Hawaiian Electric Industries, Inc. - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1998, for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI operates as a holding company with three primary segments: electric utilities (HECO, MECO, HELCO), a savings bank (American Savings Bank, F.S.B. or ASB), and diversified businesses including freight transportation, real estate, and power development.
Key Financial Metrics (Six Months Ended June 30, 1998)
| Metric | HEI Consolidated (in millions) | HECO Utility (in millions) | ASB Savings Bank (in millions) |
|---|---|---|---|
| Revenues | $738.1 | $498.2 | $203.1 |
| Operating Income | $109.8 | $54.4 | $28.7 |
| Net Income | $44.6 | $38.0 | $15.7 |
| Earnings Per Share (Basic) | $1.40 | N/A | N/A |
| Cash Flow from Operations | $43.8 | $55.1 | ($14.0) used |
| Total Assets | $8,163.3 | $2,230.1 | $5,740.0 |
| Long-Term Debt | $918.9 | $603.3 | N/A |
| Deposit Liabilities (ASB) | N/A | N/A | $3,816.8 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 3% to $738.1 million compared to the prior year, driven by the savings bank and "other" segments, partially offset by an 8% decline in electric utility revenues due to lower fuel prices passed to ratepayers and a 1% decrease in kilowatthour sales.
- Profitability: Consolidated net income rose 13% to $44.6 million. Electric utility operating income increased 7% despite lower revenues, attributed to significant reductions in fuel oil costs and improved operational efficiency.
- Savings Bank Performance: ASB revenues surged 47% and net income increased 10%, reflecting the full impact of the December 1997 acquisition of Bank of America's Hawaii operations. However, the bank saw a $156 million outflow in deposits during the first half of 1998.
- Loan Loss Provisions: ASB increased its allowance for loan losses by $6.3 million (127% increase year-over-year) due to a slow Hawaii economy, though charge-offs remained low at 12 basis points of average loans.
Outlook, Risks, and Contingencies
- Regulatory Proceedings: HELCO faces ongoing permitting delays for its Keahole combined-cycle unit due to appeals regarding Conservation District Use Permits and Prevention of Significant Deterioration permits. A Notice of Violation (NOV) was issued by the Department of Health in July 1998 regarding unauthorized construction, resulting in a $48,800 fine and a stop-work order.
- Legal Settlement: HEI settled claims with former insurance carriers regarding the 1994 Hawaiian Insurance & Guaranty Company (HIG) rehabilitation. The company expects to receive $24.5 million (approx. $14 million net), to be recorded as income from discontinued operations in Q3 1998.
- Capital Requirements: HEI estimates consolidated funding requirements of $819 million for 1998-2002, primarily for electric utility capital expenditures ($665 million). Internal sources are expected to fund 80% of these needs.
- Market Risk: ASB manages interest rate risk; U.S. Treasury yields declined between 3.0% and 5.2% from late 1997 to mid-1998. Management does not believe this materially changed the company's interest-sensitive asset/liability profile.
- Year 2000 Compliance: The company is actively renovating systems to be Year 2000 ready, estimating no material adverse financial impact.
Investor Verification Checklist
- HELCO Permitting Status: Verify the resolution of the Keahole power plant permitting appeals and the impact of the July 1998 Notice of Violation on construction timelines and costs.
- ASB Deposit Trends: Monitor the $156 million deposit outflow in H1 1998 and the bank's ability to maintain liquidity and interest rate spreads in a competitive market.
- Loan Quality: Review the 127% increase in ASB's loan loss provision and the 1.15% allowance-to-loans ratio against the backdrop of the slow Hawaii economy.
- HIG Settlement Timing: Confirm the recording of the $14 million net gain from the HIG insurance settlement in the third quarter of 1998.
- Rate Case Outcomes: Track the status of pending rate increase requests filed by HELCO (11.5%) and MECO (15.3%) with the Public Utilities Commission.