Business context and reporting period
Hawaiian Electric Industries, Inc. (HEI) filed this unaudited Form 10-Q for the quarter ended June 30, 2013. HEI’s businesses comprise Hawaiian Electric Company and its subsidiaries (the electric utilities), American Savings Bank (ASB), and other operations. Comparisons below are with the same 2012 periods unless stated otherwise.
Key financial results
| HEI consolidated | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $796.7 million | $854.3 million | $1,580.8 million | $1,669.1 million |
| Operating income | $82.4 million | $79.4 million | $153.0 million | $155.2 million |
| Net income | $41.1 million | $39.3 million | $75.2 million | $78.1 million |
| Net income for common stock | $40.6 million | $38.8 million | $74.3 million | $77.1 million |
| Diluted EPS | $0.41 | $0.40 | $0.75 | $0.80 |
| Dividend per share | $0.31 | $0.31 | $0.62 | $0.62 |
For the six months, operating cash flow was $130.8 million, compared with cash used of $3.6 million in 2012. Investing activities used $240.3 million, including utility capital spending and ASB loan growth; financing activities provided $43.5 million. Cash and cash equivalents were $153.7 million at June 30, down from $219.7 million at year-end 2012. Capital expenditures were $158.8 million for the six months.
At June 30, HEI reported total assets of $10.24 billion, liabilities of $8.58 billion and shareholders’ equity of $1.62 billion. Nonbank short-term borrowings were $125.8 million and nonbank long-term debt was $1.42 billion. ASB had $4.28 billion of deposits and $187.9 million of other bank borrowings; these are bank funding obligations, distinct from HEI’s nonbank debt.
Business segment indicators
- Electric utilities: Q2 operating revenue was $728.8 million and net income for common stock was $28.7 million, versus $787.7 million and $29.4 million, respectively, in Q2 2012. For the first six months, revenue was $1.445 billion and common net income was $53.1 million, down from $1.536 billion and $56.7 million. Trailing-twelve-month HECO consolidated ROACE was 6.6%, versus 8.7% a year earlier.
- ASB: Q2 net income was $15.9 million, up from $14.2 million; six-month net income was $30.1 million, essentially unchanged. Six-month net interest margin was 3.79%, down from 4.01%. At June 30, loans held for investment, net, were $3.91 billion and deposits were $4.28 billion. ASB’s regulatory capital ratios were above the stated well-capitalized minimums.
Material changes versus the prior comparable period
- HEI’s Q2 revenue fell 7%, mainly from lower electric utility revenue, partly offset by bank growth; operating income rose 4% and common net income rose 5%. For the first half, revenue fell 5%, operating income fell 1%, common net income fell 4% and diluted EPS fell 6%.
- Utility revenue and fuel expense both declined, largely reflecting lower fuel prices and lower kilowatt-hour sales. First-half utility common net income also weakened amid the MECO rate-case refund and higher operating and maintenance costs.
- ASB benefited from lower loan-loss provisioning and higher noninterest income, including a gain on securities sales. Lower asset yields and higher operating expenses offset some of those gains.
- ASB’s allowance for loan losses was $41.0 million, compared with $42.0 million at year-end 2012. First-half net charge-offs were $1.9 million, versus $4.4 million in the first half of 2012.
- Rising interest rates reduced the fair value of ASB’s available-for-sale securities; their net unrealized gains in accumulated other comprehensive income declined to about $1 million from $11 million at year-end.
Outlook, commentary, risks and unusual items
- HEI said it expected to maintain the $0.31 quarterly dividend, subject to quarterly board review. No specific consolidated earnings guidance was provided.
- Management said liquidity was adequate for forecast obligations and investments. The utilities’ 2013–2017 forecast included approximately $2.9 billion of net capital expenditures and near-term annual rate-base growth of 5%–10%.
- The utilities expect an ongoing gap between allowed and earned returns: management estimated a 120–150 basis-point structural ROACE gap for 2013 and 80–110 basis points for 2014–2016, and expected earned ROACE to improve gradually over 2014–2016. Utility O&M, excluding specified pass-through or third-party-covered expenses, was projected to be flat to about 1% above 2012.
- HEI and the Consumer Advocate’s 2013 agreement, approved by the PUC, included a $40 million write-off of CIP CT-1 and customer information system project costs. The after-tax charge of approximately $24 million was recorded in 2012, not in this quarter. HECO rate-case timing and revenue adjustment mechanisms were also affected by the agreement.
- In MECO’s 2012 test-year rate case, the PUC approved a $5.3 million annual revenue increase effective August 1, 2013, below the interim increase. MECO recorded a $7.6 million second-quarter charge and expected to refund customers approximately $9.7 million, including interest, in September–October 2013.
- On July 1, 2013, HELCO and MECO received a DOJ letter asserting potential Clean Air Act permitting violations at two plants. The companies were pursuing settlement discussions; the filing says the amount or effect, if any, could not then be estimated.
- MECO had a $3.6 million reserve at June 30 for investigation and estimated cleanup costs at a former generation site and adjacent parcel; final remediation costs remained uncertain. Utility environmental rules, permitting and potential generating-unit retirements could require material expenditures, not yet determinable.
- Renewable energy plans include meeting Hawaii’s 40% renewable portfolio standard by 2030. The PUC’s July 2013 orders changed the Oahu renewable-energy solicitation and opened proceedings concerning interisland transmission and the Lanai wind project. Project timing, costs, regulatory approvals and renewable supply remain uncertain.
- ASB completed the sale of its $25 million credit-card portfolio on August 1, 2013, after quarter-end. ASB also estimated that debit-card interchange-fee changes could reduce after-tax income by about $3 million for the rest of 2013 and $6 million in 2014 if it remained non-exempt.
- Principal risks include fuel-price and interest-rate movements, utility cost recovery and PUC decisions, reliability and renewable integration, environmental compliance, loan quality, deposit competition, pension funding, and Hawaii’s economic and weather conditions. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Track whether utility revenue declines, rate adjustments and customer refunds affect future earnings and cash flow as expected.
- Review ASB’s loan growth, delinquencies, charge-offs, allowance adequacy, securities valuation and deposit funding costs.
- Monitor the DOJ permitting matter and the Molokai site investigation for developments that could change contingencies or reserves.
- Assess utility capital spending, renewable-project approvals, environmental compliance costs and the ability to earn PUC-authorized returns.
- Confirm the effect and settlement of HEI’s 7 million-share equity forward transactions; the company anticipated physical settlement, but cash or net-share settlement was also permitted.