HAWAIIAN ELECTRIC INDUSTRIES INC annual report, FY2019

Hawaiian Electric Industries, Inc. — FY 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This combined filing covers HEI and Hawaiian Electric Company, Inc. HEI is a Hawaii-based holding company with electric utility, banking and renewable-infrastructure businesses. The utilities serve about 95% of Hawaii’s population; ASB is a statewide community bank.

Financial performance

HEI consolidated	2019	2018	Change
Revenue	$2.875 billion	$2.861 billion	+0.5%
Operating income	$348.7 million	$333.4 million	+5%
Net income for common stock	$217.9 million	$201.8 million	+8%
Diluted EPS	$1.99	$1.85	+8%
Operating cash flow	$512.5 million	$499.3 million	+$13.2 million
Cash used in investing activities	$541.7 million	$792.1 million	+$250.4 million
Cash from financing activities	$87.7 million	$200.1 million	−$112.4 million

HEI’s operating margin was approximately 12.1% and net income for common stock margin approximately 7.6%. The electric utility generated $2.546 billion in revenue and $156.8 million in net income for common stock, compared with $2.547 billion and $143.7 million in 2018. ASB reported $89.0 million net income, up from $82.5 million; its net interest margin was 3.85%, versus 3.83%.

HEI’s 2019 earnings benefited from a $10.8 million pretax gain on ASB property sales associated with its headquarters move (approximately $7.9 million after tax), partly offset by $3.2 million of related exit costs. The gain is an unusual item to consider when assessing recurring bank earnings.

Balance sheet, debt and liquidity

HEI total assets were $13.745 billion, up from $13.104 billion. Common stock equity was $2.280 billion; the reported common equity ratio was 51% of capital structure excluding bank deposits and other bank borrowings.
At year-end, HEI had $1.964 billion of long-term debt other than bank debt and $185.7 million of short-term borrowings other than bank debt. ASB had $6.272 billion of deposits and $115.1 million of other bank borrowings. These bank funding balances are not directly comparable to corporate debt.
Cash and cash equivalents were $196.8 million; restricted cash was $30.9 million. HEI said expected operating cash generation, market access and borrowing facilities should provide adequate liquidity. HEI’s $150 million credit facility and Hawaiian Electric’s $200 million facility had no draws at year-end.
Hawaiian Electric’s capital structure was 43.3% debt, 0.9% preferred stock and 55.8% common equity. It had $11.0 million cash and $30.9 million restricted cash; short-term borrowings were $89.0 million and net long-term debt was $1.402 billion.
ASB was classified as well-capitalized, with a 9.06% Tier 1 leverage ratio, 13.18% common equity Tier 1 ratio and 14.31% total capital ratio. Its unused FHLB borrowing capacity was reported at $2.3 billion at year-end, but the FHLB reduced this to approximately $1.5 billion in February 2020 following a collateral eligibility change.

Material changes and operating developments

HEI common earnings improved 8%; utility income rose on higher rates and major-project interim recovery, while higher utility operating and depreciation costs partly offset the increase. ASB’s gain on property sales and higher net interest income contributed to its improvement.
Utility electricity sales increased modestly to 8,740 million kWh, the first year-over-year increase since 2007, attributed largely to warmer, more humid weather. Utility revenue nevertheless was nearly flat as fuel and purchased-power pass-through revenue changed.
ASB’s loan portfolio grew: net loans held for investment rose to $5.068 billion from $4.791 billion. The allowance for loan losses was $53.4 million; 2019 provision expense increased to $23.5 million from $14.7 million, while net charge-offs increased to $22.2 million from $16.3 million, primarily reflecting consumer-loan losses and an impaired commercial credit.
Utility capital expenditures were $419.9 million. The utilities forecast up to $1.3 billion in net capital expenditures for 2020–2022; HEI separately estimated utility net capital expenditures of $1.1–$1.3 billion over that three-year period.
HEI’s quarterly dividend was $0.32 per share throughout 2019. The board approved an increase to $0.33 beginning in the first quarter of 2020. The 2019 annual dividend was $1.28 per share, with a 64% payout ratio.

Outlook, risks and contingencies

Management’s stated strategy is to grow utility and bank core earnings while funding investment and supporting the dividend. No specific consolidated earnings or EPS guidance is provided in the filing.
The utilities reported a 28.4% renewable portfolio standard (RPS) result for 2019 and said they were on track for the 30% statutory target in 2020. Hawaii’s law sets a 100% RPS target for 2045. Failure to meet statutory targets may lead to PUC penalties; renewable project delays, intermittency, grid constraints and supply availability are key execution risks.
Hawaiian Electric filed for a $77.6 million rate increase based on a 2020 test year; the PUC’s decision remained pending. The PUC’s performance-based regulation proceeding was ongoing, with a decision anticipated in December 2020. Future utility returns and cost recovery depend materially on regulatory decisions and continued operation of mechanisms such as decoupling, fuel-cost recovery and interim project recovery.
PGV geothermal generation had been offline since May 2018 because of lava flow. The utilities entered an amended PPA to extend the contract and potentially expand capacity, subject to PUC approval. The Hu Honua biomass PPA was remanded for further PUC review, including consideration of greenhouse-gas emissions and cost reasonableness; Kalaeloa’s expired PPA term was being negotiated on a month-to-month basis.
On January 1, 2020, HEI adopted the expected-credit-loss standard. Management estimated an $18–$22 million increase in the allowance for credit losses, with a corresponding reduction to retained earnings; ASB expected to remain well-capitalized after adoption.
The filing identified COVID-19 as a potential risk to Hawaii tourism, customers and supply chains, including renewable project procurement. HEI reported no material impact to date, but said future effects could not then be reasonably estimated.
Environmental and legal matters include a $2.7 million reserve for remediation at a former Molokai generation site and a $4.2 million reserve for PCB investigation and remediation related to Pearl Harbor sediment and Waiau. Management did not expect aggregate pending utility proceedings and litigation to materially affect financial position, but acknowledged possible period-specific effects.
Auditors issued unqualified opinions on HEI’s and Hawaiian Electric’s financial statements. HEI’s internal control over financial reporting was assessed as effective and received an unqualified auditor opinion.

Important facts for investors to verify

How much of 2019 ASB earnings growth is repeatable after removing the $10.8 million property-sale gain, and whether credit-loss costs continue rising.
The final outcome and timing of Hawaiian Electric’s rate case and the PUC’s performance-based regulation framework, including effects on authorized returns and cost recovery.
Whether renewable procurements, PGV restoration and other projects meet schedules and budgets, and whether the utilities achieve the 2020 RPS target.
The impact of the $18–$22 million credit-loss allowance increase and the February 2020 reduction in ASB’s FHLB borrowing capacity.
Execution of the $1.1–$1.3 billion utility capital program, related financing needs and dividend capacity, including regulatory restrictions on subsidiary distributions to HEI.
Developments in COVID-19’s effects on Hawaii’s economy and tourism, utility demand, bank credit quality and renewable-energy supply chains.