Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2009, for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI is a holding company with operations primarily in Hawaii, consisting of regulated electric utilities (HECO, HELCO, MECO) and a banking subsidiary (American Savings Bank, F.S.B. or ASB). The utilities serve approximately 95% of Hawaii's population across the islands of Oahu, Hawaii, Maui, Lanai, and Molokai. ASB is one of the largest financial institutions in the state.
Key Financial Metrics
Specific consolidated revenue, net income, and cash flow figures for HEI and HECO are incorporated by reference to the Annual Report and Form 8-K exhibits and are not explicitly detailed in the provided text. However, the following segment-specific metrics and ratios are disclosed:
- Electric Utility Segment:
- Represented approximately 88% of HEI's consolidated revenues and 96% of net income in 2009.
- Total electric sales revenues for HECO, HELCO, and MECO combined were $2,018.6 million in 2009, down from $2,844.5 million in 2008.
- Kilowatthour (KWH) sales decreased to 9,689.7 million in 2009 from 9,936.2 million in 2008.
- Average fuel oil cost per MBtu dropped significantly to 1,026.4 cents in 2009 from 1,840.0 cents in 2008.
- Banking Segment (ASB):
- Represented approximately 12% of HEI's consolidated revenues and 26% of net income in 2009.
- Total assets were $4.9 billion as of December 31, 2009.
- Return on Assets (ROA) was 0.43% and Return on Common Equity (ROCE) was 4.54%.
- Tangible efficiency ratio increased to 72% in 2009 (from 66% in 2007) due to losses on the sale of private-issue mortgage-related securities and other-than-temporary impairment (OTTI) charges.
- Nonaccrual loans increased to $65.3 million (1.8% of total loans) from $19.5 million in 2008.
- Allowance for loan losses increased to $41.7 million (1.12% of loans) from $35.8 million in 2008.
- Debt and Liquidity:
- HEI Parent Company long-term debt totaled $307 million.
- ASB had unused Federal Home Loan Bank (FHLB) borrowing capacity of approximately $1.6 billion.
- HEI's electric utility subsidiaries had common stock equity of $1.3 billion, of which approximately $588 million was restricted from transfer to HEI without regulatory approval.
Material Changes vs. Prior Period
- Revenue Decline: Electric utility revenues declined significantly in 2009 compared to 2008, driven by a 2.5% decrease in KWH sales and lower fuel costs passed through to customers via Energy Cost Adjustment Clauses (ECACs). The average revenue per KWH sold dropped to 20.83 cents in 2009 from 28.63 cents in 2008.
- Bank Asset Quality Deterioration: ASB experienced a sharp increase in nonaccrual loans (up $45.8 million) and charge-offs (up to $26.9 million) due to the economic downturn in Hawaii. The provision for loan losses rose to $32.0 million in 2009 from $10.3 million in 2008.
- Investment Portfolio Restructuring: In the fourth quarter of 2009, ASB sold its entire portfolio of private-issue mortgage-related securities, resulting in a $32.1 million loss and eliminating exposure to subprime mortgages. This action adversely affected the bank's tangible efficiency ratio.
- Regulatory Rate Relief: On February 19, 2010, the Hawaii Public Utilities Commission (PUC) granted HECO a second interim rate increase of $12.7 million to recover costs for the new Campbell Industrial Park Combustion Turbine No. 1 (CIP CT-1). Total interim increases for the 2009 test year rate case reached $73.8 million.
Guidance, Outlook, and Risks
- Outlook: Management expects KWH sales to decrease by an additional 0.9% in 2010. While a mild economic recovery is anticipated in 2010, significant improvements in employment and income are not expected until 2011. The company continues to face challenges in the real estate market and credit quality.
- Hawaii Clean Energy Initiative (HCEI): The company is committed to the Energy Agreement signed in 2008, aiming for 70% of electricity and ground transportation needs to come from clean sources by 2030. This involves significant capital investment in renewable energy and infrastructure.
- Regulatory Risks: The PUC approved a "decoupling" mechanism to separate revenues from sales volume, which is intended to mitigate regulatory lag. However, delays in final rate case decisions remain a risk. The company faces potential penalties if it fails to meet Renewable Portfolio Standards (RPS).
- Banking Risks: ASB faces risks from interest rate fluctuations, potential further deterioration in loan quality, and the need to maintain Qualified Thrift Lender (QTL) status. The bank is currently "well-capitalized."
- Unusual Items: The 2009 results were impacted by the sale of mortgage securities at a loss and increased loan loss provisions. The company also incurred costs related to the implementation of the HCEI and new generation capacity.
Investor Verification Checklist
- Rate Case Finalization: Verify the final outcome of the HECO 2009 test year rate case and the potential for refunds if interim collections exceed final approved amounts.
- Loan Loss Provisions: Monitor ASB's nonaccrual loan trends and the adequacy of the allowance for loan losses given the ongoing economic stress in Hawaii's real estate market.
- HCEI Implementation Costs: Assess the capital expenditure requirements and regulatory approval status for renewable energy projects under the Hawaii Clean Energy Initiative.
- Fuel Price Volatility: Track fuel oil prices and the effectiveness of ECACs in passing costs to customers, as well as the progress of biodiesel and biofuel initiatives.
- Dividend Restrictions: Confirm the status of regulatory restrictions on dividends from the utility subsidiaries, which currently limit the transfer of approximately $588 million of equity to the parent company.