When considering this Hawaii-based utility, its dependence on imported oil to fuel its power plants has kept me on the sidelines for decades, explains Roger Conrad in his Conrad's Utility Investor.
And, given that the company last raised its dividend in early 1998, avoiding the stock has paid off. However, in recent years, Hawaiian Electric Industries (HE) and regulators have joined forces to wean the islands off oil.
The firm has been shutting down legacy power plants, building utility-scale renewable-energy installations, and encouraging the installation of residential rooftop solar units.
About 11% of Hawaiian Electric Industries' residential customers on Oahu use rooftop solar systems. The company has integrated 236 megawatts (MW) of this capacity into its grid, up from 12 MW in 2008.
Meanwhile, the utility meets about 18% of its sales with renewable energy, beating the state's target of 15% by 2015.
The utility still grows earnings by investing in its grid, which is increasingly vital for accommodating widely distributed sources of electricity. To this end, the company has filed with the commission to build an energy storage system that would come onstream in 2017.
In this environment, Hawaiian Electric Industries' revenue has decoupled from electricity demand. And, as the company's reliance on oil-fired power plants declines, so do its costs.
By deactivating five facilities through 2014, Hawaiian Electric Industries will reduce its annual expenses by $7 million to $9 million, the majority of which will flow to the bottom line.
The company's first-quarter earnings surged by 32.4% from year-ago levels, to $0.45 a share—solid proof of concept that the push into renewable energy has worked. The company's banking unit is always a candidate for a spin-off, but has a conservative operating record.
Recent speculation that Hawaiian Electric Industries' dividend could be at risk—because of capital expenditures on solar power—has led to massive short interest in the stock—about 20.5% of its outstanding float.
This piling on by unsophisticated investors creates the foundation for a short squeeze if the company reports even marginally good news. I've upgraded Hawaiian Electric Industries to a buy up to $24.00 per share.
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