Hawaiian Electric Industries, Inc. (HEI) — Q1 2011 Form 10-Q
Business context and period. Quarter ended March 31, 2011; unaudited results compare with Q1 2010. HEI combines regulated Hawaiian electric utilities with American Savings Bank (ASB). Figures below are consolidated HEI unless otherwise noted; dollar amounts are in millions.
Key financial results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $710.6 | $619.0 | +15% |
| Operating income | $63.4 | $60.7 | +4% |
| Net income | $28.9 | $27.6 | +5% |
| Net income attributable to common stock | $28.5 | $27.1 | +5% |
| Basic and diluted EPS | $0.30 | $0.29 | +3% |
| Common dividend per share | $0.31 | $0.31 | Unchanged |
Electric utility revenue rose 18%, primarily reflecting higher fuel and purchased-power costs generally passed through to customers, increased electricity sales and interim rate increases. Utility earnings also benefited from higher sales and rates, partly offset by operating and maintenance costs. ASB net income increased 1% to $13.9 million; lower funding costs and expenses largely offset weaker interest and fee income.
HEI cash and cash equivalents were $316.3 million at March 31, 2011, versus $330.7 million at year-end 2010. Operating cash flow was negative $13.2 million, investing cash flow negative $96.4 million, and financing cash flow positive $95.2 million. Financing included $125 million of long-term debt issuance and $50 million of debt repayment. HEI’s nonbank long-term debt was $1.44 billion; it had no nonbank short-term borrowings on the quarter-end balance sheet. Consolidated assets were $9.13 billion and shareholders’ equity $1.50 billion.
HECO, the electric utility subsidiary, reported Q1 operating revenue of $644.3 million, operating income of $32.7 million and net income attributable to HECO of $19.5 million. Fuel oil averaged $101.03 per barrel, up 23%, while kilowatthour sales rose 3%. HECO cash fell to $45.4 million from $122.9 million at year-end; operating, investing and financing activities used $27.6 million, $31.8 million and $18.1 million, respectively. HECO had $1.06 billion of long-term debt and an undrawn $175 million credit facility.
ASB held $4.86 billion in assets, $4.04 billion in deposits and $3.55 billion in net loans. Its net interest margin was 4.16%, compared with 4.18% a year earlier. The allowance for loan losses was $40.8 million, or 1.14% of loans; nonaccrual loans were $61.0 million. ASB reported capital ratios above regulatory “well-capitalized” minimums, including a 9.1% leverage ratio.
Material changes, outlook and commentary
- HEI’s earnings improvement was modest relative to the revenue increase, which was largely associated with utility fuel and purchased-power pass-throughs. The company’s payout ratio was 103% for Q1; management expected to maintain the dividend at its current level, subject to quarterly board review.
- HECO began implementing a PUC-approved decoupling model on March 1, intended to separate revenues from electricity sales and provide more timely recovery of certain operating costs and investments. HECO’s stated goal was to bring return on average common equity within 100 basis points of its 10% allowed return by the end of 2012. HECO had not recorded about $1.3 million of March RAM revenue because of uncertainty over regulatory treatment.
- The utilities forecast 2011 O&M expense growth of about 7%, excluding demand-side management costs, and raised their 2011–2015 capital expenditure forecast to $2.2 billion from $1.6 billion. Management cited infrastructure replacement, environmental compliance, fuel infrastructure and renewable integration as major investment areas.
- HEI issued $125 million of senior notes in March: $75 million at 4.41% due 2016 and $50 million at 5.67% due 2021. Proceeds were partly used to repay commercial paper and were expected to help refinance 2011 maturities. HEI’s ratings were BBB-/A-3 at S&P and Baa2/P-2 at Moody’s; HECO’s long-term utility ratings had been lowered to BBB- by S&P in November 2010.
- Management identified uncertainty from the March 2011 Japan earthquake and tsunami, including potential effects on Hawaii tourism, and high and volatile oil prices. Other material risks include PUC decisions and possible project-cost disallowances, delays or cost increases in renewable and utility projects, environmental compliance costs, island-grid reliability and supply constraints, interest-rate sensitivity at ASB, and credit quality in its loan portfolio.
- PUC-ordered independent audits of costs for HECO’s East Oahu Transmission, Campbell Industrial Park turbine and Customer Information System projects were disclosed after quarter-end. Interim rate revenues may be refundable. Some pre-2004 independent power producer arrangements may require consolidation if additional information becomes available, potentially materially affecting reported assets, liabilities and earnings.
- HECO reported that the utilities’ transmission and distribution systems, excluding substations, had an estimated replacement value of about $5 billion and were uninsured; they also lacked business-interruption insurance. HECO’s estimated environmental accrual for the Honolulu Harbor Iwilei unit was $1.2 million, with total exposure uncertain.
Most important facts for investors to verify
- Whether PUC decisions support decoupling and timely recovery of costs and investments, including the disputed RAM revenue and the pending rate cases.
- Outcomes of the independent project audits and recoverability of HECO’s major project costs, particularly Campbell Industrial Park, East Oahu Transmission and the Customer Information System.
- Execution, financing and cost assumptions behind the $2.2 billion 2011–2015 utility capital plan and renewable-energy commitments.
- ASB loan performance, nonaccrual and restructured loans, allowance adequacy, deposit funding costs and sensitivity to interest-rate changes.
- HEI’s ability to refinance maturities and maintain liquidity and credit ratings, alongside the sustainability of a dividend exceeding quarterly earnings.
- Potential environmental, uninsured catastrophe, labor, regulatory and power-supply exposures; the filing does not provide a clear estimate of total potential costs for several of these risks.