Hawaiian Electric Industries, Inc. — Q2 2016 Form 10-Q
Business context and period. This combined filing covers Hawaiian Electric Industries, Inc. (HEI) and its wholly owned utility subsidiary, Hawaiian Electric Company, Inc. (Hawaiian Electric). It reports the three and six months ended June 30, 2016, with balance-sheet comparisons to December 31, 2015. HEI’s businesses include the electric utilities and American Savings Bank (ASB).
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| HEI revenue | $566.2 million | $623.9 million | $1,117.2 million | $1,261.8 million |
| HEI operating income | $85.5 million | $72.7 million | $154.3 million | $142.2 million |
| HEI net income for common stock | $44.1 million | $35.0 million | $76.5 million | $66.9 million |
| HEI diluted EPS | $0.41 | $0.33 | $0.71 | $0.63 |
| Hawaiian Electric revenue | $495.4 million | $558.2 million | $977.4 million | $1,131.6 million |
| Hawaiian Electric net income for common stock | $35.9 million | $32.8 million | $61.2 million | $59.7 million |
- HEI revenue fell 9% in Q2 and 11% in the first half, principally because lower fuel prices and purchased-power costs reduced utility revenue; the bank segment’s revenue growth partly offset the decline. HEI common earnings rose 26% in Q2 and 14% in the first half.
- Utility operating income increased as fuel and purchased-power costs declined. Q2 utility fuel expense was $91.9 million versus $146.2 million a year earlier; first-half expense was $205.6 million versus $323.0 million. These cost changes also largely pass through to customers and reduce reported revenue.
- ASB’s first-half net income was $26.0 million, down from $26.3 million. Net interest income rose to $101.4 million from $92.1 million, and net interest margin increased to 3.60% from 3.52%; higher loan-loss provision and expenses offset much of the improvement.
- HEI’s Q2 common dividend was $0.31 per share; first-half dividends were $0.62 per share. Management said it currently expects to maintain the dividend, subject to quarterly board review.
Cash flow, debt, and liquidity
- For the first six months, HEI generated $225.5 million of operating cash flow, used $385.0 million in investing activities, and generated $116.3 million in financing activities. Cash declined by $43.3 million to $257.2 million.
- Hawaiian Electric generated $194.1 million of operating cash flow and spent $197.3 million on capital expenditures; utility cash at June 30 was $27.6 million.
- HEI’s non-bank short- and long-term debt was $116.0 million and $1.579 billion, respectively. Hawaiian Electric reported $37.0 million of short-term borrowings and $1.279 billion of long-term debt. The reported HEI cash balance is consolidated and includes bank balances; the filing describes the bank and utility as largely autonomous in their financing.
- Undrawn revolving credit facilities were $150 million for HEI and $200 million for Hawaiian Electric. ASB had $5.23 billion of deposits, $4.70 billion of net loans, and approximately $1.7 billion of unused FHLB borrowing capacity. ASB met regulatory “well-capitalized” thresholds, with a 11.9% common equity Tier 1 ratio.
Material developments, outlook, and risks
- Merger termination after quarter-end: The Hawaii PUC dismissed the proposed NextEra Energy merger application on July 15, 2016; NextEra terminated the agreement the following day. It paid HEI a $90 million termination fee and $5 million expense reimbursement on July 19. HEI expected to recognize these amounts, net of taxes, and other related tax benefits and expenses in Q3. The planned ASB spin-off was cancelled.
- Merger-conditioned LNG supply and transport, LNG equipment, and Kahe combined-cycle project applications were withdrawn and their dockets closed. Management said it would continue evaluating cleaner-fuel generation options. The loss of NextEra’s resources could mean higher costs or longer timelines for renewable-energy and grid projects, as well as a higher cost of capital.
- Management expected 2016 utility kilowatt-hour sales to be below 2015 levels. It revised its expectation for utility O&M expense, excluding specified surcharges and third-party-covered costs, to 2% below 2015, from a prior estimate of 4% below. HEI estimated 2016 pension and postretirement contributions of $65 million.
- The utilities’ updated plans target 100% renewable energy by 2045. Hawaiian Electric reported 2015 renewable portfolio performance of 23%, above the 15% statutory target. Management also highlighted growing grid-integration, curtailment, capacity, and reliability challenges as distributed and intermittent generation expands. Maui Electric anticipated a possible reserve-capacity shortfall on Maui from 2017–2022.
- Credit agencies affirmed certain ratings after the merger ended, but Moody’s downgraded HEI commercial paper to P-3 and Hawaiian Electric senior unsecured debt to Baa2 on August 3. Ratings commentary cited the challenging regulatory environment and the scale and uncertainty of the utility transformation.
- Contingencies include pending shareholder litigation relating to the terminated merger, ongoing environmental investigations and potential Clean Air Act enforcement, and uncertain recovery of $19.2 million in receivables from Hawaiian Telcom. The filing cites reserves of $3.6 million for the former Molokai site and $4.5 million for Waiau PCB matters; final remediation costs remain uncertain.
Most important facts for investors to verify
- Q3 recognition and after-tax effect of the $95 million merger termination and expense-reimbursement payment, including remaining merger-related costs.
- PUC decisions and timing for utility rates, cost recovery, updated power-supply plans, and projects previously conditioned on the merger.
- Utility capital spending, financing needs, credit ratings, and execution of the renewable-energy transition following the merger’s termination.
- ASB loan quality and provisions: first-half loan-loss provision rose to $9.5 million from $2.4 million, while delinquency was 0.49% at June 30.
- Outcomes and potential costs of the pending litigation, environmental matters, Hawaiian Telcom collection dispute, and other contingencies.