Hawaiian Electric Industries, Inc. — 2014 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The combined filing covers HEI and its wholly owned electric utility subsidiary, Hawaiian Electric; HEI also owns American Savings Bank (ASB). Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| HEI revenue | $798.7 | $794.6 | $1,582.4 | $1,576.8 |
| HEI operating income | $82.3 | $80.2 | $170.6 | $149.0 |
| HEI net income attributable to common stock | $41.4 | $40.6 | $87.3 | $74.3 |
| HEI diluted EPS | $0.41 | $0.41 | $0.86 | $0.75 |
| Hawaiian Electric net income for common stock | $34.2 | $28.7 | $69.7 | $53.1 |
| ASB net income | $11.7 | $15.9 | $26.2 | $30.1 |
- HEI’s six-month operating income rose 14% and common-stock net income rose 18%; revenue was nearly unchanged. The utility drove the earnings improvement, partly offset by weaker bank results and higher corporate losses.
- For the six months, Hawaiian Electric revenue increased about 1% to $1,458.5 million and operating income increased to $140.7 million from $110.1 million. Lower fuel expense was more than offset by higher purchased-power costs; increased decoupling revenues also supported results.
- ASB’s six-month net interest income was essentially flat at $88.2 million, while net interest margin declined to 3.59% from 3.79%. Lower mortgage banking and debit-card income, and a higher loan-loss provision, contributed to lower net income. ASB’s loan portfolio grew to $4,245.2 million net; its allowance for loan losses was $42.4 million, or 0.99% of loans.
- HEI consolidated operating cash flow was $46.2 million in the first half, down from $130.8 million. Investing used $272.1 million, including $149.3 million of capital expenditures; financing provided $194.2 million. Hawaiian Electric operating cash flow was $25.1 million, versus $111.7 million, while utility capital expenditures were $145.7 million.
- At June 30, HEI reported cash of $188.4 million, short-term nonbank borrowings of $185.2 million, long-term nonbank debt of $1,517.9 million, bank borrowings of $242.5 million and bank deposits of $4,524.9 million. Hawaiian Electric separately had cash of $12.7 million, short-term borrowings of $103.0 million and long-term debt of $1,217.9 million. HEI’s $150 million revolving facility and Hawaiian Electric’s $200 million facility were undrawn at June 30; the utility facility’s extension beyond April 2015 required PUC approval.
- HEI paid common dividends of $0.31 per share for the quarter and $0.62 per share for the first half, unchanged from 2013. Management expected to maintain the dividend at its then-current level, subject to quarterly Board review.
Material changes and unusual items
- ASB’s Q2 net income fell to $11.7 million from $15.9 million; for the first half it fell to $26.2 million from $30.1 million. The bank cited weaker noninterest income, including lower mortgage banking and debit-card interchange revenue, and higher loan-loss provision expense.
- Hawaiian Electric’s first-half fuel expense declined by $37.8 million, while purchased-power expense increased by $21.4 million. The filing attributes the fuel decrease principally to lower utility generation and higher purchased-power expense to higher purchased volumes and capacity/non-fuel charges.
- HEI reported a $125 million, two-year term loan drawn in May at an initial 1.12% interest rate; proceeds were used in part to repay $100 million of notes at maturity. The filing also describes a July 2014 settlement of 1 million shares under HEI’s equity forward for $23.9 million.
- Prior-period financial statement presentation and certain disclosures were revised, including 2013 income-statement classifications and property, plant and equipment presentation. The filing states these revisions did not affect previously reported net income or cash flows and were not material to the previously filed statements.
Outlook, regulatory matters and risks
- HEI said it believed available operating cash generation, debt and equity markets, commercial paper and bank facilities would provide adequate liquidity for foreseeable requirements. This is management’s assessment, not a guarantee.
- Utilities’ electric sales had declined each year since 2007 and were expected to decline further in 2014 and 2015, reflecting customer self-generation and energy efficiency. Utilities expected 2014 O&M expense, excluding specified pass-through or third-party-covered items, to be relatively flat with 2013.
- Management estimated a 100–130 basis-point gap between utility actual and PUC-allowed ROACE during 2014–2016. PUC changes to decoupling reduced the RBA carrying rate from 6% to utility-specific short-term debt rates of 1.25%–3.25%, and limited recovery of certain rate-base RAM additions. Further decoupling proceedings were pending.
- Hawaiian Electric’s June 2014 rate-case filing proposed no change to base rates, citing customer bill pressures and a focus on cost reductions and a new utility business model. PUC acceptance and any requirement for additional rate-case materials remained uncertain; the company planned its next normal-cycle filing using a 2017 test year.
- PUC orders in April 2014 rejected the Utilities’ integrated resource plan and directed new power-supply, demand-response, distributed-generation and grid-reliability plans. The Utilities face risks from renewable-energy integration, potential curtailment, grid constraints, capacity needs and recovery of investment costs.
- In August 2014, Hawaiian Electric entered a conditional 15-year LNG liquefaction-capacity agreement with Fortis BC Energy Inc. It required PUC and other approvals and was subject to conditions; the filing does not establish that it became effective.
- Environmental and legal exposures include potentially material but presently unquantifiable compliance costs from power-plant rules, a DOJ letter alleging possible Clean Air Act violations at two plants, and a Navy assertion that Hawaiian Electric is responsible for investigation and cleanup of sediment offshore of Waiau. Maui Electric had a $3.6 million reserve for investigation and estimated cleanup costs at a former Molokai generation site; final remediation costs remained uncertain.
- ASB disclosed a pending Hawaii class action over debit-card overdraft fees; the probable outcome and reasonably possible loss range were indeterminable. ASB also cited interest-rate, deposit-competition, credit-quality and Hawaii economic risks. HEI’s and the Utilities’ forward-looking results are subject to regulatory, fuel, operational, environmental, market and weather uncertainties.
Important facts for investors to verify
- Whether utility earnings improvement is sustainable given lower expected sales, higher purchased-power costs, decoupling changes and the estimated ROACE gap.
- ASB’s margin and earnings trajectory, loan quality, allowance adequacy, deposit trends and exposure to higher interest rates or weaker Hawaii real estate conditions.
- PUC decisions on the abbreviated rate filing, decoupling proceedings, required planning submissions, utility financing approvals and the conditional LNG agreement.
- Potential capital spending, compliance costs, cleanup liabilities and outcomes of the Clean Air Act and overdraft-fee proceedings, which were not fully quantifiable in the filing.
- Cash-flow conversion and funding needs: first-half operating cash flow declined substantially year over year while utility capital spending remained significant.