in adding new generation (Keahole CT-4 and CT-5) due to legal and permitting issues, necessitating reliance on independent power producers (IPPs) and deferred retirements of older units.
Material Risks and Contingencies:
- Legal Proceedings: A significant lawsuit alleges that HECO and HEI overcharged customers by over $1 billion under the AES Hawaii power purchase agreement. While most claims were dismissed in early 2003, a claim under the Hawaii False Claims Act remains pending. Management intends to vigorously defend the suit.
- Power Supply Reliability: HELCO experienced rolling blackouts in 2002 due to unplanned outages. The Puna Geothermal Venture (PGV) is producing significantly less than its contracted 30 MW (approx. 6 MW in 2002) due to well issues. Hamakua Partners output is also limited to 55-57 MW due to technical problems.
- Environmental: MECO incurred an estimated $0.8 million expense in 2002 to remediate a diesel fuel leak at the Maalaea Generating Station.
- Tax Contingency: The IRS made a tentative finding in March 2003 that a $90 million loss from a discontinued operation should be treated as a capital loss rather than an ordinary loss. If upheld, this could result in additional federal and state income taxes of approximately $35 million for the 2001 tax year.
- Regulatory: The company is subject to rate regulation by the Hawaii Public Utilities Commission (PUC). Future rate cases are planned for HECO (2003/2004 test year) to recover costs and maintain authorized returns.
Investor Verification Checklist
- Consolidated Financial Statements: Verify total consolidated revenue, net income, and cash flow figures in the full Annual Report, as they are not explicitly stated in the provided text.
- AES Hawaii Litigation: Monitor the status of the False Claims Act lawsuit regarding the AES Hawaii power purchase agreement and potential financial exposure.
- HELCO Power Supply: Assess the timeline for resolving the Puna Geothermal Venture (PGV) output issues and the Keahole CT-4/CT-5 permitting delays, as these impact reliability and costs.
- Tax Position: Confirm the final IRS determination regarding the $90 million discontinued operation loss and the potential $35 million tax liability impact.
- Banking Asset Quality: Review ASB's nonaccrual loan ratios (0.5% in 2002) and allowance for loan losses adequacy in the context of Hawaii's economic conditions.
- Rate Case Progress: Track the filing and approval status of HECO's upcoming rate case to ensure recovery of integrated resource planning (IRP) costs.