Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2002, for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI operates primarily through two segments: electric utilities (HECO, Maui Electric Company, and Hawaii Electric Light Company) and banking (American Savings Bank, F.S.B.). The company also reports an "Other" segment and discontinued operations related to its exit from international power projects.
Key Financial Metrics (Nine Months Ended Sept 30, 2002)
| Metric | 2002 (in thousands) | 2001 (in thousands) |
|---|---|---|
| Total Revenues | $1,217,998 | $1,307,968 |
| Net Income | $90,680 | $60,467 |
| Income from Continuing Operations | $90,680 | $82,542 |
| Operating Cash Flow | $191,670 | $182,660 |
| Long-Term Debt | $1,083,517 | $1,145,769 |
| Cash and Equivalents | $251,467 | $450,827 |
| Diluted EPS (Continuing Ops) | $2.49 | $2.46 |
Segment Performance
- Electric Utility: Revenues decreased 6% to $919.6 million due to lower fuel oil prices passed to customers, partially offset by a 1.5% increase in kilowatthour (KWH) sales. Operating income declined slightly to $150.1 million due to higher maintenance and depreciation expenses.
- Bank (ASB): Revenues decreased 11% to $300.6 million due to lower yields on interest-earning assets. However, net income increased 29% to $42.8 million, driven by lower interest expense, reduced loan loss provisions, and the cessation of goodwill amortization under new accounting standards (SFAS 142).
- Other: Reported a net loss of $21.9 million, primarily due to writedowns on income notes and legal expenses.
Material Changes vs. Prior Period
- Net Income Surge: Consolidated net income increased 50% year-over-year. This is largely attributable to the absence of a $22.1 million loss from discontinued international power operations recorded in the prior year.
- Goodwill Accounting: The adoption of SFAS No. 142 eliminated goodwill amortization for the bank segment, improving reported earnings by approximately $2.9 million for the nine-month period compared to 2001.
- Discontinued Operations: HEI Power Corp. (HEIPC) has been classified as a discontinued operation following a 2001 decision to exit international power businesses. Remaining assets are being liquidated or written down.
- Cash Position: Cash and equivalents declined by approximately $200 million, primarily due to significant investing outflows in the bank segment (purchase of mortgage-related securities and loans) and utility capital expenditures.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance
- Capital Requirements: HEI estimates consolidated financing requirements of $1.2 billion for 2002–2006, with internal cash flows expected to cover approximately 73% of these needs.
- Utility Growth: KWH sales growth is forecasted at 1.7% for 2002, with modest growth expected through 2006, subject to weather and economic conditions.
- Banking: Management notes that continued low interest rates and high refinancing volumes are pressuring the interest rate spread, though the bank remains well-capitalized.
Key Risks and Contingencies
- HELCO Power Plant Litigation: Construction of the Keahole power plant expansion (CT-4 and CT-5) was suspended following a Circuit Court ruling reversing a permit extension. HELCO has appealed to the Hawaii Supreme Court. Approximately $78 million in costs are at risk if the PUC disallows recovery. Rolling blackouts were instituted in November 2002 due to tight generation reserves.
- Oahu Transmission Line: The Board of Land and Natural Resources denied a permit for the Kamoku to Pukele transmission line. HECO is evaluating alternatives, with $16.4 million in costs currently recorded in construction in progress.
- Legal Proceedings:
- AES Hawaii Lawsuit: A qui tam complaint alleges HECO overpaid AES Hawaii for power under a PPA, seeking over $1 billion in damages. HECO intends to vigorously defend the claim.
- Tax Dispute: The State of Hawaii has assessed approximately $14 million in taxes (plus interest) against ASB Realty Corporation regarding a dividends received deduction. ASB has appealed.
- PaineWebber Litigation: ASB is pursuing recovery of losses related to impermissible trust certificate investments. A trial is scheduled for February 2003.
- Market Risk: ASB faces interest rate risk; simulation analysis indicates net interest income could decline in a falling rate scenario due to prepayment speeds on mortgage assets.
Investor Verification Checklist
- HELCO Permit Status: Verify the outcome of the Hawaii Supreme Court appeal regarding the Keahole power plant construction permit and the potential write-off of $78 million in capitalized costs.
- Transmission Line Alternatives: Monitor HECO's progress on alternative routes for the Oahu transmission line and the PUC's stance on cost recovery for the denied project.
- Banking Yield Compression: Assess the impact of the Federal Reserve's interest rate cuts on ASB's net interest margin and future profitability.
- Discontinued Operations: Track the final disposition of HEIPC assets and any remaining liabilities from the international power exit.
- Legal Exposure: Review developments in the AES Hawaii lawsuit and the ASB Realty tax appeal for potential material financial impacts.