Add
HE to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| HE > SEC Filings for HE > Form 10-Q on 5-Nov-2008 | All Recent SEC Filings |
5-Nov-2008
Quarterly Report
The following discussion updates "Management's Discussion and Analysis of Financial Condition and Results of Operations" in HEI's and HECO's Form 10-K for the year ended December 31, 2007 and should be read in conjunction with the annual (as of and for the year ended December 31, 2007) and quarterly (as of and for the three months ended March 31, 2008, and as of and for the three and six months ended June 30, 2008) consolidated financial statements of HEI and HECO and accompanying notes.
HEI CONSOLIDATED
RESULTS OF OPERATIONS
Three months ended
September 30 % Primary reason(s) for
(in thousands, except per share amounts) 2008 2007 change significant change *
Revenues $ 915,431 $ 673,461 36 Increase for the electric utility
segment, partly offset by
decreases for the bank and
"other" segments
Operating income 74,129 48,017 54 Increase for the electric utility
and bank segments, partly offset
by an increase in losses for the
"other" segment
Net income 37,281 19,881 88 Higher operating income, higher
AFUDC and slightly lower
"interest expense-other than on
deposit liabilities and other
bank borrowings," partly offset
by higher taxes resulting from
higher income before taxes and a
higher effective income tax
rate **
Basic earnings per common share $ 0.44 $ 0.24 83 Higher net income
Weighted-average number of common shares outstanding 84,625 82,481 3 Issuances of shares under the HEI
Dividend Reinvestment and Stock
Purchase Plan and other Company
plans
Nine months ended
September 30 % Primary reason(s) for
(in thousands, except per share amounts) 2008 2007 change significant change *
Revenues $ 2,419,103 $ 1,828,247 32 Increase for the electric utility
segment, partly offset by
decreases for the bank and
"other" segments
Operating income 166,477 121,867 37 Increase for the electric utility
segment, partly offset by
decrease for the bank segment
(resulting from the impact of the
balance sheet restructuring) and
an increase in losses for the
"other" segment
Net income 76,384 44,194 73 Higher operating income and AFUDC
and lower "interest expense-other
than on deposit liabilities and
other bank borrowings," partly
offset by higher taxes resulting
from higher income before taxes
and a higher effective income tax
rate **
Basic earnings per common share $ 0.91 $ 0.54 69 Higher net income
Weighted-average number of common shares outstanding 84,052 81,949 3 Issuances of shares under the HEI
Dividend Reinvestment and Stock
Purchase Plan and other Company
plans
|
* Also, see segment discussions which follow.
** The Company's effective tax rates (federal and state) for the third quarters of 2008 and 2007 were 35% and 34%, respectively. The Company's effective tax rates for the first nine months of 2008 and 2007 were 35% and 34%, respectively. The effective tax rates were slightly lower in 2007 than in 2008 due primarily to state tax credits.
Dividends
On October 31, 2008, the HEI Board of Directors (Board) maintained the quarterly dividend of $0.31 per common share. The payout ratios for 2007 and the first nine months of 2008 were 120% and 102%, respectively. Excluding the net income impact ($35.6 million) of ASB's balance sheet restructuring, the payout ratio for the first nine months of 2008 would have been 70%. HEI's Board believes that HEI should have a payout ratio of 65% or lower on a sustainable basis and that cash flows should support an increase before it considers increasing the common stock dividend above its current level.
Economic conditions
As a consequence of deteriorating financial conditions within the banking industry, a series of events occurred in September and October 2008 that resulted in unprecedented global capital market volatility and decline. In September or October 2008, the U.S. government seized control of the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), Lehman Brothers Holdings Inc. (Lehman) declared bankruptcy, Bank of America agreed to acquire Merrill Lynch & Co. Inc., the Federal Reserve Bank made an emergency loan to American International Group, Inc. (AIG), Barclays PLC agreed to acquire Lehman's North American investment banking assets, the Federal Reserve approved of the Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated changes of status to bank holding companies, Washington Mutual Inc. was closed by the U.S. government in the largest failure of a U.S. bank (and its banking assets were sold to JPMorgan Chase & Co.), Wells Fargo's plan to acquire Wachovia Corporation was approved, the Bush Administration's initial $700 billion "bailout" bill was defeated in the U.S. House of Representatives (which led to the largest one-day point drop in history for the Dow Jones Industrials Average) and the Emergency Economic Stabilization Act of 2008 was signed into law (see below).
Management did not anticipate these events and the volatile capital and credit markets in its planning and forecasting. These events and the volatile markets have resulted in higher short-term borrowing costs, and have impacted or are expected to impact the Company's retirement benefit plans significantly (e.g., assets, costs and funding requirements) for 2009 and future years (see "Retirement benefits" below). Although HEI and HECO are reevaluating their financing plans under current market conditions, at this time management does not expect these extraordinary events to have a material adverse impact on the Company's or consolidated HECO's liquidity, capital resources or results of operations for 2008. For example, both HEI and HECO currently have access to the commercial paper market (although commercial paper rates are higher than earlier in the year). However, if market conditions deteriorate further, the Company's and HECO's liquidity, capital availability and results of operations could be significantly impacted. Specific segment exposure is further detailed in the segment discussions of results, "Liquidity and capital resources" and "Retirement benefits."
The Blue Chip economic consensus released on November 1, 2008 predicts real GDP growth will be marginally positive in 2009. All economists responding to the Blue Chip survey agree that the national economy has slipped into recession with most predicting that it will last longer than the recessions of 1990-1991 and 2001. Consumer confidence has been adversely affected and credit is largely unavailable, which in turn has and will continue to negatively impact consumer spending.
The price of a barrel of crude oil has fallen recently, with prices dropping from a peak of $145.29 per barrel on July 3, 2008 and closing at $64.15 per barrel on October 24, 2008. The skyrocketing cost of fuel oil over the summer pushed electricity bills higher, resulting in even greater customer conservation. As a result, in the third quarter of 2008 and into the fourth quarter of 2008, the utilities experienced sales declines. Although lower fuel prices are starting to show up in customers' bills, the utilities expect continued conservation by customers and full year 2008 kilowatthour (KWH) sales to decrease at a level similar to the year-to-date September 2008 sales decline of 1.2% (compared to the same period last year), primarily because of the ailing national and Hawaii economies' impact on consumer decisions. A similar downward trend is expected in 2009. The expected decline in sales will adversely impact the utilities' and consolidated HEI's fourth quarter 2008 and 2009 results of operations.
Short-term interest rates were very volatile during the third quarter of 2008 as a result of the volatility in the financial and credit markets. Additionally, credit concerns caused short-term Treasury rates to decline while causing short-term corporate borrowing rates to increase dramatically. ASB's borrowing costs were not impacted by the increase in credit spreads because wholesale borrowing costs from the Federal Home Loan Bank did not experience a similar increase during the third quarter.
The turmoil in the financial markets and further declines in the national and global economies are having a negative effect on the Hawaii economy, with some state economists predicting recession. Weakness is most notable in one of the state's largest industries, tourism. The closure of Aloha and ATA Airlines, departure of two Norwegian Cruise Line cruise ships from Hawaii, record-high oil prices and the downturn in the national economy have impacted the visitor industry. Visitor arrivals by air were down 15% in the third quarter of 2008 compared with the third quarter of last year and year-to-date through September 30, 2008 were down 9% compared with the same period last year. Arrivals for Kauai, Maui, Lanai and the Big Island were most affected with arrivals down on those islands by 18%, 14%, 12%, and 17%, respectively, for the nine months ended September 30, 2008 compared with the same period of 2007.
Visitor expenditures were $8.7 billion for the nine months ended September 30, 2008, down 7% compared with expenditures for the same period last year. For comparison purposes, visitor expenditures reached a record $12 billion for the full year 2006.
Hotel occupancies, another indicator of tourism sector health, are down, especially on Maui and the Big Island. Statewide figures show September 2008 occupancy rates at 63% compared with 74% for September 2007. September 2008 occupancy rates on Oahu were the highest in the state at 69.4% a 9.9 percentage point decline from September 2007. Rates for Maui and the Big Island declined more significantly. September 2008 occupancies for Maui, and the Big Island were 56.8% and 49.9%, respectively, representing percentage point declines from September 2007 of 14.8 and 9.5, respectively.
Local tourism authorities continue to increase marketing efforts in its base market, the western U.S., to help stimulate demand for travel. Current forecasts show full year visitor arrivals to be down 9% in 2008 and down 1% in 2009, with recovery delayed until 2010. However, with the national and global economies in decline, state economists may revise their expectations for visitor arrivals downward in the coming months.
In September 2008, median home prices on Oahu slipped just below the $600,000 mark and September 2008 year-to-date sales volumes continue to decline compared with volumes for the same period last year. Also in September 2008, Hawaii foreclosures rose significantly, especially on the neighbor islands.
Permitted construction (nongovernment) continues to slow due to increased costs and tighter credit conditions. However, slowing continues to be considerably more moderate than in many U.S. mainland markets. Private new residential construction in Hawaii is expected to decline in 2008 and 2009 before stabilizing in 2010. A new Disney resort development on Oahu will help permitted construction. Military projects and state infrastructure projects will also provide stability to the overall construction industry in Hawaii.
At 4.5%, seasonally-adjusted Hawaii unemployment at the end of September 2008 remains below the national average of 6.1%. Declines in tourism are expected to cause job losses to continue into next year. Total payroll jobs in Hawaii are expected to be flat in 2008, with a 0.8% decline in 2009. Growth of less than 1% is expected in 2010.
Overall, the Hawaii economy is starting to show signs of decline, but the magnitude and length of the decline cannot be predicted.
Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 (the 2008 Act) was signed into law on October 3, 2008. The principal parts of the 2008 Act are: 1) a $700 billion financial markets stabilization plan; and 2) $150 billion in tax benefits, which are partially offset by $40 billion in revenue raisers. As part of its energy and conservation related incentives, the 2008 Act allows public utility property to qualify for the energy credit for periods after February 13, 2008 and extends the credit for solar energy property, fuel cell property and microturbine property through December 31, 2016. In addition, the 2008 Act allows the credit for combined heat and power system property as energy property for periods after October 3, 2008. The 2008 Act also provides for 10-year accelerated
depreciation period for smart electric meters and smart electric grip equipment for property placed in service after October 3, 2008. The Company does not expect the tax provisions of the 2008 Act to have a material effect on results of operations for 2008. These tax provisions, however, may influence the Company's future decisions to invest in the various properties entitled to credits. For example, in subsequent years, the utilities plan, consistent with the HCEI set forth in the Energy Agreement, to invest in smart meter technology for which the 2008 Act provides the favorable 10-year depreciable life. The Company will continue to analyze the impacts of the 2008 Act on its results of operations, financial condition and liquidity and for the opportunities it presents.
Retirement benefits
Based on various assumptions (in Note 8 of HEI's "Notes to Consolidated Financial Statements" in HEI Exhibit 13 to HEI's Current Report on Form 8-K dated February 21, 2008) and assuming no further changes in retirement benefit plan provisions, consolidated HEI's, consolidated HECO's and ASB's retirement benefits expense (including amounts for the defined benefit, defined contribution and other postemployment benefit plans), net of income tax benefits, is estimated to be $19 million, $17 million and $1 million, respectively, in 2008, compared to actual expense, net of income tax benefits, of $20 million, $16 million and $2 million, respectively, in 2007. Also, see Notes 5 and 4 to HEI's and HECO's "Notes to Consolidated Financial Statements," respectively.
Because of the significant decline in the value of plan assets through September 30, 2008, the Company expects that the minimum required contribution to the qualified retirement plans (after reduction for a credit balance) calculated in accordance with the Pension Protection Act and the expected timing of the cash requirement based on 1) the value of plan assets as of September 30, 2008 and 2) 80% of the value of plan assets as of September 30, 2008, will be as follows for plan years 2009 and 2010. The minimum required contribution may differ from the cash requirement for each plan year because the rules under the Internal Revenue Code allow the Company to make its last installment contribution as late as September of the following year. In addition, the Company is allowed to elect to apply any credit balance against the minimum required contribution. Further, the utilities have committed to fund their net periodic pension cost each year unless the minimum required contribution under ERISA and the Internal Revenue Code requires a greater contribution level. The "Cash funding requirement" in the following table reflects the utilities' net periodic pension cost funding commitment (assuming a 7.125% discount rate).
(in millions) 2009 2010 Pension Protection Act minimum required contribution: (after reduction for credit balances) Assuming plan assets as of September 30, 2008 Consolidated HECO $ 21 $ 56 Consolidated HEI 21 56 Assuming 80% of the value of plan assets as of September 30, 2008 Consolidated HECO 46 83 Consolidated HEI 46 84 Cash funding requirement: Assuming plan assets as of September 30, 2008 Consolidated HECO 6 59 Consolidated HEI 6 59 Assuming 80% of the value of plan assets as of September 30, 2008 Consolidated HECO 12 98 Consolidated HEI 12 100 |
"Other" segment
Three months ended
September 30 % Primary reason(s) for
(in thousands) 2008 2007 change significant change
Revenues $ (32 ) $ 339 NM Third quarter 2007:
leveraged lease investment
income and unrealized gains
on venture capital
investments
Third quarter 2008:
unrealized losses on
venture capital investments
Operating loss (2,410 ) (1,896 ) NM See explanation for
revenues and higher labor
expense (including
executive incentive
compensation), partly
offset by lower consulting
expense
Net loss (4,056 ) (4,725 ) NM See explanation for
operating loss, offset by
lower interest expense
Nine months ended
September 30 % Primary reason(s) for
(in thousands) 2008 2007 change significant change
Revenues $ (164 ) $ 2,749 NM First nine months of 2007:
gain on the sale of Hoku
shares of $1.4 million,
leveraged lease investment
income and gain of
$0.9 million and
unrealized gains on
venture capital
investments
First nine months of 2008:
unrealized losses on
venture capital
investments
Operating loss (8,812 ) (7,949 ) NM See explanation for
revenues and higher labor
expense (including
executive incentive
compensation), partly
offset by lower consulting
expense
Net loss (13,453 ) (15,693 ) NM See explanation for
operating loss, offset by
lower interest expense and
tax adjustments
|
NM Not meaningful.
The "other" business segment includes results of operations of HEI Investments, Inc. (HEIII), a company previously holding investments in leveraged leases; Pacific Energy Conservation Services, Inc., a contract services company primarily providing wind farm operational and maintenance services to an affiliated electric utility; HEI Properties, Inc., a company holding passive, venture capital investments; The Old Oahu Tug Service, Inc., which was previously a maritime freight transportation company that ceased operations in 1999 and now is largely inactive; HEI and HEIDI, holding companies; and eliminations of intercompany transactions. Since HEIII sold all of its leveraged lease investments by the end of 2007, HEIII has filed articles of dissolution and is winding up its affairs.
Commitments and contingencies
See Note 7 of HEI's "Notes to Consolidated Financial Statements" and Note 5 of HECO's "Notes to Consolidated Financial Statements."
Recent accounting pronouncements and interpretations
See Note 9 of HEI's "Notes to Consolidated Financial Statements."
Liquidity and capital resources
Despite the recent unprecedented deterioration in the capital markets and tightening of credit, the Company believes that its ability to generate cash, both internally from electric utility and banking operations and externally from issuances of equity and debt securities, commercial paper and bank borrowings, is adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other cash requirements in the foreseeable future.
The consolidated capital structure of HEI (excluding ASB's deposit liabilities and other borrowings) was as follows as of the dates indicated:
September 30, December 31,
(in millions) 2008 2007
Short-term borrowings-other than bank $ 231 8 % $ 92 4 %
Long-term debt, net-other than bank 1,211 44 1,242 47
Preferred stock of subsidiaries 34 1 34 1
Common stock equity 1,321 47 1,275 48
$ 2,797 100 % $ 2,643 100 %
|
As of October 31, 2008, the Standard & Poor's (S&P) and Moody's Investors Service's (Moody's) ratings of HEI securities were as follows:
. . . |
|
|