Business context and reporting period
Hawaiian Electric Industries, Inc. (HEI) filed this combined Form 10-K with Hawaiian Electric Company, Inc. for the fiscal year ended December 31, 2015. HEI is a Hawaii-based holding company with regulated electric utilities serving five islands and American Savings Bank (ASB). The utility accounted for about 90% of HEI revenue and 85% of net income in 2015. This is an annual report, not a standalone fourth-quarter filing.
HEI’s proposed merger with NextEra Energy remained pending. The transaction contemplated a distribution of ASB’s parent to HEI shareholders, a $0.50-per-share special dividend, and conversion of each HEI share into 0.2413 NextEra shares, subject to approvals and other closing conditions.
Financial and operating metrics
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| HEI revenue | $2.603 billion | $3.240 billion | Down 20%, mainly reflecting lower fuel and purchased-power costs passed through utility rates |
| HEI net income for common stock | $159.9 million | $168.1 million | Down 5% |
| HEI diluted EPS | $1.50 | $1.63 | Down 8% |
| HEI operating income | $322.6 million | $332.6 million | Down 3% |
| Cash from operating activities | $355.9 million | $325.4 million | Up; cash flow statements were restated/revised for prior periods |
| Cash used in investing activities | $705.7 million | $592.4 million | Higher loan growth, securities purchases and utility capital spending |
| Cash from financing activities | $474.8 million | $222.5 million | Included deposit growth, debt issuance and equity proceeds |
| Total assets | $11.790 billion | $11.185 billion | Up 5% |
| Long-term debt, excluding bank borrowings | $1.587 billion | $1.507 billion | HEI consolidated |
| Year-end cash and cash equivalents | $300.5 million | $175.5 million | HEI consolidated |
| Annual dividend per HEI share | $1.24 | $1.24 | Payout ratio rose to 82% from 75% |
Utility revenue fell 22% to $2.335 billion, while common-stock net income declined 1% to $135.7 million. Fuel oil expense fell to $654.6 million from $1.132 billion; purchased-power expense declined to $594.1 million from $722.0 million. Utility operating income was $274.1 million. Capital expenditures were $350.2 million, net of which $40.2 million in construction contributions offset spending; cash from operations was $333.4 million. Utility long-term debt was $1.287 billion, and common equity was 56.7% of capital structure.
ASB net income increased 7% to $54.7 million. Revenue was $267.7 million; net interest income was $188.6 million, while net interest margin declined to 3.53% from 3.62%. Loans held for investment, net, grew 4% to $4.566 billion; deposits rose 9% to $5.025 billion. The allowance for loan losses was $50.0 million, or 1.08% of loans, versus $45.6 million, or 1.03%, a year earlier. Nonaccrual loans increased to $46.0 million from $36.9 million; delinquencies were 0.57% of loans. ASB’s capital ratios exceeded minimum requirements, and it reported $1.7 billion of unused FHLB borrowing capacity.
HEI’s common equity was $1.928 billion, up from $1.791 billion. Its non-bank short-term borrowings were $103.1 million; the $150 million HEI credit facility was undrawn at year-end. Hawaiian Electric’s $200 million credit facility was also undrawn. The filing does not provide one consolidated debt total that combines utility, parent and bank funding obligations on a comparable basis.
Material changes versus prior comparable period
- HEI net income declined primarily because the “other” segment’s net loss widened to $30.6 million from $20.8 million, including about $17 million of merger-related expenses in 2015, and utility net income was slightly lower. ASB earnings rose by about $3.4 million.
- Utility customer electricity sales were broadly stable at 8,956.5 million kWh versus 8,976.2 million; lower fuel prices reduced customer bills and reported revenue. Average fuel oil cost fell to $74.71 per barrel from $129.65.
- ASB expanded its commercial real estate portfolio; that category rose 29.8% to $690.6 million. Total loans grew to $4.622 billion from $4.441 billion. Nonaccrual loans and net charge-offs increased, though the delinquency ratio edged down.
- HEI issued 4.7 million shares under its equity forward transaction for $104.5 million of proceeds. Utility plant investment continued; net utility plant increased to $4.278 billion from $4.045 billion.
- The utilities’ actual returns remained below PUC-allowed returns. Their reported ROACE was 8.02% for Hawaiian Electric, 7.22% for Hawaii Electric Light and 8.52% for Maui Electric, versus allowed returns of 10%, 10% and 9%, respectively.
Outlook, management commentary, risks and unusual items
- Management expected Hawaii’s economy to grow in 2016, citing record tourism, low unemployment and improving housing activity, while noting risks from global weakness, currency movements and potential military reductions.
- HEI forecast $450 million of utility net capital expenditures in 2016, including the proposed purchase of the Hamakua Energy Partners plant, subject to approval. ASB management expected current funding sources to meet commitments and described liquidity as satisfactory.
- HEI estimated 2016 pension contributions of $65 million, including $64 million for the utilities. Pension assets returned a loss of 1.2% in 2015. The utilities projected non-surcharged O&M costs for 2016 to be up to 5% lower than 2015, partly because certain write-offs and reserves were not expected to recur.
- Hawaii’s renewable portfolio standard was amended to require 15% renewable electricity by 2015, 30% by 2020 and 100% by 2045. The utilities estimated their 2015 RPS at 23%. Intermittent generation, curtailment, grid reliability, project execution and PUC approval remain significant challenges; the PUC had not yet approved the utilities’ power-supply improvement plans.
- Fuel supply, purchased-power availability, rate decisions and recovery mechanisms are material risks. The utilities remained substantially dependent on oil; management estimated 67% of net energy generated or purchased would come from fossil fuel oil in 2016. Several renewable project agreements faced delays, defaults or termination; the Hu Honua PPA was intended for termination effective March 1, 2016 absent changed circumstances.
- Environmental and legal exposures include unresolved PCB contamination investigations and remediation near Waiau Power Plant, a $4.7 million recorded reserve for related investigations and remediation, and a separate $3.6 million reserve for a former Molokai generation site. Potential Clean Air Act enforcement matters had no estimable outcome in the filing.
- Both HEI and Hawaiian Electric reported a material weakness in cash-flow-statement controls involving identification and review of noncash transactions. Prior cash flow statements were restated or revised. New controls were implemented but still required testing for operating effectiveness; the auditor concluded internal control over financial reporting was ineffective at year-end.
- The merger faced PUC review and shareholder litigation seeking to block or challenge it. The filing describes possible regulatory conditions, litigation costs and adverse effects if the transaction does not close. The filing also reports a $90 million potential termination fee payable by NextEra in specified circumstances.
Most important facts an investor should verify
- Merger and ASB spin-off status, required regulatory approvals, litigation and any final transaction terms, including the special dividend and exchange ratio.
- Remediation and independent testing of the material weakness, and the exact effects of the cash flow statement restatements/revisions on reported periods.
- Utility rate recovery and PUC decisions on power-supply plans, decoupling, fuel-cost recovery, major projects and capital spending.
- ASB credit quality, especially commercial real estate growth, rising nonaccrual loans, allowance adequacy and Hawaii real-estate concentration.
- Funding and execution of the utilities’ renewable transition, including fuel dependence, project delays, grid reliability and environmental liabilities.
- Debt maturities, cash availability and dividend sustainability given the 82% payout ratio, parent-company funding needs and limits on subsidiary distributions.