Hawaiian Electric Industries, Inc. - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1999, 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 Utility (serving Oahu, Maui, and Hawaii islands), Savings Bank (American Savings Bank, F.S.B.), and Other (including freight transportation, independent power projects in Asia/Pacific, and real estate). The company is currently exiting its residential real estate development business (Malama Pacific Corp.), which is reported as a discontinued operation.
Key Financial Metrics (Six Months Ended June 30, 1999)
| Metric | HEI Consolidated (in millions) | HECO Utility (in millions) |
|---|---|---|
| Total Revenues | $721.9 | $487.5 |
| Operating Income | $112.7 | $60.1 |
| Net Income | $43.5 | $36.3 |
| EPS (Basic) | $1.35 | N/A |
| Cash from Operations | $100.4 | $93.2 |
| Long-Term Debt | $995.3 | $626.8 |
| Cash & Equivalents | $154.2 | $18.7 |
Note: HEI consolidated figures include the Savings Bank and Other segments. HECO figures represent the electric utility subsidiary only.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 2% to $721.9 million (from $735.5 million in 1998). The electric utility segment saw a 3% revenue drop primarily due to lower fuel oil prices passed through to customers, partially offset by a 1.8% increase in kilowatthour (KWH) sales.
- Net Income Decrease: Consolidated net income fell 2% to $43.5 million. The utility segment's net income dropped 4% despite higher operating income, driven by a 64% decrease in the Allowance for Funds Used During Construction (AFUDC) due to delays at the Keahole power plant and a 27% increase in maintenance expenses.
- Savings Bank Performance: The savings bank segment (ASB) reported a 12% increase in net income to $17.6 million, aided by a lower effective tax rate and higher operating income, despite a 1% decrease in revenues due to lower yields on interest-earning assets.
- Discontinued Operations: The real estate subsidiary (Malama Pacific Corp.) was fully discontinued in 1998; no loss from discontinued operations was recorded in the first half of 1999, compared to a $1.1 million loss in the same period of 1998.
Outlook, Risks, and Management Commentary
- HELCO Power Situation (Keahole Project): Significant regulatory delays continue to impact the construction of the Keahole combined-cycle unit. The Environmental Appeals Board (EAB) remanded the Prevention of Significant Deterioration (PSD) permit in late 1998, requiring updated air quality data. Construction of units CT-4 and CT-5 is delayed, with completion now targeted for early 2001. HEI has ceased accruing AFUDC on these units, impacting earnings.
- Independent Power Producers (IPPs): HEI is negotiating power purchase agreements with IPPs (Encogen, KCP, HCPC) to mitigate reserve margin shortages expected in 2000. The PUC approved an agreement with Encogen in July 1999, pending potential appeals.
- Asset Sales: On August 4, 1999, HEI signed an agreement to sell its maritime freight transportation operations (Young Brothers, Limited) to Saltchuk Resources, Inc., expecting an after-tax loss of approximately $2 million.
- China Project: HEI Power Corp. is developing a 200 MW coal-fired plant in Inner Mongolia, China. As of June 30, 1999, $17 million had been invested, with commitments up to $83 million. Project completion depends on interconnection agreements with the local power grid.
- Year 2000 Compliance: Management estimates total remediation costs at $10.8 million, with $8.4 million incurred by June 30, 1999. The company believes it has sufficient capacity to meet peak loads and has contingency plans for manual operations.
Investor Verification Checklist
- Regulatory Permit Status: Verify the timeline for the re-issuance of the PSD permit for the Keahole plant and the resolution of the EAB remand, as this dictates the return of AFUDC and capital deployment.
- IPP Contract Finalization: Confirm the status of negotiations with KCP and HCPC and whether the Encogen agreement faces appeals that could delay the 2000 in-service date.
- Maritime Sale Closing: Monitor the completion of the Young Brothers sale and the finalization of the expected $2 million loss.
- China Project Interconnection: Assess the progress of the interconnection agreement with Inner Mongolia Power (Group) Co. Ltd., which is a critical path item for the $83 million investment.
- Loan Loss Provisions: Review the trend in ASB's allowance for loan losses (1.21% of average loans) given the weak Hawaii economy and increased delinquencies.