Hawaiian Electric Industries, Inc. — Form 10-Q Summary
Business context and period. This unaudited report covers the quarter and nine months ended September 30, 2012, with 2011 comparisons. HEI’s principal businesses are regulated electric utilities in Hawaii and American Savings Bank (ASB). Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Financial performance and condition
| HEI consolidated metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $867.7 million | $886.4 million | $2,536.8 million | $2,391.3 million |
| Operating income | $91.7 million | $94.5 million | $246.9 million | $221.5 million |
| Net income attributable to common stock | $47.7 million | $48.4 million | $124.8 million | $104.0 million |
| Diluted EPS | $0.49 | $0.50 | $1.29 | $1.09 |
| Dividends per common share | $0.31 | $0.31 | $0.93 | $0.93 |
- Period comparison: Q3 revenue decreased 2% and common net income decreased 1%. For the first nine months, revenue rose 6%, operating income 11%, and common net income 20%; EPS increased 18%. Year-to-date earnings benefited principally from stronger utility results, lower non-bank interest expense and higher allowance for funds used during construction (AFUDC), partly offset by higher taxes. Share issuance also increased weighted-average shares.
- Cash flow, nine months: Operating cash flow was $121.6 million, investing cash outflow $297.2 million, and financing cash inflow $73.9 million. Cash declined by $101.8 million to $168.5 million. Investing outflows chiefly reflected utility capital expenditure and bank loan and securities investment.
- Balance sheet, September 30: Total assets were $9.90 billion and total liabilities $8.26 billion. HEI had $1.43 billion of long-term debt excluding bank debt and $82.2 million of short-term non-bank borrowings. These balances exclude ASB deposit liabilities and other bank borrowings.
- Utilities: HECO’s nine-month operating revenue was $2.335 billion versus $2.191 billion; common-stock net income was $95.1 million versus $74.2 million. Q3 common-stock net income was $38.4 million versus $38.0 million. Year-to-date fuel and purchased-power costs increased, while Q3 utility revenue and fuel costs declined year over year. Utility capital expenditures were $221.0 million for the first nine months.
- Bank: ASB’s nine-month net income was $44.3 million versus $44.5 million; net interest margin was 3.98% versus 4.11%. At September 30, ASB reported $4.95 billion in assets, $4.13 billion in deposits, $3.71 billion in net loans, and $211.2 million in other borrowings. Its loan-loss allowance was $39.8 million, or 1.06% of loans; nonaccrual loans were $57.7 million, compared with $66.8 million at year-end 2011.
- Liquidity and debt: HEI had a $125 million revolving credit facility, undrawn at September 30, and $38 million of commercial paper outstanding then ($47 million at October 26). HECO had a separate $175 million facility, also undrawn, and $45 million of commercial paper at September 30. ASB reported regulatory capital ratios above minimum well-capitalized thresholds and approximately $0.9 billion of unused FHLB borrowing capacity. HECO issued $457 million of long-term debt and repaid $368.5 million in the first nine months, including refinancing higher-coupon bonds.
Outlook, commentary and risks
- Management said it currently expects to maintain HEI’s common dividend at its present level, subject to quarterly board review.
- ASB management expected full-year 2012 net income to be 3%–5% below 2011, citing low interest rates and pressure on yields. Its stated performance targets were return on assets of 1.15%–1.2%, net interest margin near 4%, and an efficiency ratio in the mid-50s; nine-month results were 1.19%, 3.98% and 59%, respectively.
- The utilities expected 2013 energy sales to decline slightly from 2012 and then remain relatively flat through 2022. Their 2012–2016 plan forecast $3.0 billion of net capital expenditures and annual rate-base growth of 7%–9%. Utility O&M expense for full-year 2012 was expected to be approximately 4% above 2011.
- Utility earnings depend on PUC rate decisions, timely cost recovery and project execution. Regulatory audits and unresolved cost recovery for major projects could lead to write-offs. Potential environmental compliance costs are not yet determinable and could be material. The filing also identifies fuel-price volatility, reliability and generation capacity, renewable-project execution, interest-rate and credit risks at ASB, and possible future consolidation of certain independent power producers as risks.
- ASB disclosed a pending Hawaii class-action lawsuit concerning overdraft fees; probable outcome and reasonably possible loss could not be determined. ASB said other pending or threatened proceedings were not expected to be material to its financial position, while noting a particular-period impact on earnings or liquidity could not be ruled out.
- HECO recorded an additional $3.1 million accrual in March 2012 for investigation and estimated cleanup costs at the former Molokai electric-generation site and adjacent parcel; the reserve was $3.6 million at September 30. Final remediation costs remain dependent on investigation results. A battery fire at the Kahuku wind farm led HECO to stop purchasing its wind energy after the incident.
- HEI and HECO revised prior balance-sheet and equity information for an error in franchise-tax accounting: the cumulative pre-2010 earnings charge was approximately $3.2 million. The filing says the revisions were not material to prior statements and did not affect income statements or cash flows for periods reported.
- The utilities’ 2012 pension contributions were reduced after MAP-21 changed minimum-funding calculations. Management estimated total HEI plan contributions of $78 million for 2012. Results for interim periods are not necessarily indicative of full-year results.
Important facts for investors to verify
- Subsequent PUC decisions and the recoverability of utility project costs, including outcomes of regulatory audits and rate proceedings.
- Progress and costs of the utilities’ capital, renewable-energy and environmental-compliance plans, including the Kahuku wind-farm situation and Molokai site remediation.
- Whether ASB’s loan quality, credit-loss allowance, deposit costs and net interest margin remain consistent with management expectations.
- Actual 2012 results against the bank earnings and utility expense outlook, and the board’s future dividend decisions.
- Financing needs, debt maturities and access to credit facilities, alongside the utilities’ substantial planned capital investment and HEI’s cash-flow conversion.