Hawaiian Electric Industries, Inc. (HEI) — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. HEI is the parent of Hawaiian Electric Company (HECO), the regulated electric utility, and American Savings Bank (ASB). Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| HEI revenue | $655.7 million | $525.9 million | $1,274.7 million | $1,069.7 million |
| HEI net income attributable to common stock | $29.3 million | $15.5 million | $56.4 million | $35.9 million |
| HEI diluted earnings per share | $0.31 | $0.17 | $0.61 | $0.39 |
| HEI dividends per common share | $0.31 | $0.31 | $0.62 | $0.62 |
- HEI operating income rose 82% in Q2 and 56% for the first half. Higher electric-utility and bank operating income drove the increase; higher interest expense, income taxes, and lower construction allowances partly offset it.
- Electric-utility revenue increased 30% in Q2 and 24% for the first half. Much of the increase reflected higher fuel and purchased-energy costs passed through to customers, plus HECO interim rate relief. First-half HECO common-stock net income was $35.7 million, up 20% from $29.6 million.
- ASB first-half net income was $29.9 million, up from $14.9 million. Its first-half net interest income declined 6% to $94.9 million, while net interest margin increased to 4.20% from 4.13%. Lower loan-loss provisions, improved noninterest income, and reduced expenses supported earnings.
- Fuel oil costs were $427.1 million for the first half, up from $277.2 million; the average fuel-oil cost per barrel increased 52% to $84.13. Kilowatthour sales were nearly flat year over year.
Cash flow, debt, and liquidity
- HEI generated $85.3 million of operating cash in the first half, compared with $180.3 million in 2009. Investing used $187.2 million, versus $193.4 million provided in the prior-year period; financing used $123.6 million, versus $291.2 million. Cash and cash equivalents declined to $278.3 million from $503.9 million at year-end 2009.
- HECO generated $21.3 million of operating cash, down from $127.2 million. Capital expenditures were $78.5 million, compared with $174.5 million in the prior-year period. HECO ended June with $10.7 million in cash and $14.1 million in short-term nonaffiliate borrowings.
- At June 30, HEI had $1.365 billion of nonbank long-term debt and $55 million of nonbank short-term borrowings. HECO had $1.058 billion of long-term debt and $14 million of short-term borrowings.
- ASB reported $4.002 billion of deposits, $256.5 million of other borrowings, and $3.573 billion of net loans. It was well-capitalized, with a 9.3% leverage ratio, 13.0% Tier 1 risk-based capital ratio, and 14.1% total risk-based capital ratio. It had about $1.5 billion of unused FHLB borrowing capacity and $1.2 billion of loan commitments and unused lines and letters of credit.
- HEI established a $125 million revolving credit facility, undrawn at July 30, 2010. HECO established a $175 million facility; extension through May 2013 required PUC approval. Management stated that liquidity was adequate for foreseeable requirements, while noting that tighter credit markets or ratings downgrades could raise borrowing costs or restrict access.
Material changes, outlook, and risks
- Bank credit and earnings: ASB’s first-half loan-loss provision fell to $6.3 million from $21.8 million. Nonperforming assets were $68.7 million, or 1.90% of loans and real estate owned, compared with $69.1 million and 1.85% at year-end. Management cautioned that customer financial stress could increase delinquencies and losses.
- Utility regulation and rates: HECO filed a July 2010 request for a $94 million annual rate increase, or 5.4% over then-current rates; excluding proposed decoupling effects, the request was $113.5 million. The final decoupling order remained pending. Interim rate revenues are subject to refund with interest if they exceed amounts ultimately approved.
- Operating outlook: Management expected 2010 kilowatthour sales to be generally flat versus 2009 and forecast higher utility operation and maintenance costs, including production, reliability, and environmental-compliance expenses. HEI said it expected to maintain the existing dividend, but its first-half payout ratio was 102%; the board reviews dividends quarterly.
- Projects and unusual items: HECO increased its Honolulu power plant asset-retirement obligation by $11 million to $35 million, reflecting higher estimated removal and abatement costs. MECO recorded an approximately $1.3 million charge after agreeing to limit its recoverable investment in a combined heat and power project. HECO settled litigation with its former customer-information-system vendor and contracted with SAP for a replacement system.
- Renewable energy and environmental exposure: The HCEI and related renewable projects require regulatory approvals and third-party participation; integration, cost recovery, reliability, and fuel availability remain uncertain. New or changing environmental rules could require significant capital and compliance spending. HECO had recognized $367 million of revenue under interim orders, subject to potential refund.
- Contingencies: HECO reported approximately $5 billion of transmission and distribution system replacement value as uninsured and carried no business-interruption insurance. The Honolulu Harbor investigation had a $3.3 million cumulative accrual, with $1.4 million remaining; ultimate scope and allocation were uncertain. A BlueEarth biodiesel-related lawsuit remained pending, with trial scheduled for April 2011. Potential future consolidation of certain independent power producers could materially affect reported assets, liabilities, or losses.
- Ratings and regulation: S&P maintained negative outlooks on HEI and HECO, citing weak utility credit metrics and the need for timely rate relief. Moody’s changed their outlooks to stable in July 2010, contingent in part on an orderly regulatory transition and decoupling. The newly enacted Dodd-Frank Act was expected to change ASB’s regulatory framework; the effects were not yet clear. New overdraft rules could reduce ASB fee income, but the impact was not quantified.
Most important facts for investors to verify
- Whether the PUC issues the final decoupling order and approves rate recovery, including HECO’s requested increase and interim revenues subject to refund.
- Whether HECO’s and HEI’s cash generation, borrowing access, and credit metrics improve enough to address S&P’s negative outlooks.
- ASB’s future credit quality, provision needs, deposit trends, and the effect of lower asset yields and new consumer-protection rules.
- The final cost recovery and potential write-offs for major utility projects, and the scope and cost of environmental and renewable-energy obligations.
- Whether the uninsured utility infrastructure exposure, pension funding needs, and dividend payout remain manageable under the company’s operating and financing outlook.