Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1995, 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, Maui Electric, and Hawaii Electric Light), a savings bank (American Savings Bank, F.S.B.), and diversified operations including real estate and maritime freight.
Key Financial Metrics
Consolidated Results (Six Months Ended June 30, 1995):
- Total Revenue: $626.2 million (up 14% from prior year).
- Net Income: $36.7 million (up 25% from prior year).
- Earnings Per Share (EPS): $1.27 (up 21% from $1.05).
- Operating Income: $90.4 million (up 18% from prior year).
- Cash Flow from Operations: $51.6 million (compared to a net use of $0.8 million in the prior year).
- Debt and Liquidity:
- Cash and equivalents: $79.4 million.
- Long-term debt: $753.1 million.
- Short-term borrowings: $166.0 million.
- Deposit liabilities (Savings Bank): $2.16 billion.
- Capital Structure: Common stock equity represents 41% of total capitalization ($704.5 million).
Material Changes vs. Prior Period
Electric Utility Segment:
- Revenues increased 13% to $477.0 million, driven by interim rate relief ($30 million), higher fuel oil prices passed to customers ($20 million), and a 2.1% increase in kilowatthour (KWH) sales.
- Operating income rose 27% to $73.7 million. Net income for the segment increased 36% to $33.3 million.
- Fuel oil costs increased 21% due to higher prices and increased generation.
Savings Bank Segment (American Savings Bank):
- Revenues increased 19% to $122.3 million due to higher interest income from a larger mortgage-backed securities portfolio.
- Net income decreased 6% to $11.7 million. This decline was caused by a compression in the interest rate spread (2.98% vs. 3.79% in 1994) as the cost of liabilities rose faster than asset yields.
- Mortgage-backed securities increased 23% to $1.31 billion following the securitization of $223 million in loans.
Other Segment:
- Reported an operating loss of $3.4 million, primarily due to real estate activity losses and startup costs for HEI Power Corp. (HEIPC).
Outlook, Risks, and Contingencies
Regulatory and Rate Matters:
- HECO received interim rate relief effective January 1, 1995. Pending rate cases for HELCO and MECO seek significant increases (18.7% and 17.4%, respectively) based on 1996 test years.
- The Public Utilities Commission (PUC) is investigating the establishment of self-insured property damage reserves for catastrophic natural disasters, as current insurance for transmission systems is limited and expensive.
Legal and Operational Risks:
- HELCO Power Situation: HELCO is navigating a complex power purchase agreement with Hilo Coast Processing Company (HCPC), which emerged from bankruptcy. HELCO faces permitting delays for a planned 56-MW combined-cycle unit and risks of capacity shortages on the island of Hawaii within the next year.
- HECO Power Outage Litigation: A class-action lawsuit regarding the April 1991 Oahu power outage seeks $75 million in damages. Trial is set for January 1996. Management believes losses in excess of the $1 million reserve will not be material.
- Discontinued Operations: HEI settled a lawsuit regarding the Hawaiian Insurance & Guaranty Co. (HIG) for $32 million in 1994. HEI is seeking reimbursement from insurance carriers, with trial postponed.
Legislative Risks:
- Proposed legislation regarding the merger of the Savings Association Insurance Fund (SAIF) and Bank Insurance Fund (BIF) could impose a one-time assessment on ASB of approximately $18 million (pre-tax) or restrict HEI's ownership of the bank.
Accounting Changes:
- The company must adopt SFAS No. 121 (Impairment of Long-Lived Assets) by January 1, 1996. The impact on financial condition has not yet been determined.
Investor Verification Checklist
- Verify the status of pending rate cases for HELCO and MECO and the likelihood of full approval for the requested increases.
- Monitor the permitting progress for HELCO's combined-cycle unit and the risk of rolling blackouts on the island of Hawaii.
- Assess the impact of the interest rate environment on ASB's net interest margin and the potential for further spread compression.
- Review the outcome of the HECO 1991 power outage litigation scheduled for January 1996.
- Track legislative developments regarding SAIF/BIF merger and potential assessments on thrift institutions.
- Confirm the timeline for the adoption of SFAS No. 121 and any potential asset impairment charges.