Business context and reporting period
Hawaiian Electric Industries, Inc. (HEI) reported unaudited results for the quarter and six months ended June 30, 2015. HEI’s principal businesses are its regulated Hawaiian electric utilities and American Savings Bank (ASB). The filing also presents Hawaiian Electric Company, Inc. (the Utilities) separately; HEI is its sole common shareholder. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| HEI consolidated | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $623.9 | $798.7 | $1,261.8 | $1,582.4 |
| Operating income | $72.7 | $83.2 | $142.2 | $172.4 |
| Net income for common stock | $35.0 | $41.3 | $66.9 | $87.1 |
| Basic EPS | $0.33 | $0.41 | $0.63 | $0.86 |
- HEI’s Q2 revenue fell 22% and common net income fell 15%; first-half revenue fell 20% and common net income fell 23%. Dividends were $0.31 per share in Q2 and $0.62 for the first half, unchanged from 2014.
- Utilities’ common net income was $32.8 in Q2 versus $34.2 and $59.7 for the first half versus $69.7. Utility revenue declined largely with lower fuel prices and purchased-power costs, which are substantially passed through to customers; sales were nearly flat in Q2 and down 0.3% for the first half.
- ASB’s net income rose to $12.9 in Q2 from $11.5, while first-half net income was $26.3 versus $25.9. First-half net interest margin was 3.52%, down from 3.59%; loan-loss provision was $2.4 versus $2.0.
- HEI’s “other” segment reported a first-half net loss of $19.2 versus $8.5, reflecting increased corporate and merger-related costs. Merger-related expense was $13.5 for the first half.
For the first half, HEI operating cash flow was $104.3, investing cash outflow was $227.7, and financing cash inflow was $248.5; cash ended at $300.7, up from $175.5 at year-end. Investing outflow included $142.2 of capital expenditures. Financing included $104.5 of net proceeds from settling HEI’s equity forward and growth in bank deposits. HEI assets were $11.44 billion and total liabilities $9.51 billion at June 30.
HEI had $1.51 billion of long-term debt and $124.5 million of short-term borrowings other than bank debt. Hawaiian Electric reported $1.21 billion of long-term debt and $89.0 million of commercial paper/short-term borrowings at quarter-end, with a $200 million undrawn credit facility. Its cash was $4.5 million. ASB reported $5.78 billion in assets, $4.80 billion in deposits and $314.2 million in other borrowings. ASB’s regulatory capital ratios exceeded minimums: common equity Tier 1 12.3%, total capital 13.5%, and Tier 1 leverage 8.8%.
Material changes versus the prior comparable period
- Lower oil and purchased-power costs drove much of the Utilities’ lower revenue and expense. Utility operating income nevertheless declined, reflecting higher depreciation and, for the first half, higher O&M costs.
- HEI’s common shares outstanding increased; the company issued 4.7 million shares under its equity forward in March 2015, receiving $104.5 million net. Higher weighted-average shares contributed to the larger EPS decline relative to the decline in net income.
- ASB grew average loans and deposits, but lower asset yields and slightly lower net interest margin tempered interest-income growth. Mortgage banking income increased, while 2014’s securities-sale gain did not recur.
- The PUC’s modified decoupling/RAM framework reduced the Utilities’ 2015 incremental RAM revenues to $11.1 million, compared with $26.2 million in the April filing; revised tariffs included a net customer refund of $0.4 million.
Outlook, management commentary, risks and contingencies
- Merger: HEI shareholders approved the proposed NextEra Energy transaction on June 10, 2015. The contemplated terms provide 0.2413 NextEra shares per HEI share, an ASB Hawaii spin-off immediately before closing, and a $0.50-per-share special dividend. Regulatory approvals and other closing conditions remained outstanding; the Hawaii PUC proceeding included interveners opposing approval or seeking conditions. Shareholder litigation challenging the transaction was pending. The filing says management believes the claims are without merit and intends to defend them.
- Utility investment and earnings: Utilities reduced their 2015–2017 net-capital-expenditure forecast from $1.1–$2.0 billion to $0.8–$1.7 billion. The 2015 forecast was reduced from $420 million to $250 million; management said no HEI equity infusion would be needed by Hawaiian Electric in 2015 and it was reassessing long-term debt needs. The Utilities expect 2015 rate-base growth of 1.5%–3.0%, and project O&M expense, excluding specified pass-throughs, to decrease about 2% from 2014. Their 2015 electricity sales are expected to decline further from 2014. Management estimated an ongoing 90–110 basis-point gap between actual and allowed utility ROACE in 2015–2017.
- Regulatory commitments and energy transition: In the merger proceeding, Hawaiian Electric committed, subject to conditions and exceptions, not to seek a general base-rate increase for at least four years after closing and to forgo incremental O&M RAM recovery, representing about $60 million of cumulative customer savings. The Utilities continue plans for renewables, grid modernization and potential LNG use; the PUC’s review of resource and distributed-generation plans creates uncertainty over project approval, cost recovery and timing. Management’s plans target more than 65% renewable energy by 2030 and the state’s 100% RPS goal by 2045, but these are not guaranteed outcomes.
- Supply, environmental and operating risks: Renewable intermittency, curtailment, constrained interconnections, generating-unit outages and fuel availability could affect reliability and costs. MATS compliance was planned by April 2016 using lower-emission fuels despite the Supreme Court’s June 2015 decision remanding the rule for further proceedings. The Utilities were negotiating with DOJ over alleged Clean Air Act violations; a proposed consent decree could require controls and a penalty, but amounts were not estimable. Hawaiian Electric recorded a $0.8 million reserve for Waiau sediment investigation; final remediation responsibility and costs were undetermined. Maui Electric’s Molokai site investigation/remediation reserve was $3.6 million. AES Hawaii had initiated arbitration over a capacity-purchase dispute; management could not predict the result.
- Bank and other risks: ASB’s loan portfolio is concentrated in Hawaii and primarily real estate-related; nonaccrual loans were $31.1 million at June 30, down from $36.9 million at year-end. Interest-rate movements affect earnings and securities values; a modeled +300-basis-point shock reduced economic value of equity by 9.3%. HEI’s first-half dividend payout ratio was 97%; management expected to maintain the current dividend, subject to quarterly Board review. These forward-looking expectations are subject to regulatory, market, credit, weather, environmental and transaction risks.
- Management stated that HEI and the Utilities had adequate liquidity for foreseeable needs, while acknowledging that utility operating cash after dividends was not expected to fund all forecast capital spending over the three-year period; debt and equity financing may be required.
Investor verification checklist
- Confirm progress and final conditions for the NextEra merger, ASB spin-off, special dividend, PUC approvals and pending merger litigation.
- Track actual utility capital spending, RAM/REIP cost recovery, rate-base growth, earnings versus allowed returns, and customer sales.
- Reconcile cash generation and financing needs, including the effect of HEI’s equity-forward proceeds, utility commercial paper and future debt issuance.
- Monitor fuel and LNG contracts, generation adequacy, renewable interconnection/curtailment, and environmental compliance or remediation outcomes.
- Review ASB’s credit quality, allowance, deposit funding costs, interest-rate sensitivity and regulatory capital, particularly given its Hawaii and real-estate exposure.