Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2003, for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI is a holding company with operations primarily in the State of Hawaii, consisting of regulated electric utilities (HECO, MECO, HELCO) and a banking subsidiary (American Savings Bank, F.S.B. or ASB). The electric utilities serve approximately 93% of Hawaii's electric market across the islands of Oahu, Maui, Lanai, Molokai, and Hawaii. ASB is the third-largest financial institution in Hawaii.
Key Financial Metrics
HECO (Electric Utilities)
| Metric | 2003 | 2002 |
|---|---|---|
| Operating Revenues | $1,393.0 million | $1,252.9 million |
| Operating Income | $124.8 million | $135.2 million |
| Net Income for Common Stock | $78.9 million | $90.2 million |
| Return on Average Common Equity | 8.5% | 10.0% |
| Total Assets | $2,581.3 million | $2,493.4 million |
| Long-term Debt, Net | $699.4 million | $705.3 million |
| Common Stock Equity | $944.4 million | $923.3 million |
HEI (Consolidated)
| Metric | 2003 | 2002 |
|---|---|---|
| Net Income | $114.2 million | $118.2 million |
| Basic Earnings Per Share | $3.06 | $3.26 |
| Long-term Debt, Net | $365.0 million | $401.0 million |
| Common Stock Equity | $888.4 million | $839.5 million |
ASB (Banking Subsidiary)
ASB reported total assets of $6.5 billion and deposits of $4.0 billion as of December 31, 2003. Return on assets was 0.88% and return on common equity was 12.2%. The tangible efficiency ratio increased to 61% in 2003 from 58% in 2002 due to strategic transformation expenditures.
Material Changes vs. Prior Period
- Revenue Growth: HECO operating revenues increased 11% to $1.393 billion, driven primarily by higher energy prices ($111 million increase) and a 2.4% increase in kilowatthour (KWH) sales ($32 million increase).
- Profit Decline: HECO net income decreased 13% to $78.9 million. The primary driver was a $24 million swing in retirement benefits expense, moving from a $10 million credit in 2002 to a $14 million expense in 2003 due to revised actuarial assumptions and plan asset performance.
- Cost Increases: Fuel oil expense rose 25% and purchased power expense rose 13% due to higher global fuel prices. Average fuel oil cost per barrel increased to $36.23 in 2003 from $29.10 in 2002.
- Banking Performance: ASB saw a decline in net interest income of $3.8 million due to lower interest rates, though loan production was record-high due to a strong Hawaii real estate market.
Guidance, Outlook, and Risks
Outlook and Guidance
- Rate Cases: HECO plans to file a rate case in the second half of 2004 using a 2005 test year. HELCO and MECO have not initiated new rate cases recently.
- Capital Expenditures: Net capital expenditures for 2004 are estimated at $194 million. The five-year forecast (2004-2008) totals $0.8 billion, focused on transmission, distribution, and generation reliability.
- Pension Costs: Retirement benefits expense for 2004 is estimated at $5 million, a decrease from the $8 million expense in 2003, due to improved plan asset performance.
Risks and Contingencies
- Regulatory Risk: The Hawaii Public Utilities Commission (PUC) has broad discretion over rates. Delays in rate approvals or disallowance of costs (e.g., for the East Oahu Transmission Project) could materially impact results.
- Environmental Liabilities: Ongoing investigations include the Honolulu Harbor environmental investigation and a diesel fuel leak at MECO's Maalaea facility (estimated remediation cost of $0.8 million). A conditional settlement regarding opacity violations at Maalaea resulted in an $0.8 million penalty.
- Power Supply Reliability: HELCO faces reliability challenges due to delays in the Keahole power plant expansion and performance issues with independent power producers (IPPs), specifically Puna Geothermal Venture (PGV) and Hamakua Partners.
- Economic Sensitivity: Operations are heavily influenced by Hawaii's tourism and construction sectors. A concrete industry strike beginning in February 2004 poses a risk to construction activity and electricity demand.
- Accounting Changes: The company is evaluating the impact of FASB Interpretation No. 46R (VIEs), which may require the consolidation of IPPs, potentially significantly altering the balance sheet.
Investor Verification Checklist
- Retirement Benefit Assumptions: Verify the impact of the discount rate reduction (to 6.25%) and expected return on assets (9.0%) on future pension expenses.
- Rate Case Timing: Monitor the filing and PUC approval of HECO's 2004 rate case to assess revenue recovery capabilities.
- Environmental Settlements: Track the finalization of the MECO Maalaea opacity penalty and the status of the Honolulu Harbor investigation.
- IPP Performance: Review updates on HELCO's power supply reliability, specifically the output levels of PGV and Hamakua Partners.
- Construction Strike Impact: Assess the duration and economic impact of the Hawaii concrete industry strike on KWH sales growth.
- VIE Consolidation: Confirm the outcome of the FIN 46R analysis regarding the consolidation of independent power producers.