Hawaiian Electric Industries, Inc. (HEI) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. The combined filing covers HEI and its wholly owned electric utility subsidiary, Hawaiian Electric, as well as American Savings Bank (ASB).
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| HEI revenue | $591.6 million | $551.0 million | +7% |
| HEI operating income | $67.9 million | $68.9 million | -1% |
| HEI net income for common stock | $34.2 million | $32.4 million | +6% |
| HEI diluted EPS | $0.31 | $0.30 | +3% |
| HEI dividends per share | $0.31 | $0.31 | No change |
| Hawaiian Electric revenue | $518.6 million | $482.1 million | +8% |
| Hawaiian Electric net income for common stock | $21.5 million | $25.4 million | -15% |
HEI operating margin was approximately 11.5%, versus 12.5% a year earlier. Hawaiian Electric’s operating margin was approximately 9.4%, versus 11.5%. Higher electric revenues largely reflected fuel and purchased-power cost recovery; higher fuel and purchased-power expenses weighed on utility earnings. ASB net income rose to $15.8 million from $12.7 million, helped by stronger net interest income and a lower loan-loss provision.
Cash flow, balance sheet and liquidity
- HEI operating cash flow was $93.9 million, down from $171.0 million. Investing used $231.4 million, including utility capital spending and ASB securities purchases; financing provided $93.3 million. Cash ended at $234.2 million, down from $278.5 million at year-end 2016.
- Hawaiian Electric operating cash flow was $78.8 million, versus $146.9 million; capital expenditures were $131.7 million. Utility cash ended at $13.2 million, compared with $74.3 million at year-end.
- At March 31, HEI reported total assets of $12.54 billion and shareholders’ equity of $2.07 billion. Long-term debt, excluding bank debt, was $1.62 billion; bank borrowings were $200.2 million. Hawaiian Electric reported $1.32 billion of long-term debt and $1,500 of short-term borrowings.
- HEI and Hawaiian Electric had undrawn revolving credit facilities of $150 million and $200 million, respectively. ASB reported $5.68 billion in deposits and approximately $1.8 billion of unused Federal Home Loan Bank borrowing capacity. Management stated that available funding sources should be adequate for foreseeable requirements.
Material changes and outlook
- HEI’s earnings improved despite lower utility income, primarily because of ASB’s higher earnings and a smaller loss in the “other” segment. Prior-year “other” results included merger- and spin-off-related costs. The proposed NextEra Energy merger was terminated in July 2016; HEI received a $90 million termination fee and $5 million expense reimbursement. The transaction-related net income was recognized in 2016, not Q1 2017.
- Utility kilowatthour sales were flat year over year at 2,038 million, but management expects full-year 2017 sales below 2016, citing customer energy efficiency and increasing customer-sited renewable generation. The Utilities’ 2016 renewable portfolio standard performance was approximately 26%, against a 30% target for 2020; their plans target 100% renewable energy by 2045.
- HEI said it currently expects to maintain its dividend at the existing level, subject to quarterly board review. The Q1 dividend payout ratio was 99%; no specific earnings or EPS guidance was provided.
- Regulatory outcomes remain significant: Hawaiian Electric requested a $106.4 million annual revenue increase in its 2017 rate case, and Hawaii Electric Light requested $19.3 million in its 2016 case. The PUC’s decisions, cost-recovery limits and timing could affect returns and cash generation. Actual utility returns were below PUC-allowed returns across the three operating utilities.
Risks, contingencies and notable items
- Hawaiian Electric’s amendment to the AES Hawaii power purchase agreement was denied by the PUC in January 2017; arbitration-related settlement discussions continue. The Kalaeloa agreement, whose original term ended in 2016, extends month to month during negotiations, with neither party to give termination notice before October 31, 2017.
- Hu Honua Bioenergy sued HEI, Hawaiian Electric and Hawaii Electric Light over termination of its power purchase agreement; the companies said they believe the claims are without merit. Environmental investigations and potential remediation remain unresolved, including Waiau PCB contamination and potential Clean Air Act enforcement; recorded reserves include $5.0 million for Waiau and $3.6 million for a former Molokai site. The ultimate costs of several matters are not yet estimable.
- Utility capacity planning, renewable integration, fuel-price volatility, PUC approval and cost recovery, and possible weather or climate impacts are material risks. ASB faces credit, deposit-funding and interest-rate risks; its annualized net charge-off ratio increased to 0.29% from 0.21%, while delinquency declined to 0.42% from 0.53%.
- ASB remained well-capitalized: its common equity Tier 1 ratio was 12.4%, total capital ratio 13.6%, and Tier 1 leverage ratio 8.5%. Its net interest margin increased to 3.68% from 3.62%.
Most important facts for investors to verify
- Progress and PUC rulings in the Hawaiian Electric and Hawaii Electric Light rate cases, including allowed revenue, returns and recovery of capital investment.
- Utility cash-flow trends, capital spending, available revolver capacity and financing needs as renewable-grid projects proceed.
- Resolution and potential financial exposure from AES Hawaii arbitration, Kalaeloa contract negotiations, Hu Honua litigation and environmental matters.
- Whether lower electricity sales and renewable generation growth affect utility earnings under the decoupling and cost-recovery mechanisms.
- ASB loan quality, consumer-credit charge-offs, deposit costs and sensitivity to changing interest rates.