Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2002, 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.). The company is also in the process of exiting its international power business (HEI Power Corp.), which is reported as discontinued operations.
Key Financial Metrics
Consolidated Results (Six Months Ended June 30, 2002):
- Revenues: $786.4 million (down 9% from $860.7 million in 2001).
- Net Income: $57.9 million (up 9% from $53.3 million in 2001).
- Operating Income: $133.4 million (up 3% from $129.6 million in 2001).
- Earnings Per Share (Diluted): $1.60 (up from $1.59 in 2001).
- Cash Flow from Operations: $85.9 million (flat compared to $86.1 million in 2001).
- Cash and Equivalents: $243.9 million (down from $450.8 million at year-end 2001).
- Long-Term Debt: $1.09 billion (down from $1.15 billion at year-end 2001).
- Deposit Liabilities (Bank): $3.74 billion (up from $3.68 billion at year-end 2001).
Material Changes vs. Prior Period
Revenue Decline: Consolidated revenues decreased primarily due to lower fuel oil costs and lower fuel components in purchased energy prices, which are passed through to customers. This was partially offset by a 1.4% increase in kilowatthour (KWH) sales.
Profitability Improvement: Despite lower revenues, net income increased due to:
- Bank Segment: Operating income rose 23% to $46.5 million, driven by higher net interest income (due to lower interest rates on liabilities outpacing lower yields on assets) and the cessation of goodwill amortization under new accounting standards (SFAS No. 142).
- Electric Utility Segment: Operating income decreased slightly (2%) due to higher maintenance and depreciation costs, though fuel costs dropped significantly (22%).
- Discontinued Operations: The prior year included a loss from discontinued international power operations; the current period had no such loss.
Accounting Changes: The adoption of SFAS No. 142 eliminated goodwill amortization, improving reported earnings by approximately $1.9 million for the six-month period.
Guidance, Outlook, and Risks
Capital Expenditures: HEI estimates consolidated financing requirements of $1.2 billion for 2002–2006, with approximately $0.7 billion for net capital expenditures. Internal cash flows are expected to fund about 73% of these requirements.
Regulatory and Legal Risks:
- HELCO Keahole Expansion: Construction on combustion turbines CT-4 and CT-5 resumed in April 2002 after regulatory hurdles were cleared. However, the project faces ongoing legal challenges regarding land use permits and noise standards. Approximately $75 million in costs are currently capitalized, with potential write-offs if the project is not completed or costs are disallowed by the Public Utilities Commission (PUC).
- Oahu Transmission Line: The Board of Land and Natural Resources denied a permit for the Kamoku to Pukele transmission line in June 2002. HECO is evaluating alternatives; $16 million in costs are currently at risk.
- Litigation: A qui tam lawsuit alleges HECO overcharged customers under a power purchase agreement with AES Hawaii, seeking over $1 billion in damages. Management intends to vigorously defend the claim.
- Banking: American Savings Bank (ASB) remains well-capitalized but faces interest rate risk. Net interest income is negatively impacted by rising rates and positively impacted by falling rates.
Investor Verification Checklist
- Verify the status of the HELCO Keahole expansion legal appeals and the likelihood of cost recovery for the $75 million in capitalized costs.
- Monitor the outcome of the Oahu transmission line permit denial and HECO's alternative plans to avoid write-offs of the $16 million in incurred costs.
- Review the progress of the qui tam lawsuit regarding the AES Hawaii power purchase agreement and potential liability exposure.
- Assess the impact of fuel oil price volatility on the electric utility segment's operating margins, given the pass-through mechanism.
- Confirm the bank segment's net interest margin stability in a low-interest-rate environment and the adequacy of the allowance for loan losses (1.63% of average loans).