Hawaiian Electric Industries, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. HEI reports an electric utility business (HECO and subsidiaries), American Savings Bank (ASB), and corporate/other activities. This unaudited filing covers the quarter and six months ended June 30, 2011; comparisons are with the same periods in 2010 unless noted.
Financial performance and condition
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $794.3 million | $655.7 million | $1,505.0 million | $1,274.7 million |
| Operating income | $63.7 million | $63.6 million | $127.0 million | $124.3 million |
| Net income attributable to common stock | $27.1 million | $29.3 million | $55.6 million | $56.4 million |
| Diluted EPS | $0.28 | $0.31 | $0.58 | $0.61 |
| Dividends per common share | $0.31 | $0.31 | $0.62 | $0.62 |
- Cash flow, six months: Operating activities provided $55.2 million; investing activities used $214.2 million; financing activities provided $95.1 million. Cash and cash equivalents fell to $266.7 million from $330.7 million at year-end 2010. Capital expenditures were $89.1 million.
- Balance sheet, June 30: Total assets were $9.24 billion and shareholders’ equity was $1.51 billion. Cash was $266.7 million; bank loans held for investment, net, were $3.58 billion; deposits were $4.05 billion. Long-term debt excluding bank debt was $1.44 billion, and ASB had $239.1 million of other borrowings. HEI reported no nonbank short-term borrowings at quarter-end.
- Liquidity and leverage: HEI cited a $125 million revolving credit facility and HECO a separate $175 million facility, both undrawn at June 30. ASB reported $1.1 billion of unused FHLB borrowing capacity and capital ratios above regulatory minimums, including a 9.1% leverage ratio and 13.3% total risk-based capital ratio.
- Bank measures: ASB’s six-month net interest margin was 4.11% versus 4.20%; net income was $29.0 million versus $29.9 million. Its allowance for loan losses was $39.3 million, or 1.09% of period-end loans, and nonaccrual loans were $58.1 million.
Material changes and management commentary
- Consolidated revenue rose 21% in Q2 and 18% for the first half, mainly because higher utility fuel and purchased-power costs are generally passed through to customers. Utility revenue also reflected rate and decoupling adjustments. Utility operating income increased 3% in Q2 and 4% year to date; HEI common net income and EPS declined, largely due to higher interest expense and lower construction allowances, with higher share counts also weighing on EPS.
- HECO’s average fuel oil cost rose 43% in Q2 to $123.69 per barrel and 33% for the first half to $112.23. First-half utility kilowatt-hour sales increased 1%. HECO’s first-half common-stock net income rose to $36.2 million from $35.7 million.
- ASB revenue declined 7% in Q2 and 8% for the first half. Lower earning-asset yields and deposit-fee income were partly offset by reduced funding costs and lower expenses. New overdraft rules reduced ASB’s first-half noninterest income by about $6 million pretax year over year. Management described credit quality as improving modestly and cited a 1.20% first-half return on assets and a 57% efficiency ratio.
- Management said it expected to maintain HEI’s current dividend, subject to quarterly board review. The first-half dividend payout ratio was 106%. Management also stated that cash generation and financing access should be sufficient for foreseeable requirements; this is an expectation, not a guarantee.
- HEI issued $125 million of senior notes in March 2011: $75 million at 4.41% due 2016 and $50 million at 5.67% due 2021. Proceeds partly repaid commercial paper and were intended in part to refinance notes maturing in August 2011.
Outlook, risks, contingencies, and unusual items
- Utility rates and projects: A July 22, 2011 PUC interim order granted HECO a $38.2 million annual revenue increase net of existing RAM revenues; the total interim increase including RAM was $53.2 million. It took effect July 26 and is subject to refund with interest if it exceeds the final allowed amount. Final rates remained pending. The PUC also ordered independent audits of costs for the East Oahu Transmission Project, Campbell Industrial Park turbine, and Customer Information System project. Recovery of some project costs remains uncertain.
- Investment plans: The utilities raised their 2011–2015 capital expenditure forecast to $2.2 billion from $1.6 billion for the prior five-year forecast, with expected rate-base growth of about 5% annually. Management identified infrastructure renewal, environmental compliance, fuel infrastructure, and renewable integration as major investment areas.
- Clean energy and operating risks: Renewable projects, including proposed Lanai wind generation and an undersea cable, depend on approvals, third parties, infrastructure, and reliable grid integration. A PUC-directed draft RFP for at least 200 MW of Oahu renewable energy was due in mid-October 2011. Fuel prices, generation reliability, regulatory cost recovery, and permitting remain significant uncertainties.
- Environmental exposure: Proposed federal rules on cooling-water intakes and hazardous air emissions could require significant capital and operating expenditures; the filing says final requirements and costs cannot yet be determined. Climate-related regulation and physical impacts also pose risks.
- Credit, legal, and other contingencies: ASB had $1.3 billion in loan commitments, unused lines, and letters of credit. A March 2011 customer class action alleges improper debit-card overdraft fees; its outcome was not determinable. HECO noted that a significant IPP could potentially require consolidation if further information changes its analysis. The utilities’ transmission and distribution systems, estimated at roughly $5 billion replacement value excluding substations, are uninsured, and the utilities have no business-interruption insurance.
- Other notable items: First-half HECO pension contributions were $37 million, with approximately $73 million estimated for 2011, reflecting increased funding requirements. HEI settled forward-starting swaps for $5.2 million in the first half; $3.3 million was recognized as ineffective hedge cost, while $1.9 million is being amortized to interest expense over five years. An IRS settlement contributed to higher tax benefits in the “other” segment.
Key facts for investors to verify
- Progress and final PUC decisions on HECO’s interim rates, the three project audits, and recovery of deferred or disputed project costs.
- Whether the higher utility capital plan can be funded and earn authorized returns, given reported utility returns below PUC-allowed levels and a 106% HEI first-half dividend payout ratio.
- ASB loan performance, allowance adequacy, deposit mix and funding costs, and the outcome of the overdraft-fee lawsuit.
- Final environmental compliance requirements and their capital, operating, and potential generation-retirement impacts.
- Actual refinancing of 2011 maturities, continued access to credit facilities, and any changes to debt covenants or liquidity.