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Hawaiian Electric Industries, Inc. - Q1 1999 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 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 utilities (HECO, HELCO, MECO), a savings bank (American Savings Bank, F.S.B.), and diversified businesses including freight transportation and international power projects. The company is headquartered in Honolulu, Hawaii.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 6% to $352.2 million, driven by lower fuel oil prices passed through to utility customers and a decrease in interest income for the savings bank due to lower yields.
• Utility Segment: Operating income fell 4% to $40.9 million. While fuel costs dropped 21%, this was offset by a 28% increase in maintenance expenses (including a major turbine overhaul) and a $0.8 million write-off at MECO related to exhaust flow enhancers denied by the PUC.
• Savings Bank Segment: Operating income decreased 6% to $15.1 million due to a narrowing interest rate spread (down 5%) and higher occupancy and compensation costs. However, net income rose 2% due to lower tax rates following a reorganization into a REIT subsidiary.
• Discontinued Operations: The real estate development subsidiary (Malama Pacific Corp.) was reported as discontinued. It generated a loss of $0.6 million in Q1 1998; no loss was recorded in Q1 1999 as the exit plan continued.
• Cash Flow: Net cash provided by operating activities dropped significantly to $17.4 million from $58.6 million in the prior year, largely due to changes in working capital and lower operating income.

Outlook, Risks, and Contingencies

• HELCO Power Project Delays: Construction of the Keahole combined-cycle unit (CT-4 and CT-5) is delayed until 2000 or early 2001 due to regulatory permitting issues (PSD permit) and litigation regarding noise standards and land use. HELCO has ceased accruing AFUDC on these units. Costs incurred to date total $76.1 million, which may be written off if the project is not completed.
• Rate Cases: HELCO withdrew its 1999 rate increase application pending resolution of the Keahole delays. MECO received an 8.2% rate increase in April 1999 but must refund $0.1 million collected in excess of the final approval.
• China Project: HEI Power Corp. is developing a 200 MW coal-fired plant in Inner Mongolia. As of March 31, 1999, $17 million has been invested with a commitment of up to $83 million additional. The project faces political and regulatory risks inherent in developing countries.
• Year 2000 Compliance: The company estimates total remediation costs at $11.2 million, with $5.3 million incurred by March 31, 1999. Management believes the risk of prolonged power outages is low due to manual override capabilities.
• Environmental: Ongoing investigations regarding contamination at Honolulu Harbor and Notices of Violation (NOV) from the EPA and State DOH regarding unauthorized construction at Keahole remain active contingencies.

Investor Verification Checklist

• HELCO Project Viability: Verify the status of the PSD permit and the outcome of the noise standard litigation, as these directly impact the recoverability of the $76.1 million in capitalized costs.
• Rate Case Outcomes: Monitor the PUC's final decisions on HELCO's new rate application and the impact of the MECO refund on future cash flows.
• China Project Progress: Track the drawdown of the $83 million commitment and any regulatory hurdles in the People's Republic of China.
• Bank Asset Quality: Review the trend in nonaccrual loans and the adequacy of the allowance for loan losses (1.29% of average loans) given the weak Hawaii economy.
• Year 2000 Readiness: Confirm the completion of testing for mission-critical systems by the June 30, 1999 target date to mitigate operational risk.