Business context and reporting period
Hawaiian Electric Industries, Inc. (HEI) filed this combined Form 10-K with Hawaiian Electric Company, Inc. (Hawaiian Electric). The fiscal year ended December 31, 2017; comparisons are principally with 2016. HEI’s principal businesses are regulated electric utilities serving five Hawaiian islands and American Savings Bank (ASB). In November 2017, HEI also acquired a 60-MW power plant through Hamakua Energy.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| HEI revenue | $2.556 billion | $2.381 billion |
| HEI net income attributable to common stock | $165.3 million | $248.3 million |
| Basic / diluted EPS | $1.52 / $1.52 | $2.30 / $2.29 |
| Operating cash flow | $420.4 million | $495.7 million |
| Investing cash flow | $(815.3) million | $(736.5) million |
| Financing cash flow | $378.3 million | $218.8 million |
| Total assets at year-end | $13.100 billion | $12.426 billion |
| Long-term debt, excluding bank debt | $1.684 billion | $1.619 billion |
| Common equity | $2.097 billion | $2.067 billion |
HEI’s return on average common equity was 7.9%, versus 12.4% in 2016. Its annual common dividend remained $1.24 per share; the payout ratio was 82%, versus 54%.
Segment and operating measures
- Electric utilities: Revenue was $2.258 billion, up from $2.094 billion; common-stock net income was $120.0 million, down from $142.3 million. Utility operating cash flow was $335.2 million; capital expenditures were $441.6 million. Utility debt, including current maturities, was approximately $1.369 billion; common equity was $1.845 billion.
- ASB: Net income rose to $67.0 million from $57.3 million. Net interest income was $223.9 million and net interest margin was 3.69%, up from 3.59%. Assets were $6.799 billion, deposits $5.891 billion, and net loans $4.617 billion. The allowance for loan losses was $53.6 million, or 1.15% of loans; net charge-offs were $12.8 million, or 0.27% of average loans.
- Electricity: Utility sales revenue increased, while sales volume declined about 1.8% to 8.690 billion kWh. Average fuel oil cost rose to $68.78 per barrel from $53.49. The utilities reported a 27% renewable portfolio standard (RPS) for 2017.
Material changes versus the prior comparable period
- HEI net income fell 33%, largely because 2016 included a $90 million merger termination fee from NextEra Energy (NEE). The fee and related items contributed $60 million of after-tax merger- and spin-off-related income in 2016. The proposed merger and planned ASB spin-off were terminated.
- Excluding merger-related items, management attributed the year-over-year change to $22 million lower utility net income and a $10 million larger loss in the “other” segment, partly offset by $10 million higher ASB net income.
- Utility results were affected by higher fuel and purchased-power costs, higher operations and maintenance and depreciation expenses, the end of a temporary rate-adjustment timing arrangement, and a Tax Act-related deferred-tax charge. Fuel and purchased-power cost recovery clauses pass through specified costs to customers.
- ASB’s lower loan-loss provision and higher net interest income supported earnings, while noninterest income declined and expenses increased. Loans held for investment fell about 1%, reflecting strategic reductions in commercial lending and a large commercial real-estate payoff, partly offset by growth in residential, home-equity and consumer lending.
- Operating cash flow decreased; investing outflows increased, including utility capital spending, ASB securities purchases and the Hamakua Energy acquisition. Financing inflows increased, including deposit growth and debt issuance.
Outlook, commentary, risks and unusual items
- Outlook and capital needs: Management said expected cash generation and access to debt and equity financing should provide adequate liquidity for forecast obligations. Utilities forecast approximately $450 million of net capital expenditures in 2018. HEI reported $150 million of undrawn credit capacity and Hawaiian Electric $200 million at year-end.
- Energy transition and regulation: Hawaii’s statutory RPS targets rise to 30% by 2020 and 100% by 2045. The utilities’ plans call for more renewable generation, grid upgrades and demand response. PUC rate cases, cost recovery mechanisms, project approvals and renewable procurement remain consequential. Hawaiian Electric received approval for a $36 million interim rate increase effective February 2018; final rate outcomes remained pending.
- Reliability: The utilities operate isolated island grids. Management identified possible small Oahu reliability-guideline shortfalls after 2021 and a potential Maui reserve-capacity shortfall in 2018–2020 without demand-response benefits or equivalent measures. Mitigation and resource planning were ongoing.
- Tax Act: HEI recorded a provisional $14.2 million tax-related net expense in 2017, including $9.2 million at the utilities. The utilities reclassified approximately $285 million of net excess accumulated deferred taxes to a regulatory liability for future customer benefit; the PUC was to determine the method and timing of rate treatment. Tax accounting remained subject to further analysis and guidance.
- Risks and contingencies: Key exposures include PUC decisions and cost recovery, fuel and independent power producer availability, renewable integration and capital needs, severe weather and climate effects, largely uninsured utility transmission and distribution assets, cyber and operational-system disruptions, and Hawaii-concentrated bank lending and utility operations. Environmental reserves included $4.8 million for Waiau PCB investigation/remediation and $3.0 million for the former Molokai site and adjacent parcel. Hawaiian Telcom pole-related receivables were $22.3 million; accrued interest of $4.9 million was reserved.
- Unusual reporting item: The filing disclosed an immaterial timing error in interim cash-flow statements related to capital-expenditure payments and payables; management planned prospective correction in subsequent quarterly filings.
Important facts for investors to verify
- Reconcile reported 2017 earnings with the $60 million after-tax merger-related benefit in 2016 and the 2017 Tax Act adjustment; assess recurring earnings by segment.
- Track final PUC decisions on rate cases, tax-related customer credits, utility cost-recovery mechanisms and major-project recovery.
- Assess whether the utilities can meet RPS targets while maintaining reliability and financing planned grid and generation investments.
- Monitor ASB credit quality, consumer-loan charge-offs, real-estate concentration, deposit costs and sensitivity to interest-rate changes.
- Review environmental remediation estimates, Hawaiian Telcom receivable recovery, uninsured catastrophe exposure and the cash-flow correction in subsequent filings.