Hawaiian Electric Industries, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This combined filing covers HEI and its subsidiary Hawaiian Electric Company, Inc. (the regulated utilities); HEI also owns American Savings Bank (ASB). Figures below are in U.S. dollars unless noted.
Business context and financial results
HEI’s principal businesses are electric utilities serving about 95% of Hawaii’s population and ASB, a Hawaii-based bank. The utilities represented approximately 88% of HEI revenue in 2016. Results were materially affected by the termination of the proposed NextEra Energy merger.
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| HEI revenue | $2.381 billion | $2.603 billion | Down 9%; largely lower fuel-related utility revenues |
| HEI operating income | $348.2 million | $322.6 million | Up 8% |
| HEI net income for common stock | $248.3 million | $159.9 million | Up 55%; includes merger-related benefit |
| HEI diluted EPS | $2.29 | $1.50 | Up 53% |
| HEI operating cash flow | $495.3 million | $355.9 million | Investing cash outflow was $736.5 million; financing cash inflow was $219.2 million |
| HEI cash and cash equivalents | $278.5 million | $300.5 million | Includes bank-related cash |
| HEI long-term debt, excluding bank | $1.619 billion | $1.578 billion | HEI also had $192.6 million of bank borrowings |
| HEI common equity | $2.067 billion | $1.928 billion | Book value per share was $19.05 |
HEI paid an annual common dividend of $1.24 per share, unchanged from 2015; the reported payout ratio fell to 54% from 82%, in part reflecting merger-related income.
Operating segments
- Electric utility: Revenue was $2.094 billion, down 10%; net income for common stock increased 5% to $142.3 million. Fuel oil expense fell to $454.7 million from $654.6 million, while operating income rose to $284.5 million from $274.1 million. Utility operating cash flow was $369.9 million; capital expenditures were $320.4 million before $30.1 million of construction contributions. Utility long-term debt, net, was $1.319 billion and common equity was $1.800 billion; debt was 41.8% of capitalization.
- ASB: Net income rose 5% to $57.3 million. Net interest income increased to $206.2 million from $188.6 million, while provision for loan losses increased to $16.8 million from $6.3 million. Net interest margin was 3.59%, versus 3.53%. Assets were $6.421 billion; deposits were $5.549 billion and net loans held for investment were $4.683 billion.
Material changes versus the prior year
- HEI recognized a $90 million gross merger termination fee and $5 million of expense reimbursements after NextEra terminated the merger agreement in July 2016. Net after-tax merger- and spin-off-related income was $60 million for the year. The planned ASB spin-off was also cancelled.
- Excluding merger-related income and costs and costs associated with the terminated LNG contract, HEI said net income would have been $190 million, up 8% from $176 million in 2015.
- Utility revenue fell with lower fuel prices and purchased-power costs passed through to customers; electric sales declined about 1% to 8,845 million kWh. Fuel oil averaged $53.49 per barrel, compared with $74.71.
- ASB loan quality indicators were mixed: nonaccrual loans declined to $23.3 million from $46.0 million, but net charge-offs increased to $11.3 million from $1.9 million, mainly from commercial and unsecured consumer loans. The allowance rose to $55.5 million, or 1.17% of loans, from $50.0 million, or 1.08%.
Outlook, risks and unusual items
- Outlook: No consolidated earnings guidance is provided in the supplied filing text. Management said Hawaii’s economy was expected to continue growing in 2017, while identifying tourism, military spending, real estate, interest rates and global conditions as relevant uncertainties.
- Utility transition and regulation: The utilities reported a 2016 renewable portfolio standard level of about 25% and are planning toward Hawaii’s 100% renewable-energy requirement by 2045. The PUC’s review of utility rates and recovery mechanisms remains important. Hawaiian Electric requested a $106.4 million rate increase for its 2017 test year; Hawaii Electric Light requested $19.3 million for its 2016 test year. Decisions were pending.
- Projects and supply: The PUC approved the capped $157.3 million Schofield Generating Station project, expected in service in early 2018. Approval of the proposed $84.5 million purchase of the Hamakua Energy Partners plant remained pending. The utilities terminated their LNG supply arrangement and withdrew related project applications after the merger ended.
- Banking risks: ASB is concentrated in Hawaii real estate and lending; about 82% of its loan portfolio was real-estate-related. Commercial real estate and consumer lending growth, higher charge-offs, competition for deposits and interest-rate sensitivity are key risks. ASB remained well capitalized, with a 12.2% common equity Tier 1 ratio and 8.6% Tier 1 leverage ratio.
- Liquidity and obligations: HEI reported $150 million of undrawn parent-company credit capacity; Hawaiian Electric had a separate $200 million undrawn facility. ASB reported about $1.8 billion of unused FHLB borrowing capacity and $1.8 billion of loan commitments and unused lines/letters of credit. HEI’s estimated contractual obligations totaled $5.208 billion, including long-term debt, fuel and power-purchase obligations.
- Contingencies: Hawaiian Electric recorded a $4.1 million reserve for Waiau PCB investigation and remediation; Maui Electric recorded $3.6 million for the former Molokai generation site. The utilities were negotiating with the Department of Justice over potential Clean Air Act matters, with amounts not estimable. Hu Honua sued after termination of its power purchase agreement; HEI and the utilities said they intended to defend the claims.
- Other risks: Hawaiian Electric’s island grids are isolated, and much of the transmission and distribution system is uninsured; the utilities also lack business-interruption insurance. Management cited PUC cost-recovery decisions, renewable integration and supply reliability, environmental compliance, cyber incidents, severe weather and retirement-benefit funding as risks.
Most important facts for investors to verify
- How much of 2016 earnings and EPS is recurring after removing the merger termination benefit, reimbursements and related tax effects.
- Outcomes and timing of the pending Hawaiian Electric and Hawaii Electric Light rate cases, and any changes to decoupling or fuel-cost recovery.
- ASB’s future credit-loss provisions and charge-offs, particularly in commercial real estate and unsecured consumer lending, alongside Hawaii property-market conditions.
- PUC decisions on the HEP plant acquisition, renewable-energy plans and grid investments, and the cost and schedule of the Schofield project.
- Progress on environmental investigations and litigation, and whether reserves or potential uninsured costs change materially.
- Debt refinancing and liquidity needs, including HEI term-loan maturities in 2017 and 2018 and the utilities’ planned capital spending.