Business context and reporting period
Hawaiian Electric Industries, Inc. (HEI) filed this combined Form 10-K for the year ended December 31, 2018; it also contains separate financial information for Hawaiian Electric Company, Inc. HEI operates regulated electric utilities serving about 95% of Hawaii’s population, American Savings Bank (ASB), and renewable-energy and infrastructure investments. The filing includes unaudited quarterly results, including the fourth quarter.
Financial performance and position
| HEI consolidated | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $2.861 billion | $2.556 billion | +12% |
| Operating income | $333.4 million | $346.2 million | -4% |
| Net income for common stock | $201.8 million | $165.3 million | +22% |
| Diluted EPS | $1.85 | $1.52 | +22% |
| Operating cash flow | $499.3 million | $420.4 million | +$78.9 million |
| Cash and cash equivalents, year-end | $169.2 million | $261.9 million | -$92.7 million |
| Total assets, year-end | $13.104 billion | $12.534 billion | +5% |
HEI’s calculated operating margin was approximately 11.7% and net margin for common stock approximately 7.1%. Investing activities used $792.1 million in 2018, primarily for capital expenditures and bank investment securities and loans; financing activities provided $200.1 million. HEI declared $1.24 per share in dividends for 2018, a 67% payout ratio. The board raised the quarterly dividend from $0.31 to $0.32 per share beginning in the first quarter of 2019.
Electric utility: Revenue was $2.547 billion, operating income $241.7 million, and net income for common stock $143.7 million. Operating cash flow was $393.6 million; capital expenditures were $445.9 million, with $30.6 million of construction contributions. Utility long-term debt, net, was $1.419 billion and short-term borrowings were $25 million at year-end. Debt represented 42% of utility capitalization; common equity represented 57%. Electricity sales were essentially flat at 8.689 billion kWh.
ASB: Year-end assets were $7.028 billion, deposits $6.159 billion, and net loans $4.791 billion. Net income was $82.5 million; return on assets was 1.20%, return on equity 13.51%, and net interest margin 3.83%. ASB was well-capitalized, with a 12.8% common equity Tier 1 ratio and 13.9% total capital ratio. Unused Federal Home Loan Bank borrowing capacity was approximately $2.0 billion.
Material changes versus prior period
- HEI common-stock earnings increased from $165.3 million to $201.8 million. Utility earnings rose 20% and ASB earnings rose 23%; the Other segment’s net loss widened to $24.4 million from $21.7 million.
- Operating income declined despite higher revenue. Utility revenue increased with fuel and purchased-power costs, rate relief, and RAM/MPIR revenues, while fuel, purchased-power and operating expenses rose. HEI’s reported revenue includes these cost-recovery effects.
- ASB net interest income increased to $242.7 million from $223.9 million as average earning assets and yields rose. Provision for loan losses increased to $14.7 million from $10.9 million; net charge-offs rose to $16.3 million from $12.8 million, mainly reflecting consumer-loan charge-offs.
- Fourth-quarter HEI revenue was $761.7 million versus $658.6 million; net income for common stock was $49.6 million versus $32.4 million, and diluted EPS was $0.45 versus $0.30. Fourth-quarter operating income was $84.6 million, down from $87.2 million.
- The effective tax rate fell to 20.0% from 39.6%, principally reflecting the Tax Act’s lower federal rate and related tax adjustments. Utility tax savings were passed back to customers through rates.
Outlook, commentary, risks and unusual items
- Management said liquidity and access to financing should be adequate for forecast needs. HEI estimated $1.2–$1.4 billion of utility net capital expenditures over 2019–2021; the Utilities forecast up to $2.2 billion for 2019–2023. These are investment estimates, not earnings guidance.
- HEI reported a 27% renewable portfolio standard (RPS) for 2018 and said it was on track for the 30% 2020 milestone; Hawaii’s statutory target is 100% renewable energy by 2045. Seven solar-plus-storage power purchase agreements totaling 262 MW were signed, subject to PUC approval, with projected annual payments of $59.6 million. The Utilities’ 2018 greenhouse-gas emissions were 18.9% below the 2010 baseline.
- Performance-based ratemaking implementation was in progress, with the PUC required to establish mechanisms by January 1, 2020. The outcome, future rate decisions, cost recovery, and performance incentives or penalties could affect utility results.
- Puna Geothermal Venture (PGV), with 34.6 MW of firm capacity, had been offline since May 2018 because of lava flow. Hawaii Electric Light continued to serve the island without PGV; management said the financial impact to date was not material.
- The Utilities’ ERP/EAM system went live in October 2018. The project incurred $77.5 million against a $77.6 million cost-recovery cap. A PUC condition requires at least $244 million in customer benefits over 12 years, including $141 million of future net O&M reductions; failure to deliver could lead to penalties.
- Key risks include fuel-price and supply volatility, isolated island grids and outages, renewable-project delays or curtailment, regulatory decisions and recovery of capital costs, natural disasters and climate impacts, cyber incidents and ERP stabilization, and concentrated Hawaii exposure. For ASB, risks include interest-rate and deposit-cost pressure, real-estate concentration, and higher consumer-loan credit losses. ASB’s allowance for loan losses was $52.1 million; nonaccrual loans were $27.3 million, up from $23.6 million.
- Unusual and accounting items include the Tax Act effects and the completed Tax Act measurement-period adjustments. The 2016 merger termination fee is not recurring. Adoption of the lease standard on January 1, 2019 added approximately $257 million of lease liabilities and right-of-use assets, including $215 million related to utility PPAs. The company planned to adopt the expected-credit-loss standard in 2020 and had not yet determined its impact.
- Auditors issued unqualified opinions on HEI’s and Hawaiian Electric’s financial statements. HEI’s auditor also found its internal control over financial reporting effective; Hawaiian Electric’s management reported its controls effective.
Important facts for investors to verify
- PUC decisions on rate cases, performance-based ratemaking, renewable contracts, and recovery of utility investments and ERP/EAM benefits.
- PGV’s restoration timetable and the Utilities’ ability to maintain reliable service and meet RPS goals while it remains offline.
- ASB’s consumer-loan charge-offs, delinquencies, allowance adequacy, deposit costs, and exposure to Hawaii real estate.
- Funding plans for the substantial utility capital program, debt maturities, financing costs, and dividend sustainability.
- The realized customer savings from the ERP/EAM system, and the balance-sheet and earnings effects of lease accounting and the 2020 credit-loss standard.