HAWAIIAN ELECTRIC INDUSTRIES INC quarterly report, Q3 FY2018

Hawaiian Electric Industries, Inc. — Q3 2018 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2018. HEI’s consolidated results include its electric utility, American Savings Bank (ASB), and other businesses. Amounts below are in U.S. dollars; financial figures are approximate unless stated otherwise.

Financial performance

HEI consolidated	Q3 2018	Q3 2017	Nine months 2018	Nine months 2017
Revenue	$768.0 million	$673.2 million	$2,099.2 million	$1,897.0 million
Operating income	$98.1 million	$111.5 million	$248.8 million	$259.0 million
Net income for common stock	$65.9 million	$60.1 million	$152.2 million	$132.9 million
Basic EPS	$0.61	$0.55	$1.40	$1.22

Revenue increased 14% in Q3 and 11% year to date, principally from higher electric utility revenue and bank revenue. Higher fuel and purchased-power costs were major contributors to utility revenue growth.
Operating income fell 12% in Q3 and 4% year to date, as higher utility costs outweighed revenue growth; bank operating income improved and losses in “other” were lower.
Common-stock net income increased 10% in Q3 and 14% year to date. Lower effective tax rates—14% in Q3 and 19% year to date, versus 36% and 35%—were a significant factor, reflecting federal tax reform and tax-return adjustments.
HEI’s nine-month operating cash flow was $257.7 million, investing cash outflow was $541.8 million, and financing cash inflow was $194.3 million. Cash declined $89.8 million to $172.1 million.
At September 30, HEI had $203.4 million of short-term non-bank borrowings and $1.782 billion of long-term non-bank debt. Its $150 million revolving facility had no outstanding borrowings. HEI’s capital structure, excluding bank deposits and bank borrowings, was 51% common equity and 49% debt and subsidiary preferred stock.

Segments and material changes

Electric utilities: Q3 revenue was $687.4 million, operating income $74.0 million, and common-stock net income $49.7 million. For nine months, revenue was $1.866 billion, operating income $180.5 million, and common-stock net income $108.4 million. Year-to-date utility revenue rose 11%, while operating income fell 8% and common-stock income rose 15%.
Utility costs increased with fuel oil, purchased power, maintenance, depreciation, and taxes. The utilities’ average fuel oil cost was $84.67 per barrel in Q3 versus $67.42 a year earlier. Cost-recovery clauses and decoupling mechanisms help pass through eligible costs and separate revenues from electricity sales volumes.
ASB: Nine-month net income rose to $60.7 million from $50.1 million. Net interest income increased to $179.3 million from $166.9 million, while the provision for loan losses rose to $12.3 million from $7.2 million. The nine-month net interest margin was 3.78%, versus 3.68%.
ASB’s total assets were $6.93 billion, net loans $4.70 billion, and deposits $6.13 billion at quarter-end. Nonaccrual loans increased to $27.9 million from $23.6 million at year-end; delinquency rates were 0.52%, down from 0.60% a year earlier. ASB reported regulatory capital ratios above minimum well-capitalized thresholds.
Utility capital expenditures were $334.7 million for the first nine months, versus $307.0 million. The utilities forecast up to $2.2 billion of net capital expenditures for 2018–2022.

Liquidity, outlook, risks, and unusual items

Management said HEI and Hawaiian Electric expect internally generated cash, debt and equity issuance, commercial paper, and credit facilities to provide adequate liquidity for foreseeable needs. Hawaiian Electric had $7.2 million in cash, $85.9 million in short-term borrowings, $1.469 billion in long-term debt (including current portion), and an undrawn $200 million credit facility at September 30.
HEI said it currently expects to maintain its dividend at the present level, subject to quarterly board review. No specific earnings guidance was provided. Management expected full-year 2018 utility kilowatt-hour sales to be below 2017 levels, partly due to efficiency and customer-sited renewable generation.
After quarter-end, HEI closed a $150 million senior-note placement: $50 million at 4.58% due 2025 and $100 million at 4.72% due 2028; the latter tranche was scheduled to fund in December. Hawaiian Electric’s ERP/EAM system went live in October; management noted related control-process changes would begin in Q4.
Hawaii’s 2017 Tax Act rate changes reduced utility rates to pass tax savings to customers. Management also noted that loss of bonus depreciation may increase the initial cash requirements for future utility capital projects. The company expected to finalize provisional tax accounting by the end of 2018.
Natural-disaster and capacity matters include the 2018 Kilauea eruption, which damaged some Hawaii Electric Light property and took the Puna Geothermal facility offline. The utilities said the financial impact to date was not material and expected to meet Hawaii Island demand without Puna, but capacity planning remains relevant, particularly on Maui.
Material regulatory and execution uncertainties include rate-case outcomes, performance-based ratemaking, renewable project approvals and delivery, fuel prices, and recovery of project costs. Hawaiian Electric’s Schofield 50 MW generating station entered service in June; some related operating-cost recovery remained pending. The Hu Honua project’s appeal remained pending, and the facility was expected online by year-end 2018.
Environmental and legal contingencies include unresolved potential PCB remediation costs at Pearl Harbor and a former Molokai generation site. Management did not expect pending utility or bank legal matters, in aggregate, to materially affect financial position, but could not rule out effects on a future period’s results or liquidity. ASB also faces interest-rate, credit, deposit-competition, and loan-concentration risks.
ASB’s available-for-sale securities had an unrealized loss of $37.7 million, net of tax, compared with $15.0 million at year-end 2017. ASB attributed losses primarily to rising interest rates and said it did not consider the securities other-than-temporarily impaired.

Important facts for investors to verify

Whether utility rate recovery and decoupling mechanisms offset rising fuel, purchased-power, operating, and capital costs as expected.
Whether ASB’s higher loan-loss provision, charge-offs, nonaccrual loans, and troubled-debt restructurings signal sustained deterioration in credit quality.
How the $2.2 billion utility capital plan, new debt, and reduced bonus depreciation affect cash flow, leverage, and dividend capacity.
Progress and regulatory outcomes for renewable and firm-capacity projects, including Maui capacity needs, Hu Honua, and the AES Hawaii and Kalaeloa PPAs.
Final tax accounting, ERP/EAM implementation and controls, and the eventual cost and scope of environmental remediation or other contingencies.