Hawaiian Electric Industries, Inc. (HEI) — Q3 2011 Form 10-Q
Business context and reporting period. This unaudited joint filing covers HEI and its principal utility subsidiary, Hawaiian Electric Company (HECO), for the quarter and nine months ended September 30, 2011. HEI’s businesses are electric utilities and American Savings Bank (ASB), with a smaller “other” segment. Comparisons below are with the corresponding 2010 periods unless noted.
Key financial results
| HEI consolidated | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $886.4 million | $694.5 million | $2,391.3 million | $1,969.2 million |
| Operating income | $94.5 million | $72.6 million | $221.5 million | $197.0 million |
| Net income attributable to common stock | $48.4 million | $32.4 million | $104.0 million | $88.8 million |
| Diluted EPS | $0.50 | $0.35 | $1.09 | $0.95 |
| Common dividend per share | $0.31 | $0.31 | $0.93 | $0.93 |
Revenue and earnings are reported in dollars; tables in the filing generally present amounts in thousands. HEI revenue growth primarily reflected higher utility fuel and purchased-power costs that are generally passed through to customers, along with rate adjustments. Utility operating income improved, while the bank segment’s operating income declined.
- Electric utilities: Nine-month revenue was $2,194.3 million, up 25%; operating income was $162.7 million, up 20%; and net income for common stock was $74.2 million, up 29%. Higher interim rates, decoupling adjustments and fuel-efficiency savings supported results. Nine-month electricity sales were nearly flat at 7,159 million kWh versus 7,144 million kWh. Average fuel oil cost rose 39% to $120.13 per barrel.
- ASB: Nine-month revenue was $197.7 million, down 8%, and net income was $44.5 million, down 1%. Net interest margin fell to 4.11% from 4.23%; lower asset yields and reduced deposit-fee income were partly offset by lower funding costs, loan-loss provision and operating expenses.
Cash flow, financial position and liquidity
- HEI’s nine-month operating cash flow was $101.1 million, down from $176.9 million. Investing used $169.7 million, principally for utility capital expenditures and growth in ASB loans; financing provided $21.4 million. Cash and equivalents were $283.5 million at September 30, 2011, versus $330.7 million at year-end 2010.
- Capital expenditures were $148.1 million for HEI, including $142.7 million for HECO. HECO’s operating cash flow was $60.5 million, down from $103.7 million; investing used $127.6 million and financing used $42.0 million. HECO cash declined to $13.9 million from $122.9 million at year-end.
- At September 30, HEI had $1.34 billion of long-term debt outside the bank and $51.2 million of short-term borrowings outside the bank. HEI’s $125 million revolving credit facility was undrawn. 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, using proceeds in part to refinance maturities.
- HECO reported $1.06 billion of long-term debt, including current maturities, and a $175 million undrawn credit facility. ASB reported $4.06 billion of deposits and $237.9 million of other borrowings. HEI management stated that available internal and external funding sources were adequate for foreseeable needs.
- HEI total assets were $9.26 billion and shareholders’ equity was $1.54 billion. Consolidated liabilities include bank deposit liabilities; therefore, total liabilities should not be read as conventional corporate debt.
Material changes, outlook and risks
- HEI’s net income growth exceeded revenue growth in Q3 and year to date, with improved utility results driving the increase. ASB’s nine-month net income was slightly lower year over year. HEI’s quarterly dividend remained $0.31 per share; management expected to maintain it, subject to quarterly board review. The reported dividend payout ratio was 85% for the first nine months of 2011, versus 102% for 2010.
- HECO’s PUC-approved interim 2011 rate increase was $53.2 million annually, including $15 million already being recovered through the revenue adjustment mechanism. Interim collections may be refunded with interest if they exceed the final authorized amount. HECO’s 2011 rate case remained pending final resolution.
- Management’s full-year 2012 goal for HECO’s unconsolidated return on average common equity was to come within approximately 150 basis points of the PUC-allowed return. Utility 2011 capital expenditures were estimated at about 10% below the earlier $300 million forecast; the 2011–2015 capital plan was $2.2 billion, with expected annual rate-base growth of about 5%. ASB’s stated targets were a 1.20% return on assets, 4% net interest margin and an efficiency ratio in the mid-50s. Management characterized Hawaii’s near-term economic growth outlook as modest.
- Utilities faced regulatory uncertainty over audits of major projects, including East Oahu Transmission and the Campbell Industrial Park turbine; recovery of some costs remains subject to PUC review. Potential environmental requirements could require material capital and operating expenditures, which were not determinable in the filing. Renewable-energy initiatives also depend on PUC approvals, project execution, fuel economics and transmission infrastructure; the PUC denied approval of HELCO’s proposed biodiesel contract because of its cost relative to petroleum diesel.
- HECO disclosed that consolidation of certain independent power producers might be required if additional information becomes available; a material consolidation could affect reported assets, liabilities and earnings. ASB reported $66.6 million of nonaccrual loans, up from $58.9 million at year-end 2010, although its loan-loss provision declined. A customer class action alleging improper debit-card overdraft fees was in a preliminary stage; probable outcome and loss range were not determinable.
- Other risks include fuel-price volatility, utility generation reliability, interest-rate and credit risks at ASB, pension asset performance and funding requirements, and evolving banking, environmental and clean-energy regulation. HEI settled forward-starting swaps for $5.2 million in the first half of 2011; $3.3 million was identified as the ineffective portion, and $1.9 million is being amortized to interest expense over five years.
Important facts for investors to verify
- Final PUC decisions on utility rate cases, interim collections and cost recovery for audited projects.
- Whether utility cash generation and financing capacity can support the stated capital plan, retirement contributions and debt maturities.
- ASB’s loan-credit trends, including nonaccruals, charge-offs, allowance adequacy and exposure to Hawaii real estate.
- ASB’s ability to sustain net interest margin and earnings amid low interest rates and reduced deposit-fee income.
- Cost, timing, approvals and reliability implications of renewable projects and pending environmental rules.
- Developments in the overdraft-fee litigation and any potential IPP consolidation or other material contingencies.