Hawaiian Electric Industries, Inc. (HEI) — Q1 2012 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2012, with comparisons to Q1 2011. HEI operates electric utilities in Hawaii and American Savings Bank (ASB); results are consolidated with those of Hawaiian Electric Company (HECO), its utility subsidiary.
Financial performance and condition
| HEI consolidated, $ millions except per-share data | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | 814.9 | 710.6 | +15% |
| Operating income | 75.8 | 63.4 | +20% |
| Net income for common stock | 38.3 | 28.5 | +35% |
| Basic and diluted EPS | $0.40 | $0.30 | +33% |
| Common dividend per share | $0.31 | $0.31 | Unchanged |
- Utility revenue rose mainly with higher fuel prices and the HECO rate increase; the filing notes that fuel-cost recovery mechanisms affect utility revenues. HEI attributed higher common earnings to improved utility and bank operating income, lower interest expense and higher allowance for funds used during construction, partly offset by higher income taxes.
- HECO reported operating revenue of $747.9 million, operating income of $38.6 million and common-stock net income of $27.3 million, versus $644.3 million, $32.7 million and $19.2 million, respectively, a year earlier. Average fuel-oil cost was $134.37 per barrel versus $101.03; kilowatt-hour sales declined about 4% to 2,251 million.
- ASB reported net income of $15.9 million versus $13.9 million. Net interest income before loan-loss provision was $45.7 million versus $45.9 million; provision for loan losses fell to $3.5 million from $4.6 million. Reported return on assets was 1.29%, net interest margin 4.04% (4.16% in Q1 2011), and efficiency ratio 56%.
- HEI’s operating cash flow was negative $15.7 million, investing cash flow negative $80.9 million and financing cash flow positive $62.7 million. Cash ended the quarter at $236.3 million, down from $270.3 million at year-end. Capital expenditures were $65.3 million.
- HECO’s operating cash flow was negative $10.9 million, investing cash flow negative $40.6 million and financing cash flow positive $8.6 million. Cash ended at $5.9 million, compared with $48.8 million at year-end; utility capital expenditures were $63.4 million.
- At March 31, HEI had $156 million of short-term borrowings and $1.283 billion of long-term debt excluding bank borrowings and deposit liabilities. HECO had $84.9 million of short-term borrowings and $1.001 billion of long-term debt. HEI reported $1.554 billion of shareholders’ equity; HECO reported $1.415 billion of common equity.
- ASB had $4.963 billion of assets, $4.125 billion of deposits, and $3.672 billion of net loans. Its allowance for loan losses was $38.8 million, or 1.05% of loans; nonaccrual loans were $68.8 million. ASB reported regulatory capital ratios above stated well-capitalized minimums.
Material changes and outlook
- HEI’s reported earnings growth was driven primarily by the utility segment; bank revenue was essentially flat year over year. Utility fuel and purchased-power expenses increased substantially alongside fuel prices and purchased-energy costs.
- HEI said it currently expects to maintain its dividend at the present level, subject to quarterly board review. Management stated that HEI and HECO expect available operating cash, financing access and credit facilities to be adequate for foreseeable requirements.
- The utilities forecast approximately $3.0 billion of net capital expenditures for 2012–2016 and annualized rate-base growth of about 7%–9%. HEI estimated 2012 retirement-plan contributions of $107 million, including $105 million for the utilities; the HEI Retirement Plan’s funded status triggered more conservative minimum-funding assumptions.
- ASB management cited target returns on assets of 1.15%–1.2%, net interest margin near 4%, and an efficiency ratio in the mid-50s. It identified a low-cost funding base and lower-risk profile as supports for performance, while noting pressure from low market rates.
- After quarter-end, on April 19, HECO, MECO and HELCO issued $417 million in aggregate taxable senior notes. Of the proceeds, $267 million, together with additional funds, was used to defease or redeem $271 million of higher-coupon special-purpose revenue bonds. The remaining $150 million was the HECO 2042 series.
Risks, contingencies and unusual items
- Utility interim rate revenues of $49 million recognized at March 31 were subject to refund, with interest, if they exceed amounts allowed in final PUC orders. Rate cases, decoupling adjustments and cost-recovery approvals remain important to utility earnings.
- Recovery of costs for major projects—including the Campbell Industrial Park combustion turbine and Customer Information System—remains subject to regulatory review or audit. The PUC approved an EOTP Phase 1 settlement in March 2012 that included a $9.5 million gross plant write-off previously charged to Q4 2011 earnings, and an additional $5 million annual interim rate increase.
- Environmental rules, including federal Mercury and Air Toxics Standards and proposed cooling-water requirements, may require material utility capital and operating expenditures; the amounts were not determinable. HECO also recorded an additional $3.1 million reserve in March for investigation and estimated cleanup at a former Molokai generation site, bringing the reserve to $3.6 million.
- HECO disclosed that incomplete information from certain independent power producers could lead to consolidation of one or more entities, potentially materially affecting reported assets, liabilities and losses. Renewable-energy integration, fuel-price volatility, generation reliability and regulatory approvals are additional risks.
- ASB faces credit, interest-rate and deposit-competition risks. It had $1.4 billion of loan commitments, unused lines and letters of credit. A customer class action concerning debit-card overdraft fees remained preliminary; probable outcome and reasonably possible loss were not determinable.
- Management cited economic conditions, interest rates, regulatory decisions, environmental requirements, pension funding, credit quality, financing access, and weather or natural disasters as risks to future results. Forward-looking statements are not guarantees. Management reported effective disclosure controls and no material first-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Final PUC outcomes and refund exposure for interim utility rates, including pending rate cases and decoupling adjustments.
- Cost recovery and audit results for HECO’s major projects, and the timing and cost of environmental compliance.
- Execution and funding of the utilities’ 2012–2016 capital plan, including whether projected rate-base growth translates into earnings.
- ASB loan quality, allowance adequacy, deposit funding costs and sensitivity to interest-rate changes.
- Completion and economic effect of the post-quarter utility refinancing, and actual pension contributions versus estimates.