Hawaiian Electric Industries: Regional Banking and a Utility in Paradise

| About: Hawaiian Electric (HE)

The State of Hawaii is one of the most oil-dependent states in the nation. Hawaii currently relies on imported oil and other fossil fuels for most of its primary energy requirements. Energy in Hawaii was already among the most expensive in the nation and spiking oil prices have done little to relieve the people of Hawaii from this burden. There is a big push from local governments for energy independence and substantial progress in the amount of electricity supplied by renewable resources is being made. This is where Hawaiian Electric Industries, Inc. (NYSE:HE) comes into the picture. As the supplier of 95% of Hawaii's power to the states population, HE is playing a large role in this transformation.

Hawaiian Electric Industries is in two primary industries. It engages in electric power generation through its Hawaiian Electric Company (HECO) subsidiary and provides financial services through its American Saving Bank (ASB) subsidiary.

Electrical Power Services

Hawaiian Electric Company (HECO) was incorporated in 1891 under the laws of the Kingdom of Hawaii. HECO and its subsidiaries, Maui Electric Company, Ltd. (MECO) and Hawaii Electric Light Company (HELCO) serve 95% of the state's residents on the islands of Oahu, Maui, Hawaii Island, Lanai and Molokai. HECO's power generation is highly dependent on the use of fuel oil. This fuel oil is a by-product of the refinery process for gasoline, jet fuel and marine fuel and seemed like a logical choice to power the state's power generation plants as a means of disposal. However, with the price of oil and the dependence on foreign oil imports, the state and the company are changing direction.

Hawaiian Electric is highly committed to generating its power from local and renewable sources. In 2008, as part of the Hawaii Clean Energy Initiative, HECO and the State of Hawaii entered into an agreement to supply 40% of electricity and 70% of overall energy needs through the use of clean energy sources by 2030.

The company is pursuing many renewable sources such as biofuels, wind, solar, waste-to-energy, geothermal, ocean energy and seawater air-conditioning. To this end, the company recently announced that it successfully test-ran a petroleum oil-fired turbine generator on 100% renewable biofuel, at full capacity.

The company is also aggressively signing agreements with third-parties to purchase power from wind farms, geothermal projects and solar installations. In addition, the Hawaii Public Utilities Commission approved a decoupling mechanism designed to de-link HECOs revenues and profits from its electricity sales. This measure was taken to eliminate any disincentive HECO may have to support renewable energy and energy efficiency initiatives.

Financial Services

American Savings Bank (ASB) was acquired by HE in 1988 and is one of the largest financial institutions in the State of Hawaii, with assets of $4.8 billion. With 57 branches, ASB has the third largest branch network in the State of Hawaii. ASB offers a full range of financial services and products including checking, savings, investment services, credit cards and loans for both personal and business customers.

ASB was not immune to the problems the banking industry has endured over the last few years. However, the bank has been taking steps to improve its balance sheet since 2008. Currently 59% of its loans are what the bank considers lower risk residential mortgages and 94% of all loans are funded by core deposits. Results are improving, but the provision for loan losses still remains well above historical averages achieved prior to the banking crisis.


Hawaiian Electric offers a unique opportunity to get exposure to the banking industry, coupled with the stability of the utility industry. HECO is a leader among utilities in its commitment to the use of alternative energy. ASB has been working over the last few years on a balance sheet restructuring and improving key ratios. The banks contribution to net income is returning to historic norms. For the year ended 2010, the bank contributed 43% of net income when compared directly to the contribution from the utility. The increased performance from ASB helped HE report a strong 2010 as utility operating income slipped in 2010. However, the company expects the utility to be contributing up to 70% of net income by 2012 in part due to the decoupling mechanisms put in place by the utility commission.

Hawaiian Electric finished 2010 reporting diluted earnings per share of $1.21 compared to $0.91 in 2009. The company maintained a strong dividend of $1.24 in 2010, for a yield of 5.1% based on a recent price of $24.24. However, the payout ratio is a steep 102%. With a strong yield, expected growth in utility earnings and a better mix of banking assets, Hawaiian Electric Industries might be worth a closer look.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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