Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009, 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: the regulated electric utility business (HECO and its subsidiaries serving Oahu, Maui, and the Island of Hawaii) and the banking business (American Savings Bank, F.S.B. or ASB). The reporting period reflects the impact of a severe economic downturn in Hawaii, characterized by declining tourism, a contracting housing market, and rising unemployment, alongside global financial market volatility.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Consolidated Revenues | $543,797 | $729,617 |
| Operating Income | $44,658 | $70,746 |
| Net Income (Common Stock) | $20,395 | $33,967 |
| Diluted EPS | $0.22 | $0.41 |
| Operating Cash Flow | $115,204 | $25,968 |
| Total Assets | $8,959,956 | $10,322,580 |
| Long-term Debt (Excl. Bank) | $1,214,681 | $1,211,501 |
| Common Stock Equity | $1,404,103 | $1,389,454 |
Segment Performance
- Electric Utility: Revenues decreased 26% to $461.8 million, driven by a 7% decline in kilowatthour sales due to cooler weather and economic contraction, and lower fuel costs passed through to customers. Operating income fell 39% to $31.1 million.
- Bank (ASB): Revenues decreased 22% to $82.0 million due to lower interest income from reduced earning asset balances and yields. Net income declined 25% to $10.9 million, impacted by a significant increase in the provision for loan losses ($8.3 million vs. $0.9 million in Q1 2008) due to deteriorating credit quality in the residential market.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues dropped 25% year-over-year. The utility segment saw a $162 million decrease, while the bank segment saw a $23.8 million decrease.
- Profitability Compression: Net income for common stock fell 40% to $20.4 million. The utility segment's net income dropped 43%, and the bank segment's net income dropped 25%.
- Loan Loss Provisions: ASB's provision for loan losses surged to $8.3 million in Q1 2009 from $0.9 million in Q1 2008, reflecting increased nonperforming residential loans and reclassifications.
- Investment Portfolio: ASB reported unrealized losses on private-issue mortgage-related securities due to the housing market downturn, though management does not currently consider them other-than-temporarily impaired.
- Capital Structure: HEI issued 5 million shares of common stock in December 2008, raising approximately $110 million in net proceeds to repay short-term debt and fund working capital. This increased the weighted average shares outstanding by 9%.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management expects the Hawaii economy to continue weakening through 2009 with a gradual recovery not expected until late 2009 or 2010. The company anticipates continued pressure on electric sales due to economic contraction and energy efficiency initiatives. ASB expects higher levels of delinquencies and loan loss provisions to persist through the economic downturn. Despite market volatility, management believes liquidity is adequate to fund operations, capital expenditures, and debt obligations.
Key Risks and Contingencies
- Hawaii Clean Energy Initiative (HCEI): HEI and the State of Hawaii signed an Energy Agreement committing to 70% clean energy by 2030. This involves significant infrastructure investments, regulatory changes (including revenue decoupling), and potential stranded costs. The cost and feasibility impacts remain uncertain.
- Regulatory Lag and Rate Relief: The utilities face challenges in recovering costs through rates. Interim rate increases are subject to refund if final decisions are lower. The Public Utilities Commission (PUC) is reviewing decoupling mechanisms to separate revenue from sales volume.
- Generation Reliability: HECO faces strained reserve margins on Oahu. A new 110 MW combustion turbine (CIP CT-1) is expected to be in service by mid-2009 to mitigate outage risks, but shortfalls are projected before then.
- Banking Credit Risk: ASB faces elevated credit risk from the residential housing market. Further deterioration could lead to material other-than-temporary impairments on mortgage-related securities.
- Environmental Compliance: Potential costs associated with new EPA regulations on greenhouse gas emissions, hazardous air pollutants, and cooling water intake structures could be significant.
Investor Verification Checklist
- Rate Case Outcomes: Monitor the PUC's final decisions on HECO's 2007 and 2009 test year rate cases, specifically regarding the recovery of the CIP CT-1 project costs and the implementation of revenue decoupling.
- Bank Asset Quality: Track ASB's nonaccrual loan ratios and the provision for loan losses in subsequent quarters to assess the severity of the housing market impact.
- HCEI Implementation: Verify the progress of the Clean Energy Scenario Planning (CESP) process and the PUC's approval of the Clean Energy Infrastructure Surcharge (CEIS).
- Generation Capacity: Confirm the in-service date of the CIP CT-1 unit and monitor HECO's Adequacy of Supply reports for any unexpected outages or reserve shortfalls.
- Dividend Sustainability: Review the payout ratio (135% in Q1 2009) and management's assessment of cash flow adequacy to maintain the current dividend level amidst lower earnings.