Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI operates through three primary segments: Electric Utilities (HECO, HELCO, MECO), Banking (American Savings Bank, F.S.B. or ASB), and Other. The reporting period reflects the impact of a weak Hawaii economy, declining tourism, and a significant drop in fuel oil prices.
Key Financial Metrics (Six Months Ended June 30, 2009)
| Metric | HEI Consolidated | HECO (Electric Utilities) | ASB (Bank) |
|---|---|---|---|
| Total Revenues | $1,069.7 million | $907.1 million | $157.5 million |
| Operating Income | $79.7 million | $41.3 million | $22.6 million |
| Net Income (Common Stock) | $35.9 million | $29.6 million | $14.9 million |
| Basic EPS | $0.39 | N/A | N/A |
| Cash Flow from Operations | $180.3 million | $127.2 million | $62.0 million |
| Total Assets | $9.0 billion | $3.9 billion | $5.1 billion |
| Long-Term Debt | $1.2 billion | $0.9 billion | N/A |
| Allowance for Loan Losses (ASB) | N/A | N/A | $42.5 million |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 29% year-over-year. The Electric Utility segment saw a 30% drop primarily due to lower fuel oil costs (passed through to customers) and a 5.2% decline in kilowatthour sales driven by the economic slowdown and cooler weather. The Bank segment revenues fell 18% due to lower earning asset balances following a 2008 balance sheet restructuring and lower interest rates.
- Profitability Improvement in Banking: Despite lower revenues, ASB operating income turned positive ($22.6 million) compared to a loss of $7.6 million in the prior year. This reversal is largely attributable to the absence of the $35.6 million restructuring charge incurred in Q2 2008.
- Utility Operating Income: HECO operating income decreased 41% to $41.3 million. While fuel costs dropped significantly, this was offset by higher operation and maintenance expenses ($10.6 million increase) and lower sales volumes.
- Loan Loss Provisions: ASB recorded a provision for loan losses of $21.8 million for the six months ended June 30, 2009, compared to $2.1 million in the prior year, reflecting increased delinquencies in residential and commercial loans.
Guidance, Outlook, and Risks
- Economic Outlook: Management notes the Hawaii economy remains weak, with unemployment at 7.4% and tourism arrivals down nearly 10% in the first half of 2009. Recovery is not expected until 2011.
- Regulatory Proceedings:
- Rate Cases: HECO received an interim rate increase of $61.1 million (4.7%) in July 2009. Final decisions on 2009 test year rate cases for HECO, HELCO, and MECO are pending. The Public Utilities Commission (PUC) removed certain costs related to the CIP CT-1 project and HCEI initiatives from the interim decision.
- Decoupling: A proceeding to implement a revenue decoupling mechanism (separating revenue from sales volume) is ongoing, with briefing scheduled for September 2009.
- Capital Markets & Ratings: Both S&P and Moody's have placed HEI and HECO on a "Negative" outlook, citing the weakened Hawaii economy and high dividend payout ratios. HEI's commercial paper rating was lowered to A-3/P-2.
- Key Risks:
- Banking: Continued deterioration in the housing market could lead to material "other-than-temporary impairment" (OTTI) charges on private-issue mortgage-related securities. ASB holds $275 million in such securities with significant unrealized losses.
- Utilities: Strained generation reserve margins on Oahu; potential disallowance of project costs (e.g., CIP CT-1, East Oahu Transmission Project) by the PUC; and environmental compliance costs.
Investor Verification Checklist
- Rate Case Outcomes: Monitor the final PUC decisions on the 2009 test year rate cases for HECO, HELCO, and MECO, specifically regarding the recovery of CIP CT-1 costs and the approval of the revenue decoupling mechanism.
- Bank Asset Quality: Review future quarters for changes in ASB's nonperforming assets (currently 1.55% of loans) and any new OTTI charges on the private-issue mortgage-related securities portfolio.
- Dividend Sustainability: Assess the impact of the high dividend payout ratio (159% for the first six months of 2009) on liquidity, given the negative credit outlook and economic headwinds.
- Project Cost Recovery: Verify the status of cost recovery for major capital projects, including the CIP CT-1 combustion turbine and the East Oahu Transmission Project, which face regulatory scrutiny.
- FDIC Assessments: Track potential additional special assessments by the FDIC to restore the Deposit Insurance Fund, which could impact ASB's earnings.