Business Context and Reporting Period
This Form 10-K represents the combined annual report for Hawaiian Electric Industries, Inc. (HEI) and its wholly-owned subsidiary, Hawaiian Electric Company, Inc. (HECO), for the fiscal year ended December 31, 1997. HEI is a holding company operating primarily in Hawaii through regulated electric utilities (HECO, MECO, HELCO), a savings bank (American Savings Bank, F.S.B. or ASB), freight transportation, and real estate development. A significant event in 1997 was the acquisition of substantially all Hawaii deposits and branches of Bank of America (BoA) by ASB on December 6, 1997, increasing ASB's assets by $1.8 billion.
Key Financial Metrics
| Metric | 1997 Value | Notes |
|---|---|---|
| Electric Utility Revenues | $1,091.4 million | Consolidated sales for HECO, MECO, and HELCO. |
| HEI Net Income | $86.4 million | Parent company net income. |
| HEI Earnings Per Share (Diluted) | $2.75 | Continuing operations. |
| ASB Total Assets | $5.5 billion | Reflects BoA acquisition; 3rd largest financial institution in Hawaii. |
| ASB Deposits | $3.9 billion | Increased by $1.7 billion due to BoA acquisition. |
| ASB Return on Assets | 0.67% | 0.70% excluding one-time BoA acquisition expenses. |
| ASB Return on Common Equity | 11.0% | 12.1% excluding one-time BoA acquisition expenses. |
| HEI Long-Term Debt | $160.0 million | Parent company balance sheet. |
| HEI Commercial Paper | $189.5 million | Parent company balance sheet. |
| HEI Cash & Equivalents | $0.4 million | Parent company balance sheet. |
| Electric Utility KWH Sales | 8,963.2 million | Total sales across all islands. |
| Average Fuel Cost | 405.9 cents/MBtu | Consolidated average for electric utilities. |
Material Changes vs. Prior Period
- Banking Sector Expansion: ASB's asset base grew significantly due to the December 1997 acquisition of Bank of America's Hawaii operations. This increased deposits by $1.7 billion and assets by $1.8 billion.
- Electric Utility Revenue Growth: Consolidated electric sales revenues increased to $1,091.4 million in 1997 from $1,064.0 million in 1996, driven by rate adjustments and customer growth.
- Fuel Costs: The average cost of fuel oil for generation rose to 405.9 cents per MBtu in 1997, compared to 388.8 cents in 1996. These costs are passed through to customers via energy cost adjustment clauses.
- Nonaccrual Loans: ASB's nonaccrual loans increased to $71.8 million (2.3% of total loans) in 1997 from $47.1 million in 1996, attributed to Hawaii's weak economy and specific restructurings.
- Employee Count: Total full-time employees increased to 3,672 in 1997 from 3,327 in 1996, primarily due to the BoA acquisition.
Guidance, Outlook, and Risks
- Regulatory Proceedings: HELCO is facing delays in installing new generation capacity at the Keahole power plant due to permitting issues (CDUP amendment and PSD permit) and legal challenges. A 60-MW power purchase agreement with Encogen was submitted to the PUC for approval in January 1998.
- Competition: Legislation and PUC proceedings are examining the impact of competition on Hawaii's electric utility infrastructure, including potential retail wheeling. Management cannot predict the impact on future financial condition.
- Rate Cases: HELCO filed a request in March 1998 for an 11.5% rate increase to recover costs for the Encogen project and Keahole units. HECO filed a motion to close a PUC "show cause" proceeding regarding excess earnings, citing 1997 returns below the PUC's fair and reasonable levels.
- Environmental Risks: The company faces ongoing environmental compliance costs and potential liabilities related to hazardous waste, oil spills, and air quality permits. Recent fines were paid for violations at HELCO facilities.
- Interest Rate Risk: ASB maintained a negative interest rate sensitivity gap of 7.3% in the near term (0-6 months), indicating a liability-sensitive position where net interest income could decrease if rates rise.
Investor Verification Checklist
- BoA Integration: Verify the actual financial impact and integration costs of the Bank of America acquisition on ASB's 1998 performance.
- HELCO Generation Delays: Monitor the status of the Keahole power plant permitting and the PUC approval of the Encogen power purchase agreement, as these are critical for HELCO's reserve margins.
- ASB Asset Quality: Review trends in nonaccrual loans and the adequacy of the allowance for loan losses given the weak Hawaii economy.
- Regulatory Outcomes: Track the PUC's decisions on the HELCO rate increase request and the generic docket regarding electric competition.
- Fuel Price Volatility: Assess the impact of rising fuel oil prices on operating costs, even though pass-through mechanisms exist.