HAWAIIAN ELECTRIC INDUSTRIES INC quarterly report, Q2 FY2012

Hawaiian Electric Industries, Inc. — Q2 2012 Form 10-Q

Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2012, compared with the same 2011 periods. HEI’s principal businesses are the regulated Hawaiian electric utilities and American Savings Bank (ASB). HEI filed jointly with its principal subsidiary, Hawaiian Electric Company (HECO).

Key financial results

HEI consolidated	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Revenue	$854.3 million	$794.3 million	$1,669.1 million	$1,505.0 million
Operating income	$79.4 million	$63.7 million	$155.2 million	$127.0 million
Net income for common stock	$38.8 million	$27.1 million	$77.1 million	$55.6 million
Diluted EPS	$0.40	$0.28	$0.80	$0.58
Dividend per common share	$0.31	$0.31	$0.62	$0.62

Q2 revenue rose 8% and common-stock net income rose 43%; six-month revenue increased 11% and common-stock net income increased 39%. Improved utility results drove the gains; lower interest expense and higher allowance for funds used during construction also helped, partly offset by higher taxes.
Electric utility segment operating income was $61.5 million in Q2 and $118.8 million for six months, versus $42.5 million and $87.7 million in 2011. HECO consolidated common-stock net income was $29.4 million for Q2 and $56.7 million for six months.
Utility revenue growth largely reflected higher fuel and purchased-energy costs and rate increases, despite lower electricity sales. Six-month fuel oil expense rose to $658.9 million from $573.0 million; purchased power expense rose to $353.1 million from $319.7 million. Six-month kilowatt-hour sales fell about 4%.
ASB Q2 revenue was $64.7 million, down 2%, and net income was $14.2 million, down 7%. For six months, revenue was $130.0 million, down 1%, while net income rose 4% to $30.1 million. Lower asset yields and higher noninterest expenses pressured results; lower loan-loss provision and higher loan-sale gains provided offsets.
ASB’s six-month net interest margin was 4.01%, versus 4.11% in 2011; return on assets was 1.22% and efficiency ratio was 58%. Management’s targets are ROA of 1.15%–1.2%, NIM near 4%, and an efficiency ratio in the mid-50s.

Cash flow, balance sheet and liquidity

For the six months, HEI used $3.6 million in operating cash, used $188.3 million in investing activities and generated $129.2 million in financing activities. Cash and equivalents declined $62.7 million to $207.5 million.
Capital expenditures were $145.3 million. Financing included $417 million of long-term debt issuance and $328.5 million of repayments; HEI paid $47.9 million in common dividends and $0.9 million in subsidiary preferred dividends.
At June 30, total assets were $9.82 billion and shareholders’ equity was $1.58 billion. HEI reported $96.2 million of short-term borrowings and $1.43 billion of long-term debt, excluding bank borrowings and deposit liabilities. HEI’s $125 million credit facility was undrawn; it had $52 million of commercial paper outstanding at quarter-end and $51 million on July 23.
HECO’s six-month operating cash flow was negative $21.5 million, capital expenditures were $141.6 million, and cash ended at $5.9 million. Its $175 million credit facility was undrawn at June 30. HECO issued $417 million of notes, principally to refinance $271 million of higher-rate bonds and fund capital expenditures.
ASB had $4.96 billion in assets, $4.14 billion in deposits and $3.70 billion in net loans. Its capital ratios exceeded stated well-capitalized minimums: leverage 9.2%, Tier 1 risk-based 11.8%, and total risk-based 12.8%. Unused FHLB borrowing capacity was approximately $0.9 billion.
HEI’s first-half dividend payout ratio was 78%. Management expected to maintain the dividend at its current level, subject to quarterly Board review.

Changes, outlook and notable items

Utility earnings benefited from rate increases and implementation of revenue decoupling, which management said improved recovery of costs and returns. Utility returns remained below allowed ROACE for all three utilities over the 12 months ended June 30.
The utilities’ 2012–2016 plan forecast $3.0 billion in net capital expenditures and approximately 7%–9% compound annual rate-base growth. Management expected 2013 electricity sales to decline slightly from 2012 and then remain relatively flat through 2022. No formal consolidated earnings guidance is provided in the supplied filing text.
HEI reported an estimated $107 million of 2012 retirement-plan contributions, compared with $75 million in 2011. The pension plan’s funded status triggered more conservative funding assumptions; MAP-21 was expected to reduce minimum required contributions, but IRS guidance was still needed.
HECO’s final 2011 rate case order was issued June 29. A customer refund of approximately $0.8 million plus interest was accrued at June 30; final tariffs and the requested effective date remained subject to PUC review.
HECO accrued an additional $3.1 million in March for investigation and estimated cleanup at the former Molokai Electric Company site and adjacent parcel; the reserve was $3.6 million at June 30. Final remediation costs depend on further investigation.
Major project cost recovery remains subject to regulatory outcomes. The PUC required audits of the Campbell Industrial Park turbine and Customer Information System projects; the CIS software went live in May 2012, with $58.4 million incurred against an estimated total cost of $58.6 million. The PUC approved an EOTP Phase 1 settlement involving a prior $9.5 million gross-plant write-off, charged after tax in Q4 2011.
Environmental requirements—including power-plant cooling-water rules, air-toxics standards, regional haze and greenhouse-gas regulation—could require material capital, fuel or operating costs; the amounts were not determinable. HECO also disclosed that possible consolidation of certain independent power producers could materially affect reported assets, liabilities and earnings.
A 2011 ASB customer class action concerning debit-card overdraft fees remained preliminary; probable outcome and reasonably possible loss were not determinable. Management did not expect other pending or threatened ASB legal matters, in aggregate, to materially affect financial position, but could not rule out effects on a future period’s results or liquidity.
The companies revised prior-period statements for an understatement of franchise taxes before 2010, recording a cumulative $3.2 million reduction to retained earnings. The revision was not considered material to prior statements and did not affect income or cash flows for periods presented.

Most important facts for investors to verify

Whether final PUC decisions and regulatory audits permit recovery of utility rate-base investments and deferred project costs, including the pending customer refund.
Utility fuel and purchased-power cost trends, sales volumes, decoupling collections, and progress toward renewable-energy and reliability commitments.
ASB’s margin sensitivity to prolonged low rates, loan quality and loss reserves, and the effect of changing capital rules or deposit competition.
Funding needs for pensions and environmental compliance, and the eventual cost of the Molokai site investigation and cleanup.
Debt maturities, refinancing terms, and cash generation relative to planned utility investment and dividends.