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Hawaiian Electric Beats Estimates

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Hawaiian Electric Industries Inc. (HE - Free Report) announced third-quarter 2012 operating earnings of 49 cents per share, beating the Zacks Consensus Estimate of 42 cents. However, this came below year-ago quarterly earnings of 50 cents per share.

Operating Statistics

Total revenue of the company at the end of the reported quarter was $867.7 million versus $886.4 million in the year-ago quarter, reflecting a 2.1% decline. Reported results however came in higher than the Zacks Consensus Estimate of $860 million. Hawaiian Electric reported net income of $47.7 million versus $48.4 million in the year-ago quarter.

Segment Net Income

Electric Utility: Segment net income rose to $38.4 million in the reported quarter from $38.0 million in the year-ago quarter. Net income was flattish year over year as recovery of costs for reliability and clean energy investments were largely offset by higher expenses.

The regulatory approval for recovery of costs for reliability and clean energy investments in Oahu 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 approximately 7% higher in the third quarter of 2012 compared with the third quarter of 2011 largely due to higher customer service expenses. This was offset by lower plant overhaul expenses due to timing of work within the year.  

Banking: Hawaiian Electric’s Banking segment recorded a net income of $14.2 million in the reported quarter, compared with a net income of $15.5 million in the year-ago quarter. The decrease resulted from higher non-interest expense, primarily driven by spending for new products and projects aimed at longer-term growth, and lower net interest income from declining yields on assets. These were partially offset by higher gains on sale of new residential mortgages. Residential mortgage production totaled $272 million in the quarter compared with $123 million in the same quarter last year, outperforming the overall Hawaii market growth.

Overall, the segment continued to deliver solid results in third quarter 2012 with a return on average equity of 11.2% and a return on average assets of 1.15%.  

Other: The segment digested a quarterly net loss of $4.9 million in the third quarter of 2012 compared with a loss of $5.0 million in the third quarter of 2011.

Financial Update

Total cash and cash equivalents as of September 30, 2012, were $168.5 million versus $270.3 million as of December 31, 2011. Cash provided by operations in the first nine months of 2012 totaled $121.6 million versus cash generated from operations of $101.1 million in the year-ago period. Long-term debt rose to $1.4 billion compared with $1.3 billion at year-end 2011.

On November 7, 2012, the board of directors also declared a quarterly cash dividend of 31 cents per share, payable on December 12, 2012, to shareholders of record at the close of business on November 19, 2012 (ex-dividend date is November 15, 2012).  The dividend is equivalent to an annual rate of $1.24 per share. Hawaiian Electric has paid dividends continuously since 1901 with a yield hovering close to 4.8%.

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 first nine months of 2012, its three utilities, Hawaiian Electric, Maui Electric and Hawaii Electric Light Company, invested $188 million for developing the electric grid incorporating significant amounts of renewable energy facilities in the process.

Likewise, at its banking business, loans to customers, excluding residential lending, increased over $100 million in the first nine months of 2012, with a $15 million increase in clean energy loans. Over $600 million of new residential mortgages were originated during this period, more than double the amount for the same period last year.

However, the present weak Hawaiian economy and uncertainty regarding the sustainable strength of the Japanese economy continue to weigh on the stock’s valuation. Also management expects an increase in O&M expenses in the fourth quarter of 2012 due to the timing of projects and expects full year O&M expense to be 4% higher than 2011.

Thus, in the near term, the stock retains a short-term Zacks #4 Rank, which translates into a Sell rating. Over the long term, we maintain our Neutral recommendation on the stock. This is in line with its peers CMS Energy Corporation (CMS - Free Report) and OGE Energy Corporation (OGE - Free Report) .


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