HAWAIIAN ELECTRIC INDUSTRIES INC quarterly report, Q2 FY2020

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Hawaiian Electric Industries, Inc. — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020. Amounts are in millions of dollars unless otherwise noted. HEI’s consolidated results include Hawaiian Electric, American Savings Bank (ASB), and other businesses; Hawaiian Electric is wholly owned by HEI.

Business context and financial results

  • HEI consolidated, Q2: Revenue was $608.9, down 15% year over year; operating income was $71.6, down 1%; net income for common stock was $48.9, up 15%; diluted EPS was $0.45 versus $0.39.
  • HEI consolidated, first half: Revenue was $1,286.1, down 7%; operating income was $131.3, down 13%; net income for common stock was $82.3, down 7%; diluted EPS was $0.75 versus $0.81.
  • Electric utilities, Q2: Revenue was $534.2 versus $633.8; operating income was $67.8 versus $55.7; net income for common stock was $42.3 versus $32.6. First-half revenue was $1,131.7 versus $1,212.3, while net income was $66.2 versus $64.7.
  • ASB, Q2: Net interest income was $56.7 versus $61.5; provision for credit losses was $15.1 versus $7.7; net income was $14.0 versus $17.0. First-half net income was $29.8 versus $37.9. Net interest margin was 3.21% for Q2 and 3.46% for the first half, compared with 3.82% and 3.90%, respectively, in 2019.
  • Cash flow, first half: HEI generated $197.4 from operations, used $629.3 in investing, and received $808.0 from financing. Hawaiian Electric generated $181.5 from operations and spent $186.5 on capital expenditures.
  • Balance sheet at June 30: HEI had assets of $14,480.7, cash and cash equivalents of $574.5, long-term debt other than bank debt of $2,070.2, and shareholders’ equity of $2,291.4. ASB deposits were $7,030.0. Hawaiian Electric had long-term debt, including current maturities, of approximately $1,575.0 and common equity of $2,060.1.

Material changes versus the prior comparable period

  • COVID-19-related business closures and travel restrictions sharply reduced electricity demand: utility kWh sales fell 11.6% in Q2. Lower fuel and purchased-power costs helped reduce utility expenses, while rate, performance-incentive, and major-project recovery revenues supported Q2 utility earnings.
  • ASB’s earnings were pressured by lower asset yields and a higher credit-loss provision. Higher mortgage production and a $9.3 pretax gain from selling Visa Class B shares and investment securities partly offset those effects. The gain is an unusual, nonrecurring contributor to HEI’s results.
  • HEI’s first-half consolidated results also reflected the bank segment’s lower operating income; stronger utility income and reduced losses in “Other” partly offset the decline.
  • HEI cash and cash equivalents increased from $196.8 at December 31, 2019, while total assets increased from $13,745.3. ASB deposits grew 12% and net loans held for investment grew 6% from year-end.

Outlook, management commentary, risks, and contingencies

  • Management said the pandemic’s duration and financial effects remain uncertain. The Utilities forecast full-year 2020 electricity sales 6%–12% below 2019 levels; decoupling is intended to separate utility revenues from sales volumes, but collections can be delayed. Management expected the 2020 renewable portfolio standard result to be near, but above, the 30% statutory requirement.
  • The Hawaiian Electric 2020 rate-case settlement proposed no increase in electric revenues over 2017 test-year levels and was awaiting PUC approval. Hawaii Electric Light’s final 2019 test-year rates were subsequently ordered to remain at current levels, with no increase. The PUC also ended the mandatory triennial rate-case cycle.
  • The PUC authorized deferral of specified COVID-19 costs; the Utilities recorded $6.5 in regulatory assets at June 30. Recovery, timing, and carrying costs remain subject to future review. The Utilities had suspended customer disconnections through September 1, 2020, and expected pandemic-related bad debt and working-capital pressures.
  • ASB’s allowance for credit losses was $81.3 at June 30, versus $53.4 at year-end 2019. About 13% of outstanding loans had short-term COVID-19 modifications; these were generally current when modified and were not classified as past due or troubled debt restructurings under applicable relief. Credit quality remains exposed to the economic downturn, and reported delinquency measures exclude those modified loans.
  • Liquidity measures included new or expanded short-term facilities and $160 of utility private-placement notes. At June 30, HEI had $150 of undrawn committed capacity, Hawaiian Electric had $275, and ASB reported approximately $2.2 billion of unused FHLB capacity. HEI expected to maintain its dividend at the then-current level, subject to quarterly board review; the first-half payout ratio was 88%.
  • The Utilities forecast up to $1.3 billion of net capital expenditures for 2020–2022. Key risks include prolonged economic weakness, delayed customer collections, financing-market access and cost, bank credit deterioration and reduced net interest margins, regulatory decisions, renewable-project execution, and supplier or independent power producer performance.
  • Notable contingencies include environmental remediation reserves of $2.7 for a former Molokai site and $4.8 for Pearl Harbor sediment investigation and cleanup. Separately, a July 9, 2020 PUC order denied the request to waive Hu Honua’s amended PPA from competitive bidding requirements; a reconsideration motion was pending. Management did not expect pending legal matters overall to materially affect financial position, but could not rule out effects on a particular period’s results or liquidity.

Important facts for investors to verify

  • Whether COVID-19 sales weakness, customer arrears, and the eventual recovery of deferred utility costs materially affect cash flow and regulatory-asset recovery.
  • How ASB’s credit-loss allowance, loan modifications, charge-offs, and commercial real estate and consumer exposures evolve as economic conditions change.
  • Whether the bank’s lower net interest margin persists, and how much of reported earnings depended on the $9.3 securities-sale gain and elevated mortgage-banking activity.
  • PUC decisions on the Hawaiian Electric rate settlement, performance-based regulation, renewable procurement, and cost recovery; also track project delays and the Hu Honua proceeding.
  • Actual capital spending, debt issuance, available borrowing capacity, and dividend decisions relative to management’s liquidity plans and the $1.3 billion 2020–2022 capital forecast.