Hawaiian Electric Industries Inc. (HE) received approval from Hawaii Public Utilities Commission (PUC) to adopt a new “decoupling” method for setting electric rates designed to encourage a clean energy economy for Hawaii.
 
Under the new “decoupling” method, electric revenues would be de-linked, or “decoupled,” from the electricity (kilowatt-hours) sold. The decoupling proposal was submitted jointly by the Hawaii Division of Consumer Advocacy and the Hawaiian Electric utilities (Hawaiian Electric, Maui Electric, and Hawaii Electric Light Company) in October 2008.
 
Under a decoupled system, the PUC approves a revenue level based on the services it authorizes the company to undertake on behalf of customers. Rates are then adjusted based on varying sales levels, allowing the utility to continue recovering the cost of providing those services, but not earn additional profit from higher sales.
 
This model provides greater support for energy efficiency and conservation and achievement of Hawaii’s clean energy goals. Under that agreement the utilities are committed to very aggressive clean energy goals including increasing the proportion of renewable energy in Hawaii from 25% by the year 2020 to 40% by the year 2030.
 
The PUC’s decision requires the Consumer Advocate and the Hawaiian Electric utilities to propose a final decision and order within 30 days, detailing the components and implementation for decoupling. Other parties in the docket will be able to comment on this proposed order. The PUC must issue a final decision and order before decoupling can be implemented.
 
Honolulu-based Hawaiian Electric Industries, Inc. is a holding company with subsidiaries engaged in electric utilities, banking, real estate development, and other businesses, predominantly in Hawaii.
 
Hawaiian Electric has established a near-monopoly market position within the interest rate-sensitive utility and banking industries. Going forward, the story of Hawaiian Electric looks promising with stable earnings from regulated electric operations, and new plant installations.  However, a volatile Hawaiian economy due to the global recession, volatile financial market, and uncertainties prevailing over the sustainable strength of the Japanese economy collectively continue to weigh on the stock’s valuation.
 
The best investment case for Hawaiian Electric may be its above industry average and very competitive dividend yield of 5.9%. We do recognize the existing risks associated with the outcome of regulatory disputes and adverse movement of the yield curve. This justifies our neutral recommendation for the stock (Zacks #3 Rank).
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