Hawaiian Electric Industries, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The combined filing covers HEI and its wholly owned electric utility subsidiary, Hawaiian Electric. Amounts below are in U.S. dollars; figures are rounded where appropriate.
Business context and reporting period
HEI operates regulated electric utilities serving most of Hawaii’s population, American Savings Bank (ASB), and smaller clean-energy and corporate businesses. The filing is unaudited; interim results are not necessarily indicative of full-year results.
Key financial metrics
| HEI consolidated | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $715.5 million | $685.3 million | $1,377.1 million | $1,331.2 million |
| Operating income | $72.6 million | $78.8 million | $150.6 million | $150.7 million |
| Net income for common stock | $42.5 million | $46.1 million | $88.2 million | $86.3 million |
| Diluted EPS | $0.39 | $0.42 | $0.81 | $0.79 |
| Operating margin | 10.2% | 11.5% | 10.9% | 11.3% |
- HEI six-month operating cash flow was $133.4 million, investing cash outflow $275.1 million, and financing cash inflow $171.1 million. Cash and cash equivalents were $198.5 million at June 30, versus $169.2 million at year-end 2018.
- HEI total assets were $13.54 billion and shareholders’ equity $2.21 billion. Non-bank short- and long-term debt totaled about $2.10 billion; this excludes ASB deposits and other bank borrowings. HEI’s $150 million revolving facility had no amounts drawn, and $50 million of commercial paper was outstanding.
- HEI paid $69.7 million in common dividends in the first half. The reported payout ratio was 79% for the first half, compared with 78% for full-year 2018.
Electric utility and bank performance
- Electric utilities: Six-month revenue increased 3% to $1.212 billion; net income attributable to common stock rose to $64.7 million from $58.6 million. Q2 common income was $32.6 million, versus $31.2 million. Utility revenue growth reflected higher rates, fuel costs passed through to customers, and major-project interim recovery; operating costs also increased.
- Utility six-month operating cash flow was $100.8 million and capital expenditures were $199.9 million. Utility cash was $23.4 million at June 30. Long-term debt was $1.418 billion and short-term borrowings $161.9 million; a separate $200 million credit facility was undrawn.
- ASB: Six-month net income declined to $37.9 million from $39.5 million; Q2 net income fell to $17.0 million from $20.6 million. Six-month net interest income increased to $125.2 million from $118.1 million and net interest margin improved to 3.90% from 3.76%, but higher credit-loss provisions and operating expenses more than offset revenue growth.
- ASB’s loan-loss provision was $14.6 million for the first half, versus $6.3 million; the allowance for loan losses rose to $58.4 million from $52.1 million at year-end. Nonaccrual loans increased to $39.4 million from $27.3 million. Delinquency was 0.51%, down from 0.54% a year earlier.
Material changes versus prior comparable period
- HEI Q2 revenue rose 4%, while operating income and common-stock net income each fell 8%. For the first half, revenue rose 3%, operating income was essentially unchanged, and common-stock net income increased 2%.
- Utility first-half common income improved, supported by higher rates and interim project recovery. Utility kWh sales fell about 3% year over year in the first half; management cited energy efficiency, customer-sited renewable generation, and weather. Decoupling reduces the direct link between sales and utility revenues.
- ASB’s loan portfolio grew: net loans were $4.95 billion at June 30, up from $4.79 billion at year-end. Deposits were $6.26 billion, up from $6.16 billion. Credit provisions rose substantially, while the allowance increased.
- Adoption of the new lease standard on January 1, 2019 added approximately $257 million of lease liabilities and corresponding right-of-use assets for HEI, including purchase-power agreements; the utility portion was approximately $236 million. Prior-year periods were not recast.
Outlook, management commentary, risks and unusual items
- HEI stated it expects to maintain its dividend at the current level, subject to quarterly board review. Management said cash generation and financing access should be adequate for foreseeable obligations and investment needs. The filing does not provide a clear full-year EPS forecast.
- The utilities forecast up to $2.1 billion of net capital expenditures for 2019–2023. Hawaii’s statutory renewable portfolio target is 100% by 2045. The PUC’s performance-based regulation process was continuing, with a decision anticipated in December 2020; regulatory outcomes could affect rates, returns, and cost recovery.
- ASB management noted that potential interest-rate cuts could pressure net interest income and margin. Deposit competition, loan quality, real-estate conditions, and the bank’s Hawaii concentration are relevant risks.
- On May 13, the utilities issued $50 million of 4.21% unsecured notes due 2034 and used proceeds to refinance $51.5 million of 6.50% junior subordinated debt. After quarter-end, $150 million of 3.20% revenue bonds due 2039 were issued to refinance bonds carrying a 6.50% coupon.
- Hawaii Supreme Court remanded the Hu Honua biomass PPA matter to the PUC for further proceedings, including consideration of greenhouse-gas effects, cost reasonableness, and public interest. The Puna Geothermal Venture facility remained offline after 2018 lava flows; management reported no material financial impact to date.
- Environmental reserves included $2.7 million for the former Molokai generation site and $4.7 million for Pearl Harbor PCB matters. Management did not expect pending proceedings to be material to financial position, but said a material effect on a particular period’s results or liquidity could not be ruled out.
- Two as-available energy IPPs had not supplied information needed to determine whether consolidation might be required; the filing says consolidation could materially affect the financial statements. ASB planned to adopt the expected-credit-loss standard in 2020 and was still assessing its impact.
Important facts for investors to verify
- Whether ASB’s higher loan-loss provision and rising nonaccrual balances persist, and how they affect future earnings and reserve adequacy.
- Progress on utility rate cases, performance-based regulation, and recovery of planned capital spending and major projects.
- Execution, approval, and timing of renewable-energy and storage projects, including Hu Honua and the offline geothermal facility.
- HEI and utility borrowing levels, refinancing effects, capital spending, and dividend coverage against operating cash flow.
- The eventual effects of lease accounting, credit-loss accounting adoption, and any required consolidation of power producers.