HAWAIIAN ELECTRIC INDUSTRIES INC annual report, FY2014

Hawaiian Electric Industries, Inc. — FY 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. This combined filing covers HEI and Hawaiian Electric Company, Inc. as separate registrants; figures below identify the relevant entity. Although the request refers to Q4, the filing reports full-year results and includes unaudited quarterly data.

Business context and financial performance

HEI is a Hawaii-focused holding company whose principal businesses were regulated electric utilities and American Savings Bank (ASB). The Utilities serve Oahu, Hawaii, Maui, Lanai and Molokai. They generated approximately 92% of HEI revenue in 2014; ASB held $5.6 billion in assets.

Metric	FY 2014	FY 2013
HEI revenue	$3.240 billion	$3.238 billion
HEI operating income	$328.9 million	$315.4 million
HEI net income for common stock	$168.3 million	$161.5 million
HEI diluted EPS	$1.64	$1.62
Utilities revenue	$2.987 billion	$2.980 billion
Utilities net income for common stock	$137.6 million	$122.9 million
ASB revenue	$252.5 million	$258.1 million
ASB net income	$51.5 million	$57.5 million

HEI’s annual common dividend remained $1.24 per share; its payout ratio was 75%, versus 76% in 2013. ASB’s net interest income increased to $180.5 million from $176.0 million, while its net interest margin declined to 3.62% from 3.74%. Its return on assets was 0.95%, down from 1.13%.

Cash flow, debt and liquidity

• HEI consolidated cash flows: Operating activities provided $301.5 million, investing activities used $568.5 million and financing activities provided $222.5 million. Cash and cash equivalents ended the year at $175.5 million, down from $220.0 million.
• Utilities: Operating cash flow was $283.1 million; capital expenditures were $311.6 million before $41.8 million of construction contributions. Net utility plant rose to $4.045 billion. Long-term debt was $1.207 billion and common equity was $1.682 billion; debt represented 41.3% of utility capitalization.
• HEI parent and non-bank debt: Long-term debt was $1.507 billion and short-term borrowings were $119.0 million. HEI had a $150 million undrawn credit facility; Hawaiian Electric had a separate $200 million undrawn facility.
• ASB: Deposits were $4.623 billion, other bank borrowings $290.7 million, and net loans $4.389 billion. ASB reported $1.2 billion of unused FHLB borrowing capacity and $1.7 billion of loan commitments, undisbursed funds and unused lines and letters of credit. Management said available funding sources were adequate to meet obligations.
• HEI total assets were $11.184 billion and common equity was $1.791 billion. The filing presents utility, bank and holding-company funding separately; bank deposits and borrowings should not be confused with parent or utility debt.

Material changes versus prior year

• HEI net income for common stock rose 4% and diluted EPS rose 1%. Utility net income increased 12%, principally reflecting recovery of costs through rate mechanisms and the absence of the prior-year Maui Electric customer refund; higher operating, depreciation and interest expenses partly offset gains.
• ASB net income fell 11%, chiefly because of lower noninterest income and a higher loan-loss provision. Debit-card interchange fees were affected by the Durbin Amendment; management estimated the after-tax impact at $6 million in 2014.
• Utility electricity sales declined to 8,976 million kWh from 9,070 million kWh, attributed largely to conservation and customer-sited renewable generation. Revenue nevertheless edged up, supported by rate-base and O&M adjustments, partly offset by lower fuel prices and lower generation.
• ASB loans held for investment grew 6.8% to $4.441 billion. Nonaccrual loans decreased to $36.9 million from $48.5 million; net charge-offs fell to $0.6 million from $3.4 million. The allowance rose to $45.6 million from $40.1 million, and provision expense increased to $6.1 million from $1.5 million.
• HEI’s “other” segment reported a $20.8 million net loss, compared with $18.9 million, including $5 million of after-tax merger-related expenses. Utility regulatory assets increased to $905 million from $576 million, primarily reflecting retirement-benefit balances; regulatory liabilities were $345 million.

Outlook, management commentary and risks

• Proposed merger and spin-off: HEI agreed to be acquired by NextEra Energy, with HEI shareholders to receive 0.2413 NextEra shares per HEI share. The agreement also contemplated a pro-rata spin-off of ASB’s parent and a $0.50-per-share special dividend. Completion required regulatory approvals and approval by holders of 75% of HEI shares, among other conditions; the transaction was not completed as of the filing. Shareholder litigation sought to block the deal and alleged fiduciary and disclosure violations. The agreement provided for a $90 million termination fee and up to $5 million expense reimbursement in specified circumstances.
• The Utilities’ January 2015 PUC application proposed, among other commitments, no general base-rate increase for at least four years after the transaction and foregoing certain incremental O&M adjustments, subject to stated exceptions and continued operation of specified recovery mechanisms. The filing does not establish that the PUC approved these proposals.
• Utility investment and energy transition: Management forecast $1.9 billion of net utility capital expenditures for 2015–2017 and approximately $420 million of 2015 net capital expenditures and deferred software costs. It expected debt or equity financing to help fund the multi-year program. Utility operating cash flow after dividends was not expected to cover forecast net capital expenditures. The Utilities’ 2014 renewable portfolio standard result was estimated at 21% excluding demand-side savings; the statutory target is 25% by 2020 and 40% by 2030. Plans filed with the PUC projected more than 65% renewable energy by 2030, but remained subject to regulatory review and execution risks.
• Management expected 2015 utility O&M expense, excluding items covered by surcharges or third parties, to be about 2% above 2014. The Utilities estimated that 68% of 2015 net energy would still come from fossil fuel oil. No formal consolidated earnings or EPS guidance was provided in the supplied filing text.
• Key risks include PUC rate-setting and recovery decisions; changes to decoupling, fuel and purchased-power cost recovery; renewable integration, curtailment and reliability; fuel and independent power producer availability; environmental compliance and potentially significant remediation costs; interest-rate sensitivity and Hawaii economic concentration; ASB credit quality and margin pressure; cyber incidents; and natural disasters. The Utilities’ transmission and distribution systems, estimated replacement value of roughly $6 billion, were largely uninsured, and they had no business-interruption insurance.
• Unusual and potentially material items include the 2012 $40 million utility asset write-down under a settlement, the 2013 Maui Electric rate refund, and 2014 storm, decoupling and bank litigation impacts. Certain unusual items were excluded from management incentive calculations; those adjustments are non-GAAP compensation measures, not reported GAAP earnings.
• Both registrants received unqualified audit opinions, and management reported effective internal control over financial reporting at year-end.

Most important facts for investors to verify

• Current status and final terms of the NextEra merger, ASB spin-off and special dividend, including regulatory and shareholder approvals, litigation and any termination obligations.
• Whether the Utilities can sustain timely recovery of capital and operating costs under PUC decisions, including the future of decoupling and other adjustment clauses.
• Execution, cost, timing and financing of the $1.9 billion 2015–2017 utility investment program, and the effect on leverage, cash flows and dividends.
• ASB’s loan growth and concentration, allowance adequacy, credit trends, net interest margin and liquidity following the proposed spin-off.
• Potential costs and rate recovery for environmental matters, including the DOJ air-quality matter, Pearl Harbor sediment investigation and changing greenhouse-gas requirements.