Business context and reporting period
Hawaiian Electric Industries, Inc. (HEI) filed this unaudited Form 10-Q for the quarter ended September 30, 2017. HEI’s consolidated businesses comprise the regulated electric utilities and American Savings Bank (ASB); Hawaiian Electric Company, Inc. (Hawaiian Electric) is reported separately and is wholly owned by HEI. Comparisons below are with the third quarter or first nine months of 2016, as applicable. Dollar figures are in millions unless noted.
Financial performance and position
| HEI consolidated | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $673.2 | $646.1 | $1,897.0 | $1,763.3 |
| Operating income | $109.5 | $105.4 | $253.3 | $259.7 |
| Net income attributable to common stock | $60.1 | $127.1 | $132.9 | $203.6 |
| Basic EPS | $0.55 | $1.17 | $1.22 | $1.89 |
| Dividend declared per share | $0.31 | $0.31 | $0.93 | $0.93 |
- HEI revenue rose 4% in Q3 and 8% year to date. Q3 operating income increased 4%; nine-month operating income declined 2%.
- HEI cash from operations was $291.1 in the first nine months, versus $409.3 in 2016. Investing cash use was $440.4 and financing provided $72.9; cash ended at $202.2, down from $278.5 at year-end 2016.
- At September 30, HEI had total assets of $12.74 billion and shareholders’ equity of $2.10 billion. Excluding bank deposits and other bank borrowings, reported capital structure was 43% long-term debt, 1% subsidiary preferred stock and 56% common equity. Non-bank short-term borrowings were $24.5 and long-term debt was $1.62 billion.
- HEI’s $150 million revolving credit facility was undrawn at quarter-end; commercial paper outstanding was $19 million. Management stated that available internal and external funding was adequate for foreseeable requirements.
Electric utility and bank highlights
- Hawaiian Electric Q3 revenue was $598.8 versus $572.3; operating income was $87.1 versus $89.8; net income for common stock was $47.5 versus $47.0. For nine months, revenue was $1.674 billion versus $1.550 billion, operating income $191.1 versus $215.8, and common-stock net income $94.6 versus $108.2.
- Utility revenue growth largely reflected higher fuel oil prices and purchased-power costs, which are generally passed through to customers under adjustment clauses. Nine-month fuel expense increased to $431.8 from $334.3, while purchased-power expense rose to $440.5 from $412.7. Utility kilowatt-hour sales declined year over year; management expected full-year 2017 sales below 2016.
- Utility cash from operations was $229.9 for the first nine months, down from $275.3. Capital expenditures were $278.0, partly offset by $40.6 of customer construction contributions. Quarter-end utility cash was $10.0; long-term debt was $1.319 billion and short-term borrowings were $6 million. The $200 million utility credit facility was undrawn.
- ASB Q3 net income increased to $17.6 from $15.1; nine-month net income rose to $50.1 from $41.1. Nine-month net interest margin improved to 3.68% from 3.59%; provision for loan losses fell to $7.2 from $15.3.
- ASB had $6.62 billion in assets, $5.75 billion in deposits and $4.62 billion in net loans at September 30. Its allowance for loan losses was $53.0 million. Delinquencies increased to 0.60% from 0.51% a year earlier, and the annualized nine-month net charge-off ratio rose to 0.27% from 0.19%. ASB reported regulatory capital ratios above minimum requirements and approximately $1.9 billion of unused Federal Home Loan Bank borrowing capacity.
Material changes versus prior comparable period
- HEI’s lower net income primarily reflects the absence of the $90 million merger termination fee recognized in Q3 2016. The prior-year period also included related tax benefits; 2016 merger and spin-off proceeds and expenses make reported earnings comparisons less representative of ongoing performance.
- Utility nine-month operating income declined as higher fuel and purchased-power costs, operating expenses and lower RAM revenues outweighed revenue growth. Higher fuel costs are generally recoverable through customer tariffs, but timing and regulatory mechanisms affect results and cash flows.
- ASB’s earnings improved with higher net interest income and lower loan-loss provisions. Consumer-loan charge-offs increased, and the bank reported higher delinquency and net charge-off ratios.
- Utility capital investment increased: HEI consolidated capital expenditures were $314.4 million for the first nine months, compared with $259.2 million in 2016.
Outlook, management commentary, risks and unusual items
- HEI said it currently expects to maintain its dividend at the present level; the board reviews the dividend quarterly. The nine-month 2017 payout ratio was 76%, versus 54% for full-year 2016.
- The Utilities forecast $400 million of net capital expenditures for 2017. They are pursuing grid upgrades and renewable resources toward Hawaii’s statutory 100% renewable portfolio standard by 2045; the Utilities reported an approximately 26% renewable portfolio standard for 2016 and a 30% target for 2020.
- Hawaiian Electric’s pending rate case requested a $106.4 million annual revenue increase. Maui Electric filed a 2018 test-year request for $30.1 million; Hawaii Electric Light had received a $9.9 million interim increase, subject to refund. These are regulatory requests or interim amounts, not final guaranteed recoveries.
- Management cited continued pressure from declining electricity sales, customer-sited solar and energy efficiency, fuel prices, rate-case outcomes, renewable integration and generation capacity. Maui Electric identified potential reserve-capacity needs as older generation approaches retirement.
- HEI formed subsidiaries that agreed to acquire a 60-MW Hamakua power plant; closing was expected later in 2017. The plant’s existing power purchase agreement with Hawaii Electric Light runs through 2030.
- Unusual item: the Utilities reversed $24.4 million of asset-retirement-obligation liabilities in Q3 after revising estimated removal costs; the filing says this had no impact on utility net income.
- Environmental matters include recorded reserves of $4.9 million for Waiau PCB investigation and remediation and $3.1 million for the former Molokai site. Final remediation costs and potential responsibility for Pearl Harbor sediment contamination remain uncertain. The Utilities stated that pending legal liabilities were not expected to be material to financial position, while acknowledging possible effects on a particular period’s results or liquidity.
- HEI disclosed that the PUC’s approval of a proposed Hu Honua biomass PPA was appealed by a third party. The project was expected online by the end of 2018. The filing also notes possible future consolidation of certain IPPs if additional information changes the VIE assessment.
Most important facts for investors to verify
- How much of utility revenue and earnings growth reflects recoverable fuel and purchased-power costs versus underlying returns, and how the pending rate cases affect allowed returns and cost recovery.
- Whether the Utilities’ $400 million 2017 capital-expenditure forecast, major projects and related PUC recovery proceed on schedule and within approved cost limits.
- Whether ASB’s rising delinquency and charge-off measures, particularly in consumer lending, remain manageable and whether loan-loss provisions continue to decline.
- The timing, financing and terms of the Hamakua plant acquisition, and any resulting effects on utility operations or consolidated debt.
- Updates on environmental investigations, PPA disputes and appeals, and any material change in associated reserves or contingencies.