Hawaiian Electric Industries, Inc. — 2011 Form 10-K
Business context and reporting period. This combined filing covers Hawaiian Electric Industries, Inc. (HEI) and its subsidiary Hawaiian Electric Company, Inc. (HECO). It reports the fiscal year ended December 31, 2011, not a standalone fourth quarter. HEI’s principal businesses are regulated electric utilities serving most of Hawaii and American Savings Bank (ASB). The utilities accounted for about 92% of consolidated revenue and 72% of net income in 2011.
Key financial metrics
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Revenue | $3.242 billion | $2.665 billion | Up 22%; utility revenue growth largely reflected higher fuel costs passed through to customers. |
| Operating income | $289.7 million | $256.2 million | Up 13%; operating margin was about 8.9%, versus 9.6%. |
| Net income attributable to common stock | $138.2 million | $113.5 million | Up 22%; basic EPS rose to $1.45 from $1.22. |
| Segment net income for common stock | Electric utility: $100.0 million; bank: $59.8 million; other: loss of $21.6 million | Electric utility: $76.6 million; bank: $58.5 million; other: loss of $21.5 million | Utility earnings benefited mainly from rate increases and HECO decoupling adjustments; bank earnings increased slightly. |
| Cash from operating activities | $250.4 million | $340.7 million | Down $90.4 million. |
| Cash used in investing activities | $326.8 million | $278.7 million | Higher investment-securities purchases, utility capital spending and growth in loans held for investment. |
| Cash from (used in) financing activities | $16.0 million | $(235.3) million | Deposit and short-term borrowing inflows offset debt repayments and dividends. |
| Total assets / common equity | $9.593 billion / $1.532 billion | $9.085 billion / $1.484 billion | Year-end 2011. |
| Debt and bank funding | $1.340 billion long-term debt; $68.8 million nonbank short-term borrowings; $233.2 million other bank borrowings; $4.070 billion deposits | $1.365 billion; $24.9 million; $237.3 million; $3.975 billion | HEI’s $125 million and HECO’s $175 million revolving facilities were undrawn at year-end. |
| Dividend | $1.24 per share | $1.24 per share | Unchanged since 1998; payout ratio was 86%, versus 102%. |
Material changes versus the prior year
- Electric utility revenue rose 25% to $2.979 billion, while fuel expense increased 41% to $1.265 billion and purchased-power expense increased 26% to $690 million. Average fuel cost rose to $123.63 per barrel from $87.62; electricity sales volume declined about 1%.
- Utility net income for common stock rose to $100.0 million from $76.6 million, helped by interim and final rate increases and decoupling revenue adjustments. HECO’s 2011 return on average common equity was 6.4%, below its 10.0% allowed return; MECO’s was 7.7% versus 10.5% allowed. HELCO’s return was 9.7% versus 10.5% allowed.
- ASB net income increased to $59.8 million from $58.5 million despite net interest income falling to $184.6 million from $189.8 million. Net interest margin eased to 4.12% from 4.23%; the provision for loan losses fell to $15.0 million from $20.9 million.
- ASB loans held for investment, net, increased to $3.643 billion from $3.490 billion. Nonaccrual loans rose to $66.8 million, or 1.8% of loans, from $58.9 million, or 1.7%; nonaccrual plus restructured loans were 3.1% of loans, up from 2.8%.
- Cash declined to $270.3 million from $330.7 million. The dividend payout ratio fell as earnings grew while the per-share dividend remained unchanged.
Outlook, risks and unusual items
- Management outlook: No consolidated EPS or revenue guidance is provided. HEI forecast approximately $300 million of HECO net capital expenditures in 2012 and $3.0 billion over 2012–2016. Utility O&M expenses were expected to rise about 6% in 2012. Estimated retirement-plan contributions were $107 million in 2012 and $89 million in 2013; estimates are sensitive to market performance and actuarial assumptions.
- Regulation and capital investment: HECO’s decoupling mechanism began in March 2011, and rate cases and cost-recovery decisions remain important to earnings. The utilities’ regulatory assets were $669 million, versus regulatory liabilities of $315 million; recovery depends on continued regulatory accounting and PUC treatment. HECO’s 2011 rate case final decision was pending in the filing.
- Clean-energy transition and reliability: Renewable integration, intermittent generation, third-party project delivery, fuel availability and isolated island grids create execution and reliability risks. Hawaii’s renewable portfolio standard rises to 15% by 2015, 25% by 2020 and 40% by 2030. The utilities estimated 73% of 2012 energy would still come from fossil fuel oil.
- Environmental exposure: New federal air and cooling-water rules could require significant, but not yet quantifiable, compliance spending and could accelerate retirement of generating units. About $5 billion of utility transmission and distribution assets were uninsured, and the utilities had no business-interruption insurance.
- Banking and market risks: ASB’s Hawaii-centered, real-estate-heavy loan book is exposed to local economic and property conditions. Its low-rate environment pressured asset yields and margins; higher rates could raise funding costs and borrower stress. ASB reported $1.3 billion in loan commitments, undisbursed funds and unused lines and letters of credit, and approximately $1.1 billion of unused FHLB borrowing capacity.
- Unusual items: HECO recorded an approximately $6 million after-tax fourth-quarter charge relating to a $9.5 million gross write-off of East Oahu Transmission Project Phase 1 costs under a proposed settlement subject to PUC approval. A separate $6 million revenue adjustment relating to the third quarter reduced fourth-quarter net income by $3 million. The project and other major utility costs were also subject to regulatory review or audit.
- Other contingencies: ASB disclosed a preliminary customer class-action lawsuit alleging improper debit-card overdraft fees; the probable outcome and range of loss were not determinable. Management said other pending matters were not expected to be material in aggregate, while noting litigation outcomes remain uncertain.
Most important facts for investors to verify
- Whether final PUC decisions and audits support recovery of HECO’s interim rates and major project costs, including EOTP and the CIP combustion turbine.
- Whether higher fuel and purchased-power costs continue to be recovered through adjustment clauses, and how fuel prices affect customer demand and utility earnings.
- Whether HECO’s capital program, renewable projects and environmental compliance can be delivered on schedule and within authorized budgets without impairing reliability or liquidity.
- Whether ASB’s nonaccrual, restructured and commercial-loan trends stabilize, and whether its allowance and net interest margin remain adequate under changing economic and rate conditions.
- Whether pension funding requirements, regulatory restrictions on subsidiary distributions and access to capital affect HEI’s ability to fund investment and sustain its dividend.
- The filing reports effective internal controls and unmodified audit opinions; investors should review the incorporated HECO financial statements and notes for additional utility-specific debt, cash-flow and contingency detail.