Hawaiian Electric Industries, Inc. (HEI) — Q1 2019 Form 10-Q
Business context and reporting period. This combined, unaudited filing covers the three months ended March 31, 2019, and reports HEI and its wholly owned electric utility subsidiary, Hawaiian Electric, separately. HEI’s main businesses are the electric utilities and American Savings Bank (ASB). Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| HEI revenue | $661.6 | $645.9 | +2% |
| HEI operating income | $77.9 | $71.9 | +8% |
| HEI net income for common stock | $45.7 | $40.2 | +14% |
| HEI diluted EPS | $0.42 | $0.37 | +14% |
| Hawaiian Electric revenue | $578.5 | $570.4 | +1% |
| Hawaiian Electric net income for common stock | $32.1 | $27.5 | +17% |
| ASB net income | $20.8 | $19.0 | +10% |
- HEI’s common-stock earnings benefited from higher utility and bank income, partly offset by a larger loss in the “other” segment. The effective tax rate fell to 20% from 24%, primarily reflecting amortization of excess deferred taxes under the Tax Act and higher nontaxable bank-owned life insurance income.
- ASB’s net interest margin increased to 3.99% from 3.76%. Net interest income rose to $63.7 million from $58.5 million, while its loan-loss provision increased to $6.9 million from $3.5 million.
- HEI operating cash flow was $77.2 million, compared with $34.7 million in Q1 2018. Investing cash use was $83.0 million, mainly for capital expenditures and bank lending; financing provided $23.0 million. Cash and equivalents were $186.4 million at quarter-end.
- Hawaiian Electric generated $69.4 million of operating cash, used $102.1 million in investing activities, including $102.9 million of capital expenditures, and received $5.2 million from financing activities. Utility cash and equivalents were $8.4 million at March 31.
- At March 31, HEI had $1.88 billion of long-term debt and $110.4 million of short-term borrowings excluding bank borrowings. Hawaiian Electric had $1.42 billion of long-term debt and $56.0 million of short-term borrowings. These figures exclude ASB deposit liabilities, which were $6.21 billion.
- HEI and Hawaiian Electric had no outstanding amounts under their respective $150 million and $200 million revolving credit facilities. ASB reported approximately $2.1 billion of unused FHLB borrowing capacity and regulatory capital ratios above applicable “well-capitalized” thresholds.
Material changes versus the prior comparable period
- Utility operating income rose to $56.6 million from $51.4 million. Higher rates, major-project interim recovery and renewable-procurement incentives supported revenue; lower electricity sales partly offset those gains. Utility O&M and depreciation costs increased.
- Utility fuel-oil and purchased-power expenses declined year over year. The Utilities attributed lower kWh sales to energy efficiency, customer-sited renewable generation, and cooler, less humid weather.
- ASB’s revenue growth reflected higher loan balances and yields, higher investment-securities yields and increased bank-owned life insurance income. Higher deposit costs, operating expenses and credit-loss provisions partly offset the improvement.
- ASB’s delinquency ratio rose to 0.63% from 0.44% a year earlier, and its annualized net charge-off ratio increased to 0.39% from 0.28%. Nonaccrual loans were $40.2 million, up from $27.3 million at December 31, 2018.
- HEI adopted the new lease accounting standard on January 1, 2019. It recognized approximately $257 million of lease liabilities at adoption; Hawaiian Electric’s March 31 balance sheet included $221.3 million of operating-lease right-of-use assets and $221.1 million of lease liabilities, including liabilities associated with power purchase agreements.
- HEI’s common dividend was $0.32 per share for the quarter, versus $0.31 in Q1 2018. HEI’s reported quarterly dividend payout ratio was 76%, compared with 67% for full-year 2018.
Outlook, management commentary, risks and unusual items
- Management said it expects to maintain HEI’s dividend at its current level, subject to quarterly Board review. The filing does not provide earnings or EPS guidance.
- The Utilities expect 2019 kWh sales to be below 2018 levels, but stated that decoupling separates revenues from sales volume. Hawaii’s renewable portfolio standard targets 100% renewable energy by 2045.
- The Utilities forecast up to $2.2 billion of net capital expenditures for 2019–2023. HEI management stated that internally generated cash and access to equity, debt, commercial paper and bank borrowing should be adequate to fund foreseeable needs.
- Six renewable-energy contracts were approved by the PUC in March 2019; two additional contracts remained pending. The approved contracts’ projected annual payments totaled $54.9 million, with $7.7 million for pending contracts.
- The PUC’s performance-based regulation proceeding continued, with a Phase 1 decision pending. Maui Electric’s final rate schedules were proposed to take effect June 1, 2019, including a final increase of $12.2 million; approximately $0.5 million of interim-rate revenue was proposed for refund.
- The Utilities’ ERP/EAM system went live in October 2018. The PUC requires at least $244 million of customer benefits over its 12-year service life; $58.7 million of deferred project costs and carrying costs were recorded at March 31, 2019.
- Hawaii Electric Light’s Puna Geothermal Venture (PGV) supplier remained offline after 2018 lava flows. The Utilities reported no material financial impact to date and entered a rebuild agreement with PGV in March 2019.
- Key risks include PUC decisions and cost recovery, renewable-resource integration and supply reliability, fuel prices, weather and natural disasters, banking credit quality and deposit competition, interest-rate exposure, cybersecurity, and successful delivery of ERP/EAM customer benefits. Management does not expect pending legal proceedings to be material to financial position, but cannot exclude material effects on results or liquidity in a future period.
- Other notable items: Hawaiian Electric’s new PAR Hawaii fuel contract became effective April 28, 2019; HECO Capital Trust III issued notice that its 6.50% preferred securities would be redeemed May 15, 2019; and the filing reports a $2.7 million Molokai site remediation reserve and a $4.7 million Pearl Harbor PCB reserve.
Important facts for investors to verify
- Whether utility rate adjustments and PUC cost-recovery mechanisms proceed as expected, and how performance-based regulation affects returns.
- ASB loan quality, including the rise in delinquencies, nonaccrual loans, charge-offs and the loan-loss provision.
- Progress against the ERP/EAM requirement to deliver at least $244 million of customer benefits, and the treatment of deferred project costs.
- Execution, PUC approval and eventual cost recovery for renewable projects, PPAs and the Utilities’ forecast capital program.
- Funding and balance-sheet effects of debt maturities, short-term borrowing, newly recognized lease liabilities and the planned redemption of Trust III securities.
- Whether lower electricity sales, economic conditions in Hawaii, interest-rate changes, and natural-disaster or environmental exposures alter results or liquidity.