Hawaiian Electric Industries, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. HEI’s consolidated results include Hawaiian Electric’s regulated utilities and American Savings Bank (ASB). Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| HEI revenue | $637.9 | $783.7 | Down 19% |
| HEI operating income | $69.5 | $89.2 | Down 22% |
| HEI net income for common stock | $31.9 | $45.8 | Down 30% |
| HEI diluted EPS | $0.31 | $0.45 | Down 31% |
| HEI operating cash flow | $76.7 | $19.4 | Higher |
| Hawaiian Electric revenue | $573.4 | $720.1 | Down 20% |
| Hawaiian Electric net income for common stock | $26.9 | $35.4 | Down 24% |
| ASB net income | $13.5 | $14.4 | Down 6% |
HEI’s electric utility revenue fell primarily with lower fuel prices, lower purchased-power costs and reduced electricity generation; these cost reductions also lowered customer-billed revenue. Utility operating income nevertheless declined as higher operations and maintenance costs more than offset lower expenses. HEI’s other segment recorded an $8.5 million common-stock loss, including higher merger-related and charitable contribution expenses.
ASB reported net interest income of $45.5 million versus $44.1 million, while net interest margin declined to 3.52% from 3.64%. Its return on average assets was 0.96% (1.09% prior year), and return on average equity was 9.96% (10.94%).
Cash, debt and liquidity
- HEI consolidated cash and cash equivalents were $292.2 million at March 31, up from $175.5 million at year-end. Operating cash flow was $76.7 million; investing cash outflow was $87.8 million, including $59.0 million of capital expenditures; financing cash inflow was $127.8 million, including $104.5 million from settling the remaining equity-forward shares.
- HEI total assets were $11.27 billion and total liabilities $9.34 billion. Long-term debt excluding bank borrowings was $1.51 billion; short-term borrowings excluding bank borrowings were $30.5 million. HEI had a $150 million credit facility, undrawn at April 30, 2015.
- Hawaiian Electric had $1.21 billion of long-term debt and $30 million of short-term borrowings at quarter-end. Its $200 million credit facility was undrawn at March 31; it reported $45 million of commercial paper outstanding at April 30. Utility operating cash flow was $32.9 million, capital expenditures $54.4 million, and cash at quarter-end $8.1 million.
- ASB deposits totaled $4.75 billion and other borrowings $312.1 million. ASB reported $1.3 billion of unused FHLB borrowing capacity and $1.8 billion of borrower commitments, unused lines and letters of credit. Its March 31 capital ratios exceeded stated minimums: Tier 1 leverage 8.9%, common equity Tier 1 12.1%, Tier 1 12.1%, and total capital 13.2%.
Material changes and outlook
- HEI’s Q1 dividend remained $0.31 per share; the quarterly payout ratio was 100%. Management expected to maintain the dividend at its current level, subject to quarterly board review.
- Utilities’ 2015–2017 net capital expenditure forecast was reduced to $0.8–$1.7 billion from $1.1–$2.0 billion. The 2015 forecast fell to $250 million from $420 million; management said no HEI equity infusion was expected for the utility in 2015. Rate-base growth was estimated at 1.5%–3.0%. The utilities expected that internally generated cash after dividends would not cover forecast net capital expenditures over the three-year period, requiring debt and/or equity financing.
- Utilities’ electricity sales have declined annually since 2007, and management expected 2015 sales to fall below 2014 levels, partly due to customer renewable generation and energy efficiency. O&M expense, excluding specified surcharges and third-party-covered costs, was projected to rise 2% in 2015.
- The PUC’s March 31 decoupling order capped the RAM using a GDP price index-based limit, subject to exceptions and project-specific recovery requests. Revised 2015 annual incremental RAM revenues for the three utilities were $26.2 million, versus $31.6 million under the prior calculation. PUC review of the related tariff filings remained pending.
- The proposed NextEra Energy merger would exchange each HEI share for 0.2413 NextEra shares; the agreement also contemplated an ASB Hawaii spin-off and a $0.50-per-share special dividend immediately before closing. Shareholder approval and several regulatory and other conditions remained outstanding. The HEI shareholder meeting was scheduled for May 12, 2015; FERC had authorized the merger, while the Hawaii PUC proceeding continued. Merger-related shareholder litigation was pending.
Risks, contingencies and unusual items
- Key utility risks include PUC decisions on rates, decoupling and power-supply plans; reliability and generation shortfalls; renewable-energy integration and curtailment; fuel costs and supply; and possible delays or disallowance of cost recovery.
- Environmental requirements could require material capital and compliance spending, though amounts and timing were not determinable. The EPA denied Hawaiian Electric’s request for reconsideration of Mercury and Air Toxics Standards on April 21, 2015. DOJ negotiations concerning alleged Clean Air Act violations at two neighbor-island plants included a proposed consent decree; potential costs were not estimable.
- Hawaiian Electric recorded reserves of $3.6 million for investigation and estimated cleanup at the former Molokai electric site and $0.8 million for further investigation of PCB contamination offshore of Waiau. The extent of contamination, responsibility and ultimate remediation costs remained uncertain.
- ASB’s $2.0 million tentative settlement of a debit-card overdraft-fee class action was fully reserved, pending final court approval. ASB’s $13 million of loans collateralized by property in areas potentially affected by lava flows were being monitored; the impact beyond an existing $1.8 million commercial-loan reserve was uncertain.
- HEI’s effective tax rate rose to 38% from 36%, principally due to nondeductible merger expenses and adoption of a housing-credit accounting standard. HEI issued 4.7 million shares under its equity forward, receiving $104.5 million in proceeds.
- Other material risks include interest-rate sensitivity at ASB, credit quality, pension funding, cyber incidents, severe weather and natural disasters, and the possibility that proposed merger approvals or closing conditions are not satisfied.
Important facts for investors to verify
- Progress, approvals, litigation and closing conditions for the NextEra merger, ASB spin-off and contemplated special dividend.
- PUC decisions on the revised RAM tariffs, utility power-supply and distributed-generation plans, and future rate recovery.
- Whether lower capital spending and projected utility returns are sustained, and how the forecast financing shortfall is funded.
- ASB loan performance, allowance adequacy, deposit costs, interest-rate exposure and capital levels.
- Final costs and potential liabilities from environmental matters, Clean Air Act negotiations and other contingencies.