Hawaiian Electric Industries, Inc. (HEI) — Q3 2019 Form 10-Q
Business context and period. This combined filing covers HEI and its wholly owned electric utility subsidiary, Hawaiian Electric Company, Inc. (the Utilities), for the quarter and nine months ended September 30, 2019. HEI’s principal businesses are electric utilities and American Savings Bank (ASB). Amounts below are in millions of dollars unless noted.
Key financial results
| HEI consolidated | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $771.5 | $768.0 | $2,148.6 | $2,099.2 |
| Operating income | $97.3 | $98.1 | $247.9 | $248.8 |
| Net income attributable to common stock | $63.4 | $65.9 | $151.6 | $152.2 |
| Diluted EPS | $0.58 | $0.60 | $1.39 | $1.40 |
- Cash flow: In the first nine months, HEI generated $341.4 operating cash flow, used $373.4 in investing activities and generated $39.8 in financing activities. Capital expenditures were $332.3; cash and equivalents ended at $177.0.
- Debt and equity: At September 30, HEI reported $163.8 short-term borrowings and $1,885.5 long-term debt, excluding bank deposits and other bank borrowings; shareholders’ equity was $2,242.7. Its $150 million revolving credit facility was undrawn. HEI’s capital structure, on that basis, was 47% debt, 1% subsidiary preferred stock and 52% common equity.
- Utility: Hawaiian Electric’s Q3 revenue was $688.3 and net income for common stock was $46.8, versus $49.7 a year earlier. Nine-month revenue was $1,900.6 and common-stock net income was $111.5, versus $108.4. Utility operating income was $71.8 in Q3 and $184.0 year to date. Nine-month operating cash flow was $282.6, capital expenditures $297.8, and ending cash $32.5. Utility long-term debt, net, was $1,322.3, with $96.0 current long-term debt and $112.4 short-term borrowings.
- Bank: ASB’s Q3 net income rose to $22.9 from $21.2; nine-month net income was essentially unchanged at $60.7. Nine-month net interest margin was 3.87%, up from 3.78%. At September 30, assets were $7,135.3, net loans $5,031.3, deposits $6,196.2 and the allowance for loan losses $53.0. ASB was reported well-capitalized, with a 12.8% common equity Tier 1 ratio.
Material changes and management commentary
- HEI revenue increased 2% for the first nine months, while common-stock net income was nearly flat. Q3 common-stock income declined 4%, reflecting lower utility income and larger “other” segment losses, partly offset by bank growth.
- Utility nine-month revenue rose $34.6, largely from higher rates and Schofield Generating Station interim recovery. Higher O&M and depreciation partly offset revenue gains. Electricity sales for the first nine months were lower year over year; management expected full-year sales to be approximately level with 2018, with decoupling mechanisms intended to separate revenues from sales volume.
- ASB’s loan portfolio grew, while its investment securities portfolio declined as repayments were used to fund loan growth. Its nine-month loan-loss provision increased to $17.9 from $12.3, and annualized net charge-offs rose to 0.46% from 0.33%; the filing attributes the increase partly to consumer credit losses and a partial charge-off of a commercial credit. Delinquency rates declined to 0.41% from 0.52%.
- HEI said its liquidity was adequate for forecast obligations and expenditures and expected to maintain its dividend at the current level, subject to quarterly Board review. No earnings guidance is provided in the supplied filing text. Utilities forecast up to $2.1 billion of net capital expenditures for 2019–2023.
Outlook, risks and notable items
- Hawaiian Electric filed a 2020 test-year rate case seeking a $77.6 million increase (4.1% over current effective rates); the request remained subject to PUC review. A separate Hawaii Electric Light rate case also had unresolved issues. The PUC’s performance-based regulation proceeding may change future utility rates, incentives and earnings-sharing arrangements.
- The Utilities continued renewable-energy procurement and grid-modernization programs. A second-stage procurement process sought approximately 900 MW of renewable energy and storage. Project execution, permitting, cost recovery and integration of intermittent renewables remain risks.
- PGV’s geothermal facilities remained offline following the 2018 lava event; the reported financial effect had not been material. The Hu Honua biomass PPA returned to PUC proceedings after a Hawaii Supreme Court remand requiring further consideration, including greenhouse-gas effects and cost reasonableness.
- ASB planned to adopt the expected-credit-loss standard in Q1 2020 and anticipated an increase in its loan-loss allowance; the amount was not yet clear. HEI adopted lease accounting in 2019, recognizing operating lease assets and liabilities; the filing identified approximately $174 million of utility PPA lease liabilities at September 30.
- Environmental reserves included $2.7 million for the former Molokai generation site and $4.4 million for the Pearl Harbor sediment matter. Management did not expect pending legal proceedings to materially affect financial position, but could not exclude a material effect on a future period’s results or liquidity.
- Subsequent events: ASB completed an office-building sale in October, expecting an approximately $8.8 million pretax gain in Q4. The Utilities also issued $80 million of long-term special-purpose revenue bonds on October 10. Moody’s revised HEI and Hawaiian Electric outlooks to positive in October while affirming their cited ratings.
Important facts for investors to verify
- PUC outcomes and timing for Hawaiian Electric’s requested rate increase, Hawaii Electric Light’s rate case and the broader performance-based regulation proceeding.
- Whether renewable projects, grid investments and planned capital spending proceed on schedule and qualify for anticipated cost recovery.
- ASB credit trends, especially consumer and commercial exposures, and the allowance increase upon adoption of the expected-credit-loss standard.
- Funding needs, debt maturities and liquidity across HEI, the Utilities and ASB; note that utility and bank liquidity are not interchangeable.
- Final remediation costs for environmental matters and the eventual resolution of the Hu Honua and PGV proceedings.