Hawaiian Electric Industries, Inc. (HEI) — 2012 Form 10-K
Business context and reporting period
This combined filing covers HEI and Hawaiian Electric Company, Inc. (HECO) for the fiscal year ended December 31, 2012; it is an annual report, not a standalone fourth-quarter filing. HEI is a Hawaii-focused holding company whose principal businesses are regulated electric utilities serving about 95% of the state’s population and American Savings Bank (ASB). The filing includes separate HECO information; figures below are identified by entity where relevant.
Financial performance, cash flow and liquidity
| HEI consolidated metric | 2012 | 2011 |
|---|---|---|
| Revenue | $3.375 billion | $3.242 billion |
| Operating income | $284.2 million | $289.7 million |
| Net income for common stock | $138.7 million | $138.2 million |
| Diluted EPS | $1.42 | $1.44 |
| Cash from operating activities | $234.5 million | $250.4 million |
| Cash used in investing activities | $427.0 million | $326.8 million |
| Cash from financing activities | $141.9 million | $16.0 million |
Revenue rose about 4%, largely reflecting higher fuel and purchased-power costs passed through utility rates. Operating income declined about 2%; net income was nearly flat, while diluted EPS fell about 1% as weighted-average shares increased. Approximate derived operating and net margins were 8.4% and 4.1%, respectively, versus 8.9% and 4.3% in 2011. Year-end cash and cash equivalents were $219.7 million, down from $270.3 million.
At year-end, HEI reported $1.423 billion of long-term debt and $83.7 million of non-bank short-term borrowings. ASB’s $195.9 million of other bank borrowings and $4.230 billion of deposits are separate bank funding liabilities. HEI and HECO had undrawn credit facilities of $125 million and $175 million, respectively. HEI’s long-term debt was rated BBB- by S&P and Baa2 by Moody’s, with stable outlooks reported in the filing.
HEI’s common dividend remained $1.24 per share for the year; the payout ratio was 87%. Total assets were $10.15 billion and common equity was $1.594 billion.
Business segments and changes versus prior year
- Electric utilities: HEI utility revenue was $3.109 billion, up from $2.979 billion; net income for common stock was $99.3 million, down from $100.0 million. Electricity sales fell about 3.4% to 9,206 million kWh, attributed chiefly to cooler, less humid weather, conservation and growth in customer-sited renewable generation. Average fuel-oil cost rose to $138.09 per barrel from $123.63.
- ASB: Net income was $58.6 million versus $59.8 million. Net interest income declined to $178.6 million from $184.6 million, and net interest margin narrowed to 3.93% from 4.12%; lower funding costs and higher noninterest income partly offset reduced asset yields and higher expenses. Year-end assets were $5.04 billion, deposits $4.23 billion and net loans $3.74 billion.
- Other segment: Net loss improved to $19.3 million from $21.6 million, reflecting lower interest expense among other factors.
- Credit quality: ASB’s nonaccrual loans declined to $64.9 million, or 1.7% of loans, from $66.8 million, or 1.8%. Net charge-offs fell to $8.8 million from $17.7 million; the allowance for loan losses increased to $42.0 million from $37.9 million.
Outlook, management commentary, risks and unusual items
- Management expected utility electricity sales to decline slightly in 2013 and then remain relatively flat through 2022. No specific consolidated EPS guidance is provided in the filing text.
- The utilities forecast $2.9 billion of net capital expenditures for 2013–2017 and rate-base growth of approximately 5%–10% compounded annually. Forecast 2013 net capital expenditures were about $380 million; management expected debt and equity financing to be needed over the forecast period.
- In the fourth quarter, HEI recorded a $40 million utility-project write-off, with a $24 million after-tax charge to net income, under a settlement with the Consumer Advocate addressing the Customer Information System (CIS) and Campbell Industrial Park combustion turbine project audits. The January 2013 agreement remained subject to PUC approval. A separate East Oahu Transmission Project charge of approximately $6 million after tax had been recorded in 2011.
- Utility results depend on PUC rate decisions and continued operation of cost-recovery mechanisms, including decoupling, fuel and purchased-power adjustment clauses. Regulatory assets were $864.6 million and regulatory liabilities $322.1 million at year-end; impairment of recoverability or required refunds could materially affect results.
- Key exposures include fuel-price and supply risk, reliance on independent power producers, renewable integration and permitting, environmental compliance costs, natural disasters and uninsured utility transmission and distribution assets. ASB is exposed to interest-rate pressure, Hawaii real-estate concentration, borrower credit deterioration, and regulatory requirements. The utilities estimated $2.643 billion of fuel-purchase obligations and $1.255 billion of minimum fixed-capacity power-purchase charges.
- Management stated that available cash generation and financing sources were adequate for foreseeable needs. Auditors issued an unqualified opinion on HEI’s financial statements and reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether the PUC approved the utility settlement and whether the remaining CIS and turbine costs are recoverable in rates.
- Actual utility capital spending, project timing, financing needs and rate-base growth compared with the 2013–2017 forecast.
- Whether utility decoupling and fuel and purchased-power recovery mechanisms remain effective, and how lower kWh sales affect earnings and customer bills.
- ASB’s margin trends, commercial-loan risk migration, allowance adequacy and performance of Hawaii real-estate collateral.
- Progress toward renewable portfolio targets and the cost, reliability and permitting consequences of integrating intermittent generation.