Hawaiian Electric Industries, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results cover HEI and its subsidiaries, including Hawaiian Electric utilities and American Savings Bank (ASB). Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| HEI consolidated | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $641.4 | $770.9 | $1,927.6 | $2,148.0 |
| Operating income | $99.6 | $96.7 | $230.8 | $247.2 |
| Net income attributable to common stock | $65.0 | $63.4 | $147.3 | $151.6 |
| Diluted EPS | $0.59 | $0.58 | $1.35 | $1.39 |
- Q3 revenue declined 17% year over year, while common net income rose 3%; for the first nine months, revenue fell 10% and common net income fell 3%.
- Electric utilities: Q3 revenue was $562.6 versus $688.3; operating income increased to $88.5 from $71.8 and common net income to $60.1 from $46.8. Nine-month revenue was $1,694.2 versus $1,900.6; common net income rose to $126.3 from $111.5.
- ASB: Q3 net income declined to $12.2 from $22.9; nine-month net income declined to $41.9 from $60.7. Nine-month bank operating income was $43.4 versus $75.7.
- ASB’s net interest margin was 3.12% in Q3, down from 3.82%; nine-month margin was 3.34%, down from 3.87%. The bank’s provision for credit losses rose to $39.5 for nine months from $17.9, including $14.0 in Q3 versus $3.3 a year earlier.
Cash flow, balance sheet and liquidity
- HEI operating cash flow for the first nine months was $312.3, down from $341.4. Investing used $1,144.6 versus $373.4, including $296.2 of capital expenditures and substantial ASB securities purchases and loan growth. Financing provided $819.7 versus $39.8, supported by deposit growth and debt issuance.
- At September 30, HEI had assets of $14.54 billion, cash and cash equivalents of $193.1, short-term nonbank borrowings of $137.8, nonbank long-term debt of $2.07 billion, and bank borrowings of $151.9. ASB deposits were $7.04 billion; consolidated deposit liabilities are principally a bank funding source.
- HEI reported $150 million of unused revolving capacity; Hawaiian Electric reported $275 million of unused capacity. ASB reported approximately $2.0 billion of unused FHLB borrowing capacity. Management said liquidity was adequate, while noting COVID-19 uncertainty.
- HEI’s capital expenditures were $296.2 for nine months. Utilities forecast up to $1.3 billion of net capital expenditures for 2021–2023.
- HEI paid $108.1 in common dividends during the first nine months. The payout ratio was 73%; management expected to maintain the dividend at its then-current level, subject to quarterly board review.
Key changes and unusual items
- Utility results benefited from substantially lower fuel and purchased-power costs, lower operating and maintenance expense, and higher rates and interim project-recovery revenue. These factors more than offset reduced electricity demand and revenue.
- Utility kilowatt-hour sales declined 13.1% in Q3 and 7.3% for nine months. Average fuel-oil cost per barrel fell to $49.71 in Q3 from $82.30.
- ASB recognized a $9.3 gain on investment-security sales in the first nine months, including sale of its Visa Class B shares and other securities. Higher mortgage-banking income partly offset lower interest income, increased credit-loss provision, and COVID-related costs.
- HEI adopted the expected-credit-loss standard on January 1, 2020. The adoption increased the allowance for credit losses by approximately $21 million and reduced retained earnings by $15.4 million after tax. ASB’s allowance for credit losses was $91.5 at September 30, versus $53.4 at year-end 2019.
- HEI assessed ASB goodwill for impairment after a COVID- and rate-related triggering event; no impairment was recorded, and estimated fair value exceeded carrying value by more than 35%.
Outlook, commentary and risks
- The Utilities expected full-year 2020 electricity sales to be 6%–12% below 2019 levels and expected to exceed the statutory 30% renewable portfolio standard for 2020. Decoupling helps stabilize utility revenue, but collection timing can lag sales changes.
- Hawaiian Electric’s 2020 rate-case settlement, approved by the PUC on October 22, 2020, provided for no increase in base rates. The order set a 9.5% allowed return on common equity and a 7.37% return on rate base. Management’s planned cost reductions are important to offset the absence of a rate increase.
- The PUC authorized deferral of certain COVID-related utility expenses; $12.4 was recorded as regulatory assets at September 30. Future recovery remains subject to PUC review. Customer disconnections for nonpayment were suspended through December 31, 2020, creating potential pressure on receivables and cash collections.
- ASB reported that approximately 3% of loans had short-term COVID-related modifications at September-end; these were generally current when modified and excluded from past-due and TDR classifications under applicable relief. ASB had secured more than $370 million of PPP loans for about 4,100 small businesses. It warned that PPP compliance failures could jeopardize federal guarantees.
- Management cited Hawaii’s economic downturn, tourism weakness, elevated unemployment, lower bank interest margins, credit deterioration, regulatory recovery, renewable-project execution, market access and interest-rate sensitivity as material uncertainties. The filing provides no firm consolidated earnings guidance.
- Subsequent events include $115 million of utility notes executed October 29, 2020, with funding available by January 15, 2021, and a $50 million HEI note placement expected to be drawn by December 29, 2020. The PUC also approved a 50-year Army distribution-system contract after quarter-end; its earnings impact was expected to be immaterial.
Important facts for investors to verify
- Whether the Utilities can deliver cost savings and maintain adequate liquidity amid weak sales, delayed collections and no base-rate increase.
- Future ASB credit performance, reserve adequacy and loan outcomes as COVID-related relief and modifications run their course.
- ASB’s ability to sustain earnings as low rates pressure net interest margin, and the sensitivity of its economic value of equity to rate changes.
- PUC treatment and timing of recovery for deferred COVID costs, project spending and other regulatory balances.
- Progress and economics of renewable-energy projects, including permitting, interconnection, contract execution and the Utilities’ renewable-target performance.