Hawaiian Electric Industries, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This combined filing covers HEI and its electric utility subsidiary HECO; the requested “2010 Q4” is not a standalone quarterly filing. The filing provides unaudited fourth-quarter figures as well as full-year results.
Business context and financial results
HEI is a Hawaii-focused holding company with two principal businesses: regulated electric utilities serving about 95% of Hawaii’s population and American Savings Bank (ASB). In 2010, utilities generated approximately 89% of consolidated revenue and 67% of net income.
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $2.665 billion | $2.310 billion |
| Operating income | $256.2 million | $187.7 million |
| Net income attributable to common stock | $113.5 million | $83.0 million |
| Basic / diluted EPS | $1.22 / $1.21 | $0.91 / $0.91 |
| Cash from operating activities | $340.7 million | $284.5 million |
| Cash and cash equivalents at year-end | $330.7 million | $503.9 million |
| Total assets at year-end | $9.085 billion | $8.925 billion |
Revenue increased 15% and common-stock net income increased 37%. Fourth-quarter 2010 revenue was $695.7 million and common-stock net income was $24.7 million, compared with $619.6 million and $13.7 million, respectively, in fourth-quarter 2009. The filing does not provide a clear consolidated margin measure.
Segments, liquidity and capital
- Electric utilities: Revenue was $2.382 billion, up 17%; common-stock net income was $76.6 million, down 4%. Electricity sales declined 1.1% to 9.579 billion kWh. Higher fuel prices and interim rate relief increased revenue, while lower sales and higher operating, maintenance and depreciation costs pressured earnings. Fuel and purchased-power costs are generally passed through under adjustment clauses.
- ASB: Revenue was $282.7 million and net income was $58.5 million, versus $21.8 million in 2009. Net interest income declined 6% to $189.8 million; net interest margin edged up to 4.23% from 4.19%, mainly as funding costs fell. Loans net of allowance were $3.490 billion, down 5%; deposits were $3.975 billion, down 2%. Nonaccrual loans were $58.9 million, or 1.7% of loans, and the allowance for loan losses was $40.6 million. The provision for loan losses was $20.9 million.
- Cash and debt: Operating cash flow was $340.7 million; investing activities used $278.7 million and financing activities used $235.3 million. HEI had $1.365 billion of nonbank long-term debt, $24.9 million of nonbank short-term borrowings, and $237.3 million of ASB borrowings. ASB deposits were $3.975 billion. HEI and HECO had undrawn credit facilities of $125 million and $175 million, respectively. Management said available cash generation and financing sources should cover foreseeable needs.
- Capital returns: HEI maintained its annual dividend at $1.24 per share. The payout ratio was 102%, compared with 137% in 2009.
- Credit and funding: S&P lowered HEI and HECO long-term ratings from BBB to BBB- in November 2010, with stable outlooks; Moody’s affirmed Baa2 for HEI and changed its outlook to stable. HEI’s long-term debt maturities include $150 million in 2011; the utilities forecast substantial future borrowing and equity needs for investment.
Material changes, outlook and risks
- ASB’s earnings recovery reflected lower expenses after its performance-improvement project, lower loan-loss provisioning than in 2009, and the absence of the prior-year securities-sale and impairment losses. ASB had sold its private-issue mortgage-related securities portfolio in 2009 and reported no such exposure at year-end 2010.
- HECO’s PUC-approved revenue decoupling was being implemented, intended to separate authorized utility revenue from electricity sales and support more timely recovery of approved costs and investment. Final HECO tariffs were pending review, with a requested March 2011 effective date. Management cited 2011 utility kWh sales growth of 2.4% and expected utility O&M costs, excluding demand-side management costs, to rise about 7%.
- The utilities’ estimated gross capital spending was $300 million in 2011 and approximately $2.2 billion for 2011–2015; estimated net capital expenditures for that five-year period were about $2.0 billion. Management expected 2011 funding from operations, equity proceeds, short-term borrowing and existing cash, while forecast utility cash flows after dividends would not cover the full five-year program.
- Management emphasized Hawaii’s clean-energy transition, including renewable generation, biofuels, grid investments and plans to integrate approximately 1,100 MW of renewable resources. Delivery, permitting, cost recovery and grid reliability remain dependent on regulators and third parties. The statutory renewable portfolio standard rises to 40% by 2030.
- Key risks include PUC decisions and delays in rate recovery; fuel-price and supplier exposure; intermittent renewable generation and capacity adequacy; Hawaii’s concentrated economy and island-specific electric grids; ASB’s real-estate-heavy, Hawaii-concentrated loan portfolio and interest-rate sensitivity; and increased environmental requirements. The utilities’ transmission and distribution systems, estimated to have roughly $5 billion in replacement value, are uninsured, as is business interruption.
- Environmental and regulatory exposures include the Honolulu Harbor contamination investigation, for which HECO had accrued $1.4 million for its estimated share of Iwilei costs; the total scope and allocation remain uncertain. Utility regulatory assets were $478 million and regulatory liabilities $297 million at year-end; failure of regulatory accounting assumptions could require write-offs or refunds. New air, water and greenhouse-gas requirements could add significant costs.
- Retirement benefit plan assets were $983 million at year-end. Management expected 2011 contributions of $64 million across the company’s plans. The utilities’ 2011–2015 capital program excludes potentially material future environmental and renewable-infrastructure spending.
- Unusual items included utility tax-settlement interest income, contributing about $6 million to utility net income after tax, and a $2 million tax expense for an expired capital-loss carryforward. HEI’s effective tax rate was 37%, versus 34% in 2009.
The independent auditor issued an unqualified opinion on HEI’s 2010 financial statements and internal control over financial reporting; management also reported effective disclosure controls.
Important facts for investors to verify
- Whether decoupling and final rate mechanisms are implemented as expected, and whether allowed rates provide timely recovery of utility costs and capital investment.
- ASB’s loan quality, especially residential and vacant-land exposures, charge-offs, allowance adequacy, deposit trends and net interest margin as interest rates change.
- Actual 2011–2015 utility capital spending, financing needs, credit-rating developments and capacity to sustain the $1.24 annual dividend.
- Progress, cost and PUC approval of renewable projects and fuel contracts, including the proposed long-term biodiesel supply, and the utilities’ ability to maintain reliable service during the transition.
- Outcomes and potential costs of the Honolulu Harbor investigation and emerging environmental rules, including cooling-water, air-emissions and greenhouse-gas requirements.