Hawaiian Electric Industries, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. HEI is a Hawaii-based holding company whose principal businesses are Hawaiian Electric and American Savings Bank (ASB). This combined, unaudited filing covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. Unless otherwise stated, figures below are in millions of dollars.
Financial performance and position
| HEI consolidated | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $867.1 | $829.2 | $2,449.5 | $2,406.0 |
| Operating income | $91.1 | $88.0 | $261.7 | $237.1 |
| Net income attributable to common stock | $47.8 | $48.2 | $135.2 | $122.5 |
| Diluted EPS | $0.46 | $0.48 | $1.32 | $1.23 |
- Utilities: Q3 revenue was $803.6 million and common-stock net income $38.9 million, versus $764.1 million and $37.8 million a year earlier. For nine months, revenue was $2,262.1 million and common-stock net income $108.5 million, versus $2,210.0 million and $90.9 million.
- ASB: Q3 net income was $13.3 million, down from $15.3 million; nine-month net income was $39.5 million, down from $45.4 million. Nine-month net interest margin was 3.60%, compared with 3.77%; return on average assets was 0.98%, versus 1.19%.
- Cash flow: HEI generated $173.4 million of operating cash in the first nine months, versus $246.7 million in 2013; investing used $377.0 million, including $236.0 million of capital expenditures, and financing provided $176.1 million. Cash and equivalents were $192.6 million at quarter-end, down from $220.0 million at year-end 2013.
- Debt and liquidity: At September 30, HEI reported $1,517.9 million of long-term debt, $150.6 million of short-term nonbank borrowings, and $263.2 million of other bank borrowings; bank deposits were $4,533.8 million. HEI had a $150 million revolving facility, undrawn at October 31, and $67 million of commercial paper outstanding then. The utility had $1,206.5 million of long-term debt, $11.4 million current maturities, and $85.0 million short-term borrowings; its $200 million credit facility was undrawn at October 31, subject to PUC approval for a longer term.
- Bank position: ASB had $5.44 billion in assets, $4.29 billion in net loans and $4.53 billion in deposits. Its allowance for loan losses was $43.5 million, or 1.00% of loans; nonaccrual loans were $36.9 million. ASB was reported well-capitalized, with a 9.1% leverage ratio, 11.5% Tier 1 risk-based ratio and 12.6% total risk-based ratio.
- Dividends and returns: HEI paid $0.31 per share in Q3 and $0.93 per share for the first nine months, unchanged from 2013. Management currently expects to maintain the dividend, subject to quarterly Board review.
Material changes versus the prior period
- For the first nine months, HEI revenue rose about 2% and common-stock net income rose about 10%; diluted EPS increased from $1.23 to $1.32. Q3 common-stock net income and diluted EPS were slightly lower year over year, partly because of weaker bank results and higher share count.
- Utility nine-month operating income increased to $216.9 million from $179.9 million, principally reflecting higher revenues and rate-base and O&M adjustments. Higher purchased-power costs and depreciation partly offset the improvement.
- ASB’s loan balance grew, but lower mortgage refinancing activity, reduced debit-card interchange income, and a higher loan-loss provision weighed on earnings. The nine-month provision rose to $3.6 million from $1.0 million.
- Operating cash flow declined substantially year over year, with timing-related decreases in accounts payable and other working-capital movements among the factors discussed by management.
- Prior-period presentation revisions moved certain utility-related amounts between income-statement lines and corrected property balances. The filing says these revisions did not affect previously reported net income or cash flows and were not material. A $3.1 million out-of-period tax benefit recorded in Q3 2013, including $2.7 million for the utilities, makes the tax-rate comparison less directly comparable.
Outlook, management commentary and key risks
- Management said HEI’s cash generation and access to debt, equity and credit facilities should be adequate for foreseeable obligations, capital spending and other cash needs. This is an expectation, not a guarantee.
- The utilities forecast further declines in electricity sales in 2014 and 2015, in part due to customer solar and energy-efficiency adoption; they expect 2014 O&M expenses to be relatively flat with 2013. Management estimated an ongoing 100–130 basis-point gap between allowed and achieved utility ROACE for 2014–2016.
- The PUC’s April 2014 orders require new supply, demand-response and grid plans. The utilities’ plans envision more renewables, storage and grid modernization, and over 65% renewable energy by 2030; PUC review and approval remain uncertain. Grid integration constraints, renewable curtailment, fuel costs and cost recovery are material risks.
- Hawaiian Electric filed an abbreviated 2014 rate-case submission proposing no change to base rates, citing customer bill pressures and a focus on cost reduction and business-model changes. Management said the PUC’s acceptance of the filing and whether additional evidence or a traditional rate proceeding will be required cannot be predicted. Hawaiian Electric plans its next rate case using a 2017 test year, subject to circumstances and regulatory action.
- A 15-year LNG liquefaction-capacity agreement with Fortis BC is conditional on Hawaii PUC and other approvals. Fuel-supply amendments with Chevron also require regulatory approval. Neither agreement assures lower customer costs.
- Environmental and legal exposures include a DOJ proposal for a consent decree concerning alleged Clean Air Act violations at two plants; controls and penalties are under review and cannot yet be estimated. Potential Pearl Harbor sediment investigation and remediation costs are also undetermined. A $3.6 million reserve covers investigation and estimated cleanup at a former Molokai generation site. Environmental rules could require material spending or earlier unit retirements.
- ASB faces interest-rate, credit, deposit-competition and regulatory risks. A pending class action over debit-card overdraft fees has an indeterminable probable outcome and loss range. Management noted that potential impacts from the Kilauea lava flow were not then expected to be material, but could not determine effects on affected borrowers and properties.
- Other risks include pension assumptions and funding, Hawaiian economic conditions, financing access and costs, and possible future consolidation of certain independent power producers if the utilities obtain information currently withheld by those counterparties.
Most important facts for investors to verify
- Whether PUC decisions on decoupling, the abbreviated rate filing and utility power-supply plans preserve cost recovery and the projected return profile.
- Whether planned LNG and renewable projects receive approvals, are delivered on schedule and produce the anticipated customer savings without compromising grid reliability.
- Whether operating cash flow recovers and capital spending, short-term borrowings and dividend payments remain supportable.
- Whether ASB’s loan growth, allowance, delinquencies and net interest margin remain consistent with management’s credit and earnings expectations.
- Any quantified outcomes from the DOJ Clean Air Act negotiations, Pearl Harbor sediment matter and other environmental proceedings.
- Effects of new pension mortality assumptions and regulatory requirements on benefit obligations, contributions and reported earnings.