Hawaiian Electric Industries, Inc. — Q3 2010 Form 10-Q
Business context and period. HEI is a Hawaii-based holding company whose principal businesses are regulated electric utilities (HECO and subsidiaries) and American Savings Bank (ASB). This summary covers the quarter and nine months ended September 30, 2010; financial statements are unaudited. Unless noted otherwise, amounts are in millions of dollars.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $694.5 | $620.3 | $1,969.2 | $1,690.0 |
| Operating income | $72.6 | $68.6 | $197.0 | $148.4 |
| Net income attributable to common stock | $32.4 | $33.5 | $88.8 | $69.4 |
| Basic and diluted EPS | $0.35 | $0.37 | $0.95 | $0.76 |
| Dividend per common share | $0.31 | $0.31 | $0.93 | $0.93 |
- Electric utilities: Q3 revenue increased 14% to $623.1, while operating income fell 5% to $51.3 and common-stock income fell 17% to $22.0. For nine months, revenue rose 20% to $1,755.3, operating income rose 15% to $135.4, and common-stock income increased 3% to $57.7.
- Utility fuel-oil expense rose 26% in Q3 and 43% year to date; average fuel-oil cost per barrel increased 35% and 45%, respectively. Fuel and purchased-power cost increases are generally passed through to customers. Electricity sales fell 3% in Q3 and 1% year to date, mainly due to cooler, less humid weather.
- ASB: Q3 net income was $15.3, up 35%; nine-month net income was $45.2, up 72%. Nine-month revenue declined 7% to $214.0, but operating income increased 78% to $71.9, reflecting lower loan-loss provisions, lower expenses, and comparison with 2009 securities impairment losses. Net interest margin was 4.31% for Q3 (4.23% in 2009) and 4.23% year to date (4.17% in 2009).
- Cash flow: HEI generated $189.6 of operating cash in the first nine months, versus $227.0 in 2009; investing used $79.4, versus providing $222.5; financing used $226.6, versus $373.9. Cash ended at $387.5, down from $503.9 at year-end 2009. HECO generated $116.4 operating cash, spent $131.1 on capital expenditures, and ended with $35.0 cash.
- Balance sheet and funding: HEI assets were $8.90 billion. Cash was $387.5; nonbank short- and long-term debt totaled about $1.39 billion. ASB deposits were $3.96 billion and other bank borrowings $246.6. HECO had $1.06 billion of long-term debt and a $175 million revolving credit facility; HEI had a $125 million facility. Both facilities were undrawn at September 30, 2010.
- ASB’s nonperforming assets were $65.7, or 1.87% of loans and real estate owned, compared with $69.1 and 1.85% at year-end 2009. Its allowance for loan losses was $38.3, or 1.09% of loans. ASB reported capital ratios above regulatory well-capitalized minimums.
Material changes and management outlook
- HEI’s nine-month common income and EPS improved substantially, despite a Q3 decline. Utility interim rate relief supported year-to-date results; Q3 utility earnings were pressured by lower sales, higher operating and maintenance costs, lower construction allowances, and higher interest expense. ASB earnings benefited from the absence of significant 2009 securities impairment charges and lower loan-loss provisions.
- The PUC issued a final decoupling order in August 2010, subject to modifications. The mechanism is intended to reduce the link between utility revenues and electricity sales; implementation depends on rate decisions incorporating reduced returns. HEI reported $167 million of utility revenue recognized under interim orders, which remains subject to refund with interest if final allowed amounts are lower.
- HECO’s 2011 test-year rate request seeks a $94 million annual increase, subject to PUC review. Management expected 2010 utility sales to be about 1% below 2009 and utility O&M expense, excluding demand-side management costs, to be about 13% higher than 2009. These are management estimates, not earnings guidance.
- HEI said it currently expects to maintain its dividend at the existing level, while noting the board reviews it quarterly. The nine-month payout ratio was 98% (137% for 2009).
- Major execution and regulatory matters include renewable-energy integration and the proposed undersea cable/wind projects; rate recovery for significant utility projects; environmental and greenhouse-gas requirements; and uncertainty over potential consolidation of certain independent power producers if additional information becomes available.
Risks, contingencies, and unusual items
- Utility interim rates can be refunded; project costs may be disallowed or require write-offs. PUC approvals and permits remain important to capital spending and recovery. The company cited actual utility returns below recent allowed returns, mainly due to lower sales and higher O&M costs.
- HECO recorded asset-retirement obligations of $35 million for retired Honolulu units and $12 million for Waiau units, including expected asbestos and lead-paint abatement. Environmental rules could require significant additional capital and compliance costs.
- HECO’s estimated remaining share of Honolulu Harbor Iwilei remediation costs was $1.4 million; total scope and final cost allocation remain uncertain. A BlueEarth-related lawsuit against MECO, HECO, and others seeks damages and equitable relief; trial was scheduled for June 2011.
- HECO’s transmission and distribution systems, with an estimated replacement value of roughly $5 billion, are uninsured, and the utilities have no business-interruption insurance. A major disaster could materially affect results, financial condition, and liquidity if costs or lost revenues are not recoverable.
- ASB remains exposed to Hawaii real-estate and borrower credit conditions, deposit competition, and interest-rate risk. The Dodd-Frank Act will change bank supervision and impose new requirements; management said the ultimate effects were not yet predictable.
- Unusual items included a $1.3 million second-quarter 2010 write-off of part of MECO’s CHP investment and a $6.2 million negative fair value on HEI forward-starting swaps hedging planned 2011 debt issuance. The filing also describes prior-year ASB securities impairment charges that affect year-over-year comparisons.
Important facts for investors to verify
- Whether PUC rate decisions permit timely recovery of costs, and whether interim revenues are retained or refunded.
- Whether utility cost growth, lower electricity sales, and fuel-price volatility affect margins beyond the periods reported.
- ASB’s loan quality, allowance adequacy, deposit trends, and sensitivity to changing interest rates and Hawaii real-estate conditions.
- Funding needs and cost recovery for utility capital projects, retirement benefits, environmental obligations, and uninsured catastrophe exposure.