Business context and reporting period
Hawaiian Electric Industries, Inc. (HEI) filed this unaudited Form 10-Q for the three months ended March 31, 2014, with comparative results for Q1 2013. HEI’s principal businesses are its regulated Hawaiian electric utilities and American Savings Bank (ASB).
Key financial metrics
Unless noted, amounts are HEI consolidated and in millions of dollars.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $783.7 | $782.2 |
| Operating income | $88.3 | $68.8 |
| Net income attributable to common stock | $45.9 | $33.7 |
| Diluted EPS | $0.45 | $0.34 |
| Dividend per common share | $0.31 | $0.31 |
| Operating cash flow | $19.4 | $48.3 |
| Capital expenditures | $65.8 | $71.0 |
- HEI operating margin was approximately 11.3%, versus 8.8% a year earlier. Electric utility operating income rose to $70.7 million from $51.1 million; bank operating income was approximately flat at $21.6 million.
- HEI total assets were $10.46 billion at March 31, 2014. Cash and cash equivalents were $269.1 million, up from $220.0 million at year-end 2013.
- HEI had $136.4 million of short-term nonbank borrowings and $1.49 billion of long-term nonbank debt. Bank deposits were $4.48 billion and other bank borrowings were $244.6 million. HEI’s reported capital structure excluding deposits and other bank borrowings was 51% common equity, 44% long-term debt, 4% short-term borrowings and 1% subsidiary preferred stock.
- Cash flow: investing used $74.2 million, while financing provided $103.9 million, principally from higher deposits and short-term borrowings. The filing states that operating cash flow declined year over year; working-capital movements, including fuel oil stock, regulatory assets, taxes and other assets and liabilities, affected the comparison.
- ASB’s net interest income was $44.1 million, net interest margin was 3.64% (3.78% in Q1 2013), and net income was $14.5 million versus $14.2 million. Loans held for investment, net, were $4.15 billion; deposits were $4.48 billion. Nonperforming loans were $46.3 million, and the allowance for loan losses was $40.9 million, or 0.98% of loans.
- For Hawaiian Electric, revenue was $720.1 million and net income for common stock was $35.4 million, compared with $717.4 million and $24.4 million, respectively. Utility operating margin was approximately 9.8%, versus 7.1%.
Material changes versus the prior comparable period
- HEI common-stock net income rose 36% and diluted EPS rose 32%, mainly reflecting higher utility operating income and construction-related equity allowances. Revenue was nearly unchanged.
- Utility operating income improved as fuel oil expense fell $18.8 million and O&M expense fell $13.2 million, partly offset by a $11.6 million increase in purchased power and higher depreciation. Utility kilowatthour sales increased about 1.5% in the quarter.
- ASB’s loan-loss provision decreased to $1.0 million from $1.9 million, while mortgage banking income declined and a $2.8 million gain on sale of securities partly offset lower noninterest income. ASB’s net interest margin compressed.
- HEI operating cash flow fell to $19.4 million from $48.3 million. Utility operating cash flow was only $0.6 million, compared with $53.5 million, reflecting cash timing and working-capital items.
- HEI revised the presentation of Q1 2013 income statement figures and corrected certain prior balance-sheet disclosures. The filing says the revisions did not affect previously reported net income or cash flows and were not material.
Outlook, management commentary, risks and unusual items
- HEI said it currently expects to maintain its dividend at $0.31 per share; the board reviews the dividend quarterly. No earnings guidance was provided in the filing.
- Management believes HEI and Hawaiian Electric have adequate liquidity for foreseeable requirements. HEI’s consolidated ROACE was 10.4% for the twelve months ended March 31, 2014, versus 8.5% in the prior-year period. Utility returns remained below PUC-allowed levels; management estimated a 100–130 basis-point structural gap for 2014–2016.
- Utility decoupling changes ordered by the PUC reduced the interest rate applied to outstanding revenue-balancing-account balances from 6% to utility-specific short-term debt rates of 1.25%–3.25%, and modified the rate-base revenue adjustment. Further PUC review remained pending.
- April 2014 PUC orders, after quarter-end, rejected the Utilities’ integrated resource plan and required power-supply improvement plans and demand-response planning. They also directed additional filings on grid reliability and distributed generation.
- Utilities expected electricity sales to decline further in 2014 and 2015 as customer solar generation and energy efficiency expand. Management projected 2014 O&M expense to be relatively flat with 2013 and said Hawaiian Electric’s generation capacity was sufficient for expected demand through 2016; Maui Electric anticipated additional firm capacity needs around 2016.
- On April 28, 2014, the IRS approved a change to recognize revenue-balancing-account revenues for income-tax purposes when collected rather than accrued. Management expects improved cash flow from deferred tax payments in 2014.
- Key exposures include fuel-price volatility, dependence on purchased power and renewable integration, PUC rate and cost-recovery decisions, lower utility sales, and ASB interest-rate and credit risks. Potential environmental compliance costs could be material but were not estimable. The DOJ had raised potential Clean Air Act violations involving two subsidiary power plants; the utilities could not estimate any settlement. A former Molokai generation-site cleanup reserve was $3.6 million, with final costs dependent on ongoing investigation.
- ASB’s overdraft-fee class action remained pending, with outcome and reasonably possible loss indeterminable. HEI also disclosed a subsequent $125 million two-year term loan, drawn May 2, 2014, primarily to repay $100 million of notes maturing May 5, 2014.
Important facts for investors to verify
- Whether utility earnings and cash generation remain resilient as electricity sales decline and PUC decoupling rules and rate proceedings evolve.
- How the PUC’s April 2014 resource-planning and reliability directives affect capital spending, renewable additions, and cost recovery.
- ASB’s loan quality, allowance adequacy, deposit costs, and net interest margin under changing interest rates; also monitor the impact of debit-card interchange restrictions.
- Potential environmental compliance and Clean Air Act settlement costs, which the filing says are not currently determinable.
- Execution and financing of planned utility investments, and the effect of HEI’s borrowings and remaining equity-forward settlement on leverage and share dilution.