Business Context and Reporting Period
This Form 10-Q covers Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO), for the quarterly and nine-month periods ended September 30, 1998. HEI operates as a holding company with three primary segments: Electric Utility (HECO and subsidiaries), Savings Bank (American Savings Bank, F.S.B. or ASB), and Other (including freight transportation, investment, and power development). The filing includes unaudited consolidated financial statements and management discussion.
Key Financial Metrics (Nine Months Ended Sept 30, 1998)
| Metric | HEI Consolidated (in millions) | HECO Utility (in millions) | ASB Savings Bank (in millions) |
|---|---|---|---|
| Total Revenues | $1,112.8 | $755.6 | $306.3 |
| Operating Income | $172.9 | $86.9 | $42.1 |
| Net Income (Continuing Ops) | $73.5 | $62.9 | $23.6 |
| Net Income (Total) | $63.7 | $62.9 | $23.6 |
| Basic EPS (Total) | $1.99 | N/A | N/A |
| Cash from Operations | $156.4 | $132.1 | $22.0 |
| Long-Term Debt | $920.7 | $613.1 | N/A |
| Cash & Equivalents | $275.1 | $5.5 | $264.9 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 3% year-over-year (YoY) to $1.11 billion, driven primarily by the Savings Bank segment (+46%) following the acquisition of Bank of America's Hawaii operations in late 1997. This was partially offset by an 8% decline in Electric Utility revenues due to lower fuel prices passed to ratepayers and a 1.5% decrease in kilowatthour (KWH) sales.
- Profitability: Consolidated Net Income from Continuing Operations rose 8% to $73.5 million. Electric Utility net income increased 9% despite lower sales, aided by lower fuel costs and improved efficiency. Savings Bank net income grew 11%.
- Discontinued Operations: The Company reported a significant loss from discontinued operations of $9.8 million (vs. $4.4 million prior year), primarily due to a $19.3 million impairment charge on the residential real estate subsidiary (Malama Pacific Corp.). This was partially offset by a $24.5 million settlement gain from insurance carriers regarding the former Hawaiian Insurance & Guaranty Company (HIG).
- Capital Structure: HEI issued $113 million in medium-term notes in 1998 to pay down short-term borrowings. ASB experienced a net outflow of deposits ($85 million) but increased borrowings from the Federal Home Loan Bank.
Guidance, Outlook, and Risks
- Utility Outlook: KWH sales are forecast to decline 1.4% in 1998 and 0.7% in 1999 due to a slow Hawaii economy and cooler weather. The five-year sales growth forecast was revised down to 0.3% annually. Management is pursuing rate increases for HELCO and MECO to recover costs for new generation projects.
- Regulatory & Legal Risks:
- HELCO Keahole Project: Significant delays persist in obtaining permits for the Keahole combined-cycle unit. The EPA and Department of Health issued Notices of Violation (NOV) in 1998 regarding unauthorized construction, resulting in fines and work stoppages. Litigation regarding land use permits and power purchase agreements with independent power producers (IPPs) remains active.
- Competition: The Public Utilities Commission (PUC) is reviewing the feasibility of retail competition in Hawaii. HECO argues retail competition is not feasible due to isolated island grids, but the PUC is exploring rate unbundling and competitive bidding for new generation.
- Year 2000 (Y2K): HEI estimates total remediation costs at $9 million ($2 million for utilities, $6 million for the bank). Management believes costs will not materially impact financial condition, but risks of system disruption remain.
- Real Estate Exit: HEI plans to exit the residential real estate development business (Malama Pacific Corp.) by September 1999. Assets are being marketed for sale.
Investor Verification Checklist
- HELCO Permitting Status: Verify the resolution of the EPA and DOH Notices of Violation regarding the Keahole power plant and the status of the Conservation District Use Permit (CDUP) appeals.
- Rate Case Outcomes: Monitor PUC decisions on pending rate increase requests for HELCO (11.5% requested) and MECO (11.9% requested), specifically regarding the recovery of costs for new generation units.
- Real Estate Asset Valuation: Assess the potential recovery value of Malama Pacific Corp.'s real estate assets, as the $18.9 million remaining net assets may differ materially from realized sale prices.
- ASB Loan Quality: Review trends in nonaccrual loans and loan loss provisions for American Savings Bank, which increased significantly ($9.5 million provision in 9 months) due to the weak local economy.
- Y2K Remediation Progress: Confirm the completion of testing for mission-critical systems by the stated deadlines (June 1999 for HEI mainframe, year-end 1998 for ASB internal testing).