Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2006 for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI operates as a holding company with two primary segments: electric utilities (HECO, Maui Electric Company, and Hawaii Electric Light Company) and banking (American Savings Bank, F.S.B.). The company serves the State of Hawaii, with operations heavily influenced by local economic conditions, tourism, federal military spending, and fuel oil prices.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2006 | Six Months Ended June 30, 2005 |
|---|---|---|
| Total Revenues | $1,179,931 | $994,890 |
| Net Income | $59,561 | $51,675 |
| Operating Income | $129,880 | $118,120 |
| Diluted EPS | $0.73 | $0.64 |
| Cash from Operating Activities | $147,689 | $70,167 |
| Total Assets (June 30, 2006) | $10,020,728 | $9,951,577 |
| Long-term Debt, net (June 30, 2006) | $1,033,089 | $1,142,993 |
| Stockholders' Equity (June 30, 2006) | $1,205,141 | $1,216,630 |
Segment Performance (Six Months Ended June 30, 2006)
- Electric Utility: Revenues of $979.0 million; Net Income of $38.3 million. Driven by interim rate relief and higher fuel costs passed to customers.
- Bank (ASB): Revenues of $202.6 million; Net Income of $33.0 million. Driven by higher net interest income and loan growth.
- Other: Net Loss of $11.8 million, primarily due to unrealized losses on Hoku Scientific, Inc. shares.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 19% year-over-year, driven by a 22% increase in electric utility revenues and a 7% increase in bank revenues.
- Profitability: Net income rose 15% to $59.6 million. The electric utility segment saw a 19% increase in net income, while the bank segment increased 6%.
- Fuel Costs: Average fuel oil costs per barrel increased 35% to $66.20 for the six-month period, significantly impacting utility operating expenses, though largely passed through to customers via energy cost adjustment clauses.
- Cash Flow: Net cash provided by operating activities more than doubled to $147.7 million, compared to $70.2 million in the prior year.
- Investment Losses: The "Other" segment reported a net loss due to a $2.6 million unrealized and realized loss on Hoku Scientific shares.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Dividends: HEI maintained its quarterly dividend at $0.31 per share. The payout ratio for the first six months of 2006 was 85%. Management targets a sustainable 65% payout ratio.
- Utility Rates: HECO received interim rate relief in September 2005. A final decision on the pending rate case is pending, with specific focus on new legislation (Act 162) regarding energy cost adjustment clauses. HELCO filed a new rate case in May 2006.
- Generation Reliability: HECO faces a projected reserve capacity shortfall of 170-200 MW between 2006 and 2009. A 110 MW combustion turbine project is planned for 2009. On June 1, 2006, HECO experienced a generation shortfall requiring load shedding for 29,300 customers.
- Banking Strategy: ASB continues to transform from a thrift to a community bank, with growth in commercial loans. Management anticipates margin compression due to a flat or inverted yield curve.
Risks and Contingencies
- Regulatory Risk: Outcomes of Public Utilities Commission (PUC) proceedings regarding rate increases, energy cost adjustment clauses, and competitive bidding frameworks could materially affect revenues.
- Environmental and Litigation: Ongoing investigations into petroleum contamination at Honolulu Harbor and potential costs related to the Regional Haze Rule and Clean Water Act.
- Retirement Benefits: Potential recognition of minimum pension liabilities could reduce stockholders' equity and impact rate base, though the company has requested regulatory asset treatment.
- Interest Rate Risk: ASB faces sensitivity to interest rate changes, with a Net Portfolio Value (NPV) ratio of 11.03% as of June 30, 2006.
Investor Verification Checklist
- Rate Case Finalization: Monitor the PUC's final decision on HECO's pending rate case and the impact of Act 162 on energy cost adjustment clauses.
- Generation Capacity: Verify progress on HECO's 110 MW combustion turbine project and the status of HELCO's Keahole plant expansion (ST-7) to mitigate reliability risks.
- Fuel Price Volatility: Track global crude oil prices and their pass-through to customers via energy cost adjustment clauses.
- Bank Asset Quality: Review ASB's allowance for loan losses and net interest margin trends in the context of rising interest rates.
- Regulatory Asset Treatment: Confirm the PUC's decision on the request to record minimum pension liabilities as regulatory assets to protect rate base and equity.