Business context and reporting period
Hawaiian Electric Industries, Inc. (HEI) filed this unaudited combined Form 10-Q with Hawaiian Electric Company, Inc. (Hawaiian Electric), its wholly owned utility subsidiary, for the quarter ended March 31, 2016. HEI’s principal businesses are the electric utilities and American Savings Bank (ASB). Results are for the three months ended March 31 and are not necessarily indicative of full-year performance.
Key financial results
Unless otherwise noted, amounts are in millions of dollars. HEI consolidated figures include the electric utility, bank and corporate operations.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| HEI revenue | $551.0 | $637.9 | Down 14% |
| HEI operating income | $68.9 | $69.5 | Down 1% |
| HEI net income for common stock | $32.4 | $31.9 | Up 2% |
| HEI diluted EPS | $0.30 | $0.31 | Down 3% |
| HEI dividends per share | $0.31 | $0.31 | No change |
| Operating cash flow | $170.6 | $138.6 | Up $32.0 |
| Investing cash flow | $(215.3) | $(152.0) | Greater use of cash |
| Financing cash flow | $78.9 | $130.1 | Down $51.1 |
- Electric utilities: Revenue was $482.1 versus $573.4; operating income was $55.3 versus $57.6; and net income for common stock was $25.4 versus $26.9. Lower fuel and purchased-power costs reduced customer-billed revenue and expenses; utility fuel expense fell to $113.7 from $176.8, while purchased-power expense fell to $115.9 from $136.0. Average fuel-oil cost was $53.99 per barrel versus $86.60.
- Bank: ASB net income was $12.7 versus $13.5. Net interest income increased to $50.4 from $45.5, and net interest margin improved to 3.62% from 3.52%. The provision for loan losses rose to $4.8 from $0.6.
- Balance sheet and funding: At March 31, HEI reported total assets of $11.87 billion, total liabilities of $9.89 billion and shareholders’ equity of $1.94 billion. Cash and cash equivalents were $334.7 million, compared with $300.5 million at year-end 2015. Non-bank long-term debt was $1.58 billion and non-bank short-term borrowings were $95.5 million. Separately, ASB had $5.14 billion of deposits and $329.1 million of other bank borrowings. HEI reported $83 million of commercial paper outstanding and an undrawn $150 million credit facility at April 28; Hawaiian Electric reported no commercial paper or credit-facility draws at that date.
- Utility investment and liquidity: Hawaiian Electric’s net utility property, plant and equipment was $4.32 billion. Its first-quarter operating cash flow was $146.9 million, capital expenditures were $125.2 million, and cash was $49.0 million at quarter-end. The company reported a 57% common-equity share of its capitalization and $1.28 billion of long-term debt.
- Bank asset quality and capital: ASB’s net loans were $4.59 billion and its allowance for loan losses was $52.3 million. Nonaccrual loans were $46.9 million; the annualized net charge-off ratio was 0.21%, versus 0.04%. ASB remained well-capitalized, with a 12.0% common equity Tier 1 ratio and an 8.7% Tier 1 leverage ratio.
Material changes versus the prior comparable period
- HEI revenue declined mainly because of lower electric utility revenue, substantially reflecting lower fuel prices; bank revenue increased. HEI common net income rose modestly, but EPS declined as weighted-average shares increased 4%.
- Utility common-stock net income fell by about $1.5 million, with higher depreciation and lower operating income partly offset by cost reductions. Utility kilowatthour sales increased slightly in the quarter, but management expected full-year 2016 sales to be below 2015.
- ASB’s net interest income benefited from higher average earning-asset balances and improved yields, but higher loan-loss provisions, lower mortgage-banking income and higher expenses weighed on earnings. The allowance increased from $50.0 million at year-end.
- HEI operating cash flow increased, while investing cash use rose, including utility capital spending and bank purchases of investment securities. Financing cash flow was lower, in part reflecting reduced common-stock issuance proceeds versus Q1 2015.
Outlook, management commentary and risks
- Management said it currently expected to maintain HEI’s dividend at its then-current level; the board reviews the dividend quarterly. The first-quarter payout ratio was 103%.
- Utilities expected full-year 2016 kilowatthour sales below 2015 and forecast 2016 O&M expenses, excluding costs covered by surcharges or third parties, to be 4% below 2015. Management expected $65 million of 2016 pension and other postretirement plan contributions, compared with $88 million in 2015.
- The proposed NEE transaction remained pending. The agreement contemplated exchanging each HEI share for 0.2413 NEE shares, distributing ASB Hawaii to HEI shareholders before closing, and paying a $0.50-per-share special dividend. HEI shareholders had approved the agreement and FERC and antitrust waiting-period requirements had been addressed; Hawaii PUC approval and other closing conditions remained outstanding. The agreement allowed either party to terminate if the merger was not completed by June 3, 2016. Litigation by purported HEI shareholders sought, among other relief, to block the transaction; HEI said it believed the allegations were without merit.
- In the PUC merger proceeding, applicants had proposed a four-year base-rate-increase moratorium and $60 million in customer rate credits over that period, among other commitments. The PUC decision was pending. These commitments and the transaction’s completion were subject to regulatory and other conditions.
- Utilities continued planning for Hawaii’s renewable-energy transition and grid upgrades. Management cited increasing integration and curtailment challenges from intermittent generation and potential reliability concerns. The Utilities’ updated power supply plans were filed in April 2016. A proposed smart-grid expansion was estimated to cost $340 million over five years and required PUC approval.
- Some renewable and generation plans faced execution uncertainty: the Utilities terminated three SunEdison solar PPAs totaling 109.6 MW after project milestones were missed; SunEdison disputed the terminations. Hawaii Electric Light terminated the Hu Honua biomass PPA, while discussions about possible revised terms continued. Maui Electric anticipated a possible reserve-capacity shortfall on Maui from 2017 through 2022 and planned to evaluate replacement resources.
- New Chevron fuel-supply agreements for 2017 onward were subject to PUC approval. The Kalaeloa PPA was nearing its stated term, with negotiations underway and month-to-month extensions possible while negotiations continued. Hawaiian Electric believed it could comply with federal Mercury and Air Toxics Standards through operational changes.
- Environmental exposures included a $3.6 million reserve for investigation and estimated cleanup at a former Molokai generation site and a $4.3 million reserve for PCB investigations and remediation near the Waiau plant. Potential Clean Air Act enforcement matters remained under negotiation, with the amount and effect of any resolution not estimable. The filing also described climate, weather, fuel-price, regulatory, supply and cyber-security risks.
- HEI and Hawaiian Electric stated that a previously identified material weakness in cash-flow-statement controls had been remediated after enhanced controls operated effectively for two quarters. The weakness had led to prior-period cash-flow restatements or revisions.
Most important facts for investors to verify
- Whether the proposed NEE merger, ASB Hawaii spin-off and special dividend received all required approvals and closed, and the resulting terms and timing.
- How the PUC ruled on the merger commitments, utility rate recovery, power supply plans and major capital projects, including the proposed smart-grid investment.
- Whether utility reliability and capacity plans remain adequate as renewable generation expands and planned generation units retire or PPAs expire.
- Whether ASB’s higher loan-loss provision and charge-offs persist, and how nonaccrual loans, troubled restructurings and consumer-loan growth develop.
- Whether environmental investigations, potential enforcement matters and other contingencies require additional reserves or cash spending.
- Whether the remediated cash-flow controls continue to operate effectively, given the history of cash-flow-statement restatements and revisions.