Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010, 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 and its subsidiaries serving Oahu, Maui, and the Big Island) and banking (American Savings Bank, F.S.B. or ASB). The company is a large accelerated filer. As of May 7, 2010, HEI had 93,174,549 shares of common stock outstanding.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Consolidated Revenues | $619,040 | $543,797 |
| Operating Income | $60,707 | $44,658 |
| Net Income | $27,599 | $20,868 |
| Net Income for Common Stock | $27,126 | $20,395 |
| Diluted EPS | $0.29 | $0.22 |
| Cash and Equivalents (End of Period) | $341,330 | $161,359 |
| Long-Term Debt (Net) | $1,364,847 | $1,364,815 |
| Total Assets | $8,892,940 | $8,959,956 |
Segment Performance
- Electric Utility: Revenues increased 19% to $548.1 million, driven by higher fuel costs passed through to customers, interim rate increases, and a 2% increase in kilowatthour sales. Operating income rose 37% to $42.6 million.
- Bank (ASB): Revenues decreased 14% to $70.9 million due to lower interest income from reduced loan volumes and yields. However, operating income increased 27% to $21.8 million, aided by a lower provision for loan losses ($5.4 million vs. $8.3 million in Q1 2009) and reduced noninterest expenses.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue grew 14% year-over-year, primarily due to the electric utility segment's pass-through of higher fuel costs ($69 million impact) and interim rate relief.
- Profitability: Net income for common stock increased 33% to $27.1 million. This was driven by higher operating income in both utility and bank segments, partially offset by higher interest expense and income taxes.
- Loan Portfolio: ASB's loan portfolio decreased slightly to $3.62 billion as the bank sold substantially all salable residential loan production. Nonperforming assets increased to $78.3 million (2.13% of total loans and REO) from $69.1 million, reflecting the economic environment.
- Cash Flow: Net cash provided by operating activities dropped significantly to $9.9 million from $115.7 million in Q1 2009, largely due to changes in working capital, specifically a $26.5 million increase in fuel oil stock and a $48.7 million increase in prepaid/accrued taxes.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management expects the Hawaii economy to continue a gradual recovery in 2010, constrained by U.S. consumer spending and government budget uncertainties. The company anticipates continued pressure on operating costs due to fuel price volatility and the need for infrastructure investment to support the Hawaii Clean Energy Initiative (HCEI). The HCEI aims for 70% of Hawaii's energy needs to come from clean sources by 2030.
HEI and HECO have secured new credit facilities effective May 7, 2010: a $125 million facility for HEI and a $175 million facility for HECO, replacing expiring lines of credit.
Key Risks and Contingencies
- Regulatory Risk: Significant uncertainty exists regarding the timing and outcome of Public Utilities Commission (PUC) rate cases. Interim rate increases are subject to refund if final orders are lower. The PUC has deferred decisions on specific recovery mechanisms for major projects like the CIP CT-1 combustion turbine and the East Oahu Transmission Project.
- Project Cost Recovery: Major projects (CIP CT-1, East Oahu Transmission, HELCO ST-7, and the Customer Information System) have accumulated costs totaling over $360 million that have not yet been allowed in rate base. If the PUC disallows these costs, material write-offs could occur.
- Environmental Compliance: The company faces potential significant capital expenditures related to EPA regulations on greenhouse gas emissions, hazardous air pollutants, and regional haze rules.
- Banking Regulation: Proposed federal financial regulatory reforms could eliminate the Office of Thrift Supervision (OTS) and the "grandfathering" provisions that allow HEI to own a bank, potentially forcing a divestiture of ASB.
- Interest Rate Risk: ASB faces interest rate risk; rising rates could reduce the fair value of its investment securities, while falling rates compress net interest margins.
Investor Verification Checklist
- Rate Case Outcomes: Verify the final decisions in HECO's 2009 test year rate case and the pending 2010 test year cases for HELCO and MECO, specifically regarding the recovery of CIP CT-1 and transmission project costs.
- Project Cost Write-offs: Monitor PUC rulings on the recoverability of deferred costs for the CIP CT-1 ($193 million), East Oahu Transmission ($53 million), and Customer Information System ($25 million) projects.
- Bank Asset Quality: Track the trend in ASB's nonperforming assets and the adequacy of the allowance for loan losses given the Hawaii real estate market conditions.
- Regulatory Reform Impact: Assess the potential impact of federal banking reform legislation on HEI's ability to retain ownership of American Savings Bank.
- Fuel Price Volatility: Monitor the effectiveness of the Energy Cost Adjustment Clause (ECAC) in passing through rising fuel costs to customers without regulatory delay.