Hawaiian Electric Industries, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. HEI’s businesses include Hawaiian Electric’s regulated utilities, American Savings Bank (ASB), and other operations. Comparisons are with Q1 2019 unless noted. Amounts are in millions of dollars except per-share data.
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| HEI revenue | $677.2 | $661.6 | +2% |
| Operating income | $59.7 | $77.9 | -23% |
| Net income for common stock | $33.4 | $45.7 | -27% |
| Diluted EPS | $0.31 | $0.42 | -26% |
| Operating margin | 8.8% | 11.8% | Down 3.0 percentage points |
| Operating cash flow | $61.3 | $77.2 | Lower by $15.9 |
- Segment performance: Electric utility revenue increased to $597.4 from $578.5, but operating income declined to $44.0 from $56.6. ASB revenue fell to $79.7 from $83.1 and operating income to $19.4 from $26.1. Other-segment losses narrowed.
- Cash flow and investment: HEI used $260.5 in investing activities, principally for capital expenditures, securities purchases and loan growth, and generated $207.9 from financing activities. Utility operating cash flow was $39.1, down from $69.4; utility capital expenditures were $119.1, up from $102.9.
- Debt and liquidity: At March 31, HEI reported $205.5 in cash and cash equivalents and $30.9 in restricted cash. Excluding bank deposits and other bank borrowings, HEI had $100.0 in short-term borrowings and $2,068.1 in long-term debt. Hawaiian Electric had $12.4 in cash and cash equivalents, $100.0 in short-term borrowings and $1,510.6 in long-term debt, including current maturities.
- Bank credit and capital: ASB’s net interest margin was 3.72%, versus 3.99% a year earlier. Its provision for credit losses was $10.4 versus $6.9; its allowance for credit losses was $77.1 at quarter-end. ASB reported a 12.8% common equity Tier 1 ratio and was classified as well-capitalized.
- Shareholder return: HEI paid a quarterly dividend of $0.33 per share. The first-quarter payout ratio was 108%, compared with 64% for full-year 2019.
Material changes and drivers
- Utility revenue growth did not translate into higher earnings: operating costs rose faster than revenue, including higher fuel and purchased-power expense, O&M, and depreciation. Utility common-stock earnings fell to $23.9 from $32.1.
- ASB’s lower loan and investment yields reduced interest income. Higher credit-loss provisions also weighed on earnings; ASB net income declined to $15.8 from $20.8.
- HEI adopted the expected-credit-loss standard on January 1, 2020. The adoption increased the credit-loss allowance by approximately $21 and reduced retained earnings by $15.4 after tax.
- HEI’s consolidated balance-sheet total assets were $13.85 billion at March 31, up from $13.75 billion at December 31, 2019. AFS investment securities increased to $1.34 billion, while net loans were $5.10 billion.
Outlook, risks and notable items
- COVID-19: Management said the pandemic had severely affected Hawaii’s economy and created substantial uncertainty. A cited UHERO interim forecast projected a 7.7% contraction in Hawaii real GDP, a 41% decline in visitor arrivals and 13.7% unemployment for 2020. These were external forecasts, not company guidance.
- Utilities: The company expected 2020 electricity sales to be 8%–14% below 2019 levels while travel-quarantine and stay-at-home restrictions remained in effect. Decoupling was expected to help preserve utility revenue, but collections could be delayed; management also expected higher receivables, bad-debt expense and write-offs. The utility forecast up to $1.3 billion of net capital expenditures for 2020–2022.
- Bank: ASB expected lower net interest income and margin, higher credit-loss provisions, reduced fee income and increased pandemic-related expenses. By the end of April, short-term loan modifications covered approximately 10% of loans outstanding. ASB had secured more than $300 million in Paycheck Protection Program loans; the filing notes possible compliance and credit risks if loans fail program requirements.
- Funding actions: Disruption in commercial-paper markets led HEI and Hawaiian Electric to draw on revolving facilities; balances at March 31 were $65 and $95, respectively. Subsequent to quarter-end, HEI obtained a $65 term loan and Hawaiian Electric added a $75 revolving facility. The utilities also priced a $160 taxable-debt private placement, expected to close in May. Management stated that liquidity was adequate but cautioned that pandemic duration, capital-market access and future cash flows were uncertain.
- Regulatory matters: Hawaiian Electric had requested a $77.6 annual revenue increase, or 4.1%, in its 2020 test-year rate case; a PUC interim decision was scheduled for October 2020. The utilities’ March 2020 decoupling filing proposed a net $35.9 customer refund for June 2020–May 2021, subject to PUC review. After quarter-end, the PUC authorized regulatory assets for certain costs associated with suspended service disconnections; recovery remains subject to later review.
- Other contingencies: Environmental remediation reserves included $2.7 for a former Molokai generation site and $4.8 for Pearl Harbor PCB matters. Management did not expect aggregate pending legal proceedings to materially affect financial position, but could not rule out effects on results or liquidity in a future period. Two as-available power producers had not supplied information needed for VIE assessments; eventual consolidation could materially affect reported assets, liabilities or losses.
Investor verification priorities
- Track pandemic-related changes in utility collections, customer arrears, bad-debt expense and timing or recoverability of decoupling balances.
- Monitor ASB credit quality, allowance assumptions and loan modifications as Hawaii’s economic conditions evolve.
- Confirm completion and terms of the announced post-quarter financing transactions and available borrowing capacity.
- Review PUC decisions on the Hawaiian Electric rate case, annual decoupling filing and recovery of pandemic-related costs.
- Assess whether HEI can sustain its $0.33 quarterly dividend given first-quarter earnings, cash needs and the economic outlook.