HAWAIIAN ELECTRIC INDUSTRIES INC quarterly report, Q2 FY2018

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Hawaiian Electric Industries, Inc. (HEI) — Q2 2018 Form 10-Q

Business context and reporting period

Unaudited results cover the three and six months ended June 30, 2018, compared with the same 2017 periods. HEI is a Hawaii-based holding company whose principal businesses are regulated electric utilities and American Savings Bank (ASB). The filing is also made separately by Hawaiian Electric Company, HEI’s wholly owned utility subsidiary.

Key financial results

  • HEI, Q2: Revenue was $685.3 million, up 8%; operating income was $78.8 million, up 1%; net income attributable to common stock was $46.1 million, up 19%. Diluted EPS rose to $0.42 from $0.36. Dividend declared was $0.31 per share, unchanged.
  • HEI, first half: Revenue was $1.331 billion, up 9%; operating income was $150.7 million, up 2%; common net income was $86.3 million, up 18%. Diluted EPS was $0.79 versus $0.67.
  • Utilities: Q2 revenue increased to $608.1 million from $556.9 million, while operating income declined to $55.1 million from $56.5 million. First-half revenue was $1.179 billion versus $1.075 billion; operating income was nearly flat at $106.5 million versus $106.8 million. First-half common net income increased to $58.6 million from $47.1 million, helped by lower income taxes.
  • ASB: Q2 net income was $20.6 million versus $16.7 million; first-half net income was $39.5 million versus $32.5 million. First-half net interest margin increased to 3.76% from 3.68%. At June 30, loans held for investment, net, were $4.722 billion and deposits were $6.116 billion.
  • Cash flow, first half: HEI generated $108.3 million from operations, used $391.4 million in investing, and received $275.9 million from financing; cash ended at $254.7 million. Hawaiian Electric generated $69.8 million from operations, used $195.3 million in investing, and received $133.9 million from financing; cash ended at $20.9 million.
  • Debt and liquidity: HEI reported $1.783 billion of long-term debt and $202.9 million of short-term non-bank borrowings; its $150 million revolving facility was undrawn. Hawaiian Electric reported $1.468 billion of long-term debt, including current maturities, and $91.9 million of short-term borrowings; its $200 million facility was undrawn. ASB had approximately $2.0 billion of unused FHLB borrowing capacity and exceeded regulatory “well-capitalized” thresholds.

Material changes versus the prior comparable period

  • HEI’s earnings growth was driven by higher utility and bank earnings and a lower effective tax rate, partly offset by increased losses in the “other” segment. The Tax Act reduced HEI’s effective tax rate to 22% in Q2 and 23% for the first half, from 34% in both 2017 periods. Utility tax benefits are being returned to customers through rates.
  • Utility revenue rose largely because higher fuel and purchased-power costs, rate adjustments and rate relief flowed through customer tariffs. These pass-through costs also increased expenses. Utility kilowatt-hour sales continued to decline; management expects full-year 2018 sales below 2017, while decoupling separates revenues from sales volume.
  • Operating cash flow at HEI fell by $65.8 million year over year; Hawaiian Electric’s fell by $68.9 million. The utility attributed the decrease mainly to the timing of customer collections and supplier payments, including higher bills associated with fuel and purchased-power costs.
  • ASB’s loan portfolio grew, while deposits increased 4% from year-end 2017. Delinquency rates rose to 0.54% from 0.44% a year earlier; the allowance for loan losses was $52.8 million, down from $53.6 million at year-end.

Outlook, commentary, risks and unusual items

  • HEI said it expects to maintain its current dividend, subject to quarterly board review. Management stated that available internal cash generation, debt and equity issuance, commercial paper and credit lines should be adequate for foreseeable requirements.
  • The Utilities forecast up to $2.2 billion in net capital expenditures for 2018–2022. Loss of utility bonus depreciation may increase initial cash needs for future projects. The Schofield 50-MW generating station entered service in June 2018; project cost was $141.5 million against a revised $157.3 million cap.
  • Hawaiian Electric’s final rate-case order approved $37.7 million of rate relief before a $38.3 million Tax Act reduction. Maui Electric’s rate case remained pending at filing; the parties’ proposed interim entitlement was $6.4 million under existing depreciation rates, with a higher amount possible under revised rates.
  • Hawaii’s PUC opened a performance-based regulation proceeding, with state legislation requiring PBR mechanisms by January 1, 2020. Future incentives, penalties and rate-setting changes could affect utility returns.
  • Supply and execution risks include the Puna geothermal plant shutdown due to lava flows, ongoing negotiations over the Kalaeloa power agreement, pending PUC review of an AES Hawaii agreement, renewable project delays and Maui’s forecast reserve-capacity shortfall. Management said the lava event’s financial impact had not been material to date, but the event remained unpredictable.
  • Environmental liabilities include a $4.7 million reserve for PCB investigation and remediation related to Waiau and Pearl Harbor, and a $2.7 million reserve for a former Molokai generation site; final remediation costs remain uncertain. Management did not expect aggregate pending legal matters to materially affect financial position, while noting period-specific effects on results or liquidity could not be ruled out.
  • The filing disclosed an immaterial prior-period cash-flow classification error: correcting the first-half 2017 statements reduced operating cash flow and investing cash flow by $12 million each. Adoption of the new revenue standard did not materially change revenue timing or pattern; the new pension-cost presentation also had no net-income impact.

Most important facts for investors to verify

  • Whether utility rate orders and Tax Act pass-backs support earnings and cash recovery, especially Maui Electric’s pending rate case.
  • Utility cash conversion, working-capital timing, capital spending and the financing required for the $2.2 billion five-year investment forecast.
  • ASB credit trends, including rising delinquencies and charge-offs, commercial real-estate exposures, and the effects of interest rates on funding costs and securities values.
  • Progress and regulatory outcomes for renewable procurement, grid modernization, PBR, Kalaeloa/AES agreements and Maui capacity plans.
  • Potential changes in the scope or cost of lava-related impacts, environmental remediation and other contingencies; interim results are not necessarily indicative of full-year performance.