Hawaiian Electric Industries, Inc. (HEI) — Q1 2018 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017. HEI’s businesses include the regulated Hawaiian Electric utilities and American Savings Bank (ASB). Hawaiian Electric is wholly owned by HEI.
Financial performance and condition
| HEI consolidated metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $645.9 million | $591.6 million | +9% |
| Operating income | $71.9 million | $69.7 million | +3% |
| Net income for common stock | $40.2 million | $34.2 million | +18% |
| Basic and diluted EPS | $0.37 | $0.31 | +19% |
| Net cash from operating activities | $34.7 million | $47.0 million | Down $12.3 million |
| Net cash used in investing activities | $231.1 million | $184.5 million | Outflow increased $46.6 million |
| Net cash from financing activities | $179.3 million | $93.3 million | Up $86.0 million |
- HEI’s operating margin was approximately 11.1%, versus 11.8% a year earlier; net margin was approximately 6.2%, versus 5.8%. Lower income-tax expense helped lift net income: the effective tax rate fell to 24% from 33%, primarily due to the Tax Act.
- At March 31, HEI had $244.8 million cash and $12.70 billion total assets. Short-term borrowings excluding bank borrowings were $238.4 million; nonbank long-term debt was $1.684 billion. ASB had $6.079 billion of deposits and $100.4 million of other bank borrowings.
- HEI’s $150 million revolving credit facility and Hawaiian Electric’s separate $200 million facility had no amounts drawn at quarter-end. HEI had $67 million commercial paper outstanding; Hawaiian Electric had $122 million.
- Hawaiian Electric reported $570.4 million revenue, $51.4 million operating income and $27.5 million net income for common stock, compared with $518.6 million, $50.4 million and $21.5 million, respectively, in Q1 2017. Operating margin was approximately 9.0%, versus 9.7%.
- ASB net income was $19.0 million, up from $15.8 million. Net interest income was $58.5 million versus $54.8 million; net interest margin was 3.76% versus 3.68%. ASB’s assets were $6.89 billion and its regulatory capital ratios exceeded the stated well-capitalized minimums.
- HEI declared a $0.31 per-share dividend, unchanged year over year. Its Q1 dividend payout ratio was 84%.
Material changes versus the prior comparable period
- Utility revenue increased largely with higher fuel-oil prices and related cost recovery, higher rate-adjustment mechanism revenue and interim rate relief. Fuel and purchased-power expenses also rose; utility kilowatthour sales declined approximately 1.3%.
- ASB benefited from higher yields and investment balances. The bank’s loan portfolio grew overall, while management reduced certain commercial and national loan exposures. Noninterest income was lower partly because debit-card interchange costs moved from expense to net presentation under the new revenue standard.
- HEI operating cash flow declined, while utility capital expenditures increased to $114.5 million from $84.7 million. HEI’s consolidated capital expenditures were $133.4 million.
- Other comprehensive income included a $13.3 million after-tax unrealized loss on available-for-sale securities, largely reflecting interest-rate movements; HEI’s total other comprehensive loss was $12.8 million, compared with income of $1.0 million in Q1 2017.
- The filing corrected an immaterial prior-period cash-flow statement error: Q1 2017 operating cash flow and investing cash flow were each reduced by $47 million. The correction did not affect net income.
Outlook, commentary, risks and unusual items
- Management said it expects to maintain HEI’s dividend at its current level, subject to quarterly Board review. Utility full-year 2018 electricity sales are expected to be below 2017, reflecting customer conservation and increasing customer-sited renewable generation.
- The Utilities forecast $2.2 billion of net capital expenditures for 2018–2022. Management expects operating cash generation, debt and equity issuance, commercial paper and available credit facilities to support funding needs; the Tax Act’s elimination of bonus depreciation for qualifying utility property may increase initial project cash requirements.
- The Tax Act lowered the federal corporate tax rate, but utility tax benefits are being tracked as regulatory liabilities and are expected to be returned to customers through rates. Certain rate-case and decoupling adjustments remain subject to PUC action; $7.0 million of interim-rate revenue recognized in Q1 is subject to refund with interest if it exceeds final allowed amounts.
- Hawaiian Electric’s interim rate increase of $36 million became effective February 16, 2018; final rates remained pending. Maui Electric requested a $30.1 million rate increase, and Hawaii Electric Light’s interim rates were adjusted for tax reform after quarter-end.
- Operational and regulatory risks include Maui’s anticipated reserve-capacity shortfall, dependence on IPP capacity and renewable project execution, and potential delays or cost-recovery disallowances for utility projects. The PUC’s performance-based regulation investigation and related legislation may change future utility incentives and ratemaking.
- Environmental and legal matters include unresolved PCB investigations at Pearl Harbor (a $4.7 million reserve) and the former Molokai generation site (a $2.7 million reserve); final remediation costs remain uncertain. Hawaiian Telcom pole-purchase agreements for approximately $48 million, partly offset by receivables, were signed after quarter-end and require PUC approval.
- ASB’s available-for-sale securities had a $28.2 million after-tax unrealized loss in accumulated other comprehensive income at quarter-end. Management attributed unrealized losses primarily to rising rates, but interest-rate changes, deposit competition and loan credit quality remain risks. ASB’s delinquency ratio edged up to 0.44% from 0.42% a year earlier.
- HEI adopted the new revenue-recognition standard in Q1 with no material effect on revenue timing or pattern. Management planned adoption of the new lease standard in 2019 and the expected-credit-loss standard in 2020; the adoption effects were still under evaluation.
Important facts for investors to verify
- Track final PUC decisions on Hawaiian Electric’s and the other utilities’ rate cases, tax-related customer refunds, and interim revenue subject to refund.
- Assess whether the $2.2 billion 2018–2022 utility capital program, renewable integration and capacity plans remain on schedule and recoverable in rates.
- Monitor cash generation versus investment spending, commercial-paper balances, borrowing needs and the availability of credit facilities.
- Review ASB’s credit quality, deposit costs, securities valuation and sensitivity to interest-rate changes, including the concentration in real-estate-related lending and investments.
- Follow developments in the Pearl Harbor and Molokai environmental matters, the Hawaiian Telcom pole transaction, and material PPA negotiations or approvals.