Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2001, for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI operates as a holding company with three primary business segments: Electric Utility (HECO and subsidiaries), Savings Bank (American Savings Bank, F.S.B.), and International Power (HEI Power Corp.). The filing includes unaudited consolidated financial statements and management's discussion and analysis.
Key Financial Metrics (Six Months Ended June 30, 2001)
| Metric | 2001 (in millions) | 2000 (in millions) |
|---|---|---|
| Total Revenues | $863.7 | $815.0 |
| Operating Income | $130.0 | $125.3 |
| Net Income | $53.3 | $48.1 |
| Diluted EPS | $1.59 | $1.48 |
| Cash from Operations | $120.1 | $123.6 |
| Long-Term Debt | $1,164.3 | $1,088.7 |
| Cash & Equivalents | $495.1 | $215.0 |
Segment Performance (Six Months 2001):
- Electric Utility: Revenues of $632.1 million; Net Income of $44.1 million.
- Savings Bank: Revenues of $228.0 million; Net Income of $22.1 million.
- International Power: Revenues of $3.0 million; Net Loss of $0.8 million (improved from a $9.9 million loss in 2000 due to prior write-offs).
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 6% year-over-year, driven by higher fuel oil and purchased energy prices passed to customers, a 1.6% increase in kilowatthour (KWH) sales, and a rate increase for HELCO.
- Utility Operating Income: Decreased 5% to $98.0 million despite higher sales, primarily due to increased purchased power capacity payments and higher maintenance expenses.
- Banking Performance: Net income increased 7% to $22.1 million, aided by higher net interest income and gains on the sale of mortgage/asset-backed securities, partially offset by higher operating expenses.
- International Power: Results improved significantly compared to 2000, which included a $65.7 million write-off of the Philippines investment (EAPRC). The 2001 period reflects a partial release of a $10 million loan guaranty liability.
- Liquidity: Cash and equivalents more than doubled to $495.1 million, supported by strong operating cash flows and net proceeds from investing activities (sales of securities).
Outlook, Risks, and Contingencies
Management Commentary & Guidance:
- Capital Requirements: HEI estimates total financing requirements of $1.3 billion for 2001–2005, with approximately 59% expected to be funded by internal sources.
- International Strategy: Management is evaluating its international power strategy and has paused new investments in international projects pending a review expected to conclude by Q3 2001.
- Rate Cases: HELCO received a final rate increase order in early 2001. Future rate requests for the Keahole expansion depend on regulatory approvals.
Key Risks and Contingencies:
- HELCO Keahole Project: Construction of two combustion turbines (CT-4 and CT-5) faces delays due to land use permit amendments and air permit appeals. Approximately $74 million in costs have been incurred. A contested case hearing on the construction deadline extension is scheduled for September 2001. Failure to secure permits could result in a material write-off.
- China Project (Baotou): The 200 MW coal-fired power plant project in Inner Mongolia is delayed due to the failure of the local grid operator (IMPC) to enter a satisfactory interconnection agreement. HEI has paused construction and may withdraw from the project, potentially seeking recovery of its ~$25 million investment.
- Philippines Investment: While the EAPRC investment was written off in 2000, HEI faces a remaining guaranty obligation of $8.5 million (after a $1.5 million release) which El Paso Energy has demanded payment on.
- Environmental Liability: HEI and HECO are involved in the Honolulu Harbor contamination investigation. The EPA has issued a Notice of Federal Interest, and the scope of required remediation and associated costs remains undetermined.
- Regulatory Risk: The PUC dismissed a proposal for performance-based rate-making (PBR) in early 2001, maintaining the current cost-of-service methodology.
Investor Verification Checklist
- Keahole Permit Status: Verify the outcome of the September 2001 contested case hearing regarding the construction deadline extension for HELCO's Keahole expansion.
- China Project Resolution: Monitor developments regarding the interconnection agreement with Inner Mongolia Power Company (IMPC) and the potential withdrawal from the Baotou project.
- Philippines Guaranty: Track the status of the $8.5 million guaranty payment demand from El Paso Energy and any legal resolutions.
- Banking Asset Quality: Review the allowance for loan losses (1.25% of average loans) and the impact of the Office of Thrift Supervision (OTS) examination on ASB's capital adequacy.
- Environmental Costs: Assess the final scope and cost estimates for the Honolulu Harbor remediation work following the EPA's directive.