Hawaii Electric Beats on All Counts

Hawaiian Electric Industries Inc. (HE - Analyst Report) announced second-quarter 2012 operating earnings of 40 cents per share, beating both the Zacks Consensus Estimate of 36 cents and year-ago earnings of 28 cents per share.

Operating Statistics

Total revenue of the company at the end of the reported quarter was $854.3 million versus $794.3 million in the year-ago quarter, reflecting growth of 7.6%. Reported results also came in higher than the Zacks Consensus Estimate of $804 million. Hawaiian Electric’s reported net income of $38.8 million compared favorably with $27.1 million in the year-ago quarter.

Segment Net Income

Electric Utility: Segment net income rose to $29.4 million in the reported quarter from $17.0 million in the year-ago quarter. The main driver of the improvement was the regulatory approval for recovery of costs for reliability and clean energy investments in Oahu which became effective in July 2011. Earlier, in 2011, the utility’s performance was affected by a ramp-up of its clean energy and reliability initiatives. This put pressure on first half 2011 earnings until the Oahu utility was allowed to start the recovery of these costs in July 2011. Operations and maintenance (O&M) expenses were $2 million lower for the first quarter of 2012 compared to the second quarter of the prior year. This was largely due to lower administrative and general expenses from a regulatory change in the capitalization of costs which became effective in July 2011.

Banking: Hawaiian Electric’s Banking segment recorded a net income of $14.2 million in the reported quarter, compared with a net income of $15.2 million in the year-ago quarter. The decrease resulted from non-recurring insurance gain recorded in the second quarter of 2011. Overall, the segment achieved strong profitability in the quarter with a return on average equity of 11.4% and a return on average assets of 1.2%.

Other Loss from this segment was $4.8 million in the reported quarter compared with a net loss of $5.1 million in the year-ago quarter.

Financial Update

Total cash and cash equivalents as of June 30, 2012, were $207.5 million versus $270.3 million as of December 31, 2011. Cash used in operations in the first half of 2012 totaled $3.6 million versus cash generated from operations of $55.2 million in the year-ago period. Long-term debt rose to $1.4 billion compared with $1.3 billion at year-end 2011.

Our View

Based in Honolulu, Hawaii, Hawaiian Electric, through its subsidiaries, primarily engages in electric utility and banking businesses primarily in the state of Hawaii.

Performance in the reported quarter was driven by all round stable results. The company continued to reinvest earnings into its Hawaii-based businesses. In the reported quarter, its three utilities, Hawaiian Electric, Maui Electric and Hawaii Electric Light Company, invested $74 million for developing the electric grid incorporating significant amounts of renewable energy facilities in the process. The share of renewable energy from these three utilities is now more than 13% of electric sales.

Likewise, its banking business increased its loan portfolio for the seventh consecutive quarter, adding more than $110 million in loans to customers’ year over year. The Banking segment performed well in the reported quarter due to lower credit costs.

However, the present weak Hawaiian economy and uncertainty regarding the sustainable strength of the Japanese economy continue to weigh on the stock’s valuation. Thus, in the near term, we retain a short-term Zacks #4 Rank on the stock, which translates into a Sell rating. Over the long term, we maintain our Neutral rating on the stock. This is in line with its peers CMS Energy Corporation (CMS - Analyst Report) and OGE Energy Corporation (OGE - Analyst Report).