Hawaiian Electric Industries, Inc. (HEI) — Q2 2017 Form 10-Q
Business context and reporting period. This unaudited combined filing covers HEI and its wholly owned electric utility subsidiary, Hawaiian Electric, for the quarter and six months ended June 30, 2017. HEI’s principal businesses are the regulated electric utilities serving several Hawaiian islands and American Savings Bank (ASB). Comparisons are with the corresponding 2016 periods.
Financial performance and position
- HEI consolidated, second quarter: Revenue was $632.3 million, up 12%; operating income was $75.9 million, down 11%; net income attributable to common stock was $38.7 million, down 12%; and diluted EPS was $0.36 versus $0.41. The operating margin was approximately 12.0%, compared with 15.1% a year earlier. Quarterly dividends declared were $0.31 per share.
- HEI consolidated, first half: Revenue was $1.224 billion, up 10%; operating income was $143.8 million, down 7%; common-stock net income was $72.9 million, down 5%; and diluted EPS was $0.67 versus $0.71. Operating cash flow was $186.0 million, down from $225.8 million. Investing cash outflow was $399.4 million, including $222.2 million of capital expenditures; financing cash inflow was $145.3 million. Cash declined to $210.4 million from $278.5 million at year-end 2016.
- Electric utilities: Second-quarter revenue was $556.9 million, up 12%, while common-stock net income fell to $25.6 million from $35.9 million. First-half revenue was $1.075 billion, up 10%, while common-stock net income fell to $47.1 million from $61.2 million. Operating income declined to $55.0 million for the quarter and $104.0 million for the half-year, from $70.7 million and $126.0 million, respectively. Higher fuel and purchased-power costs drove much of the revenue increase; higher fuel expense, lower RAM revenue and higher operating and depreciation expenses pressured earnings.
- Bank: ASB second-quarter net income increased to $16.7 million from $13.3 million; first-half net income rose to $32.5 million from $26.0 million. First-half net interest margin was 3.68%, versus 3.60%. At June 30, assets were $6.61 billion, deposits $5.72 billion and net loans $4.69 billion. The allowance for loan losses was $56.4 million; nonaccrual loans were $21.0 million, down from $23.3 million at year-end 2016. Delinquencies were 0.44%, lower than 0.49% a year earlier, although first-half annualized net charge-offs increased to 0.25% from 0.18%.
- Debt and liquidity: HEI reported $1.619 billion of non-bank long-term debt and $49.8 million of non-bank short-term borrowings at June 30; its $150 million revolving facility was undrawn. Hawaiian Electric had $1.319 billion of long-term debt, $44.0 million of short-term borrowings and $200 million of undrawn credit capacity. ASB had $188.1 million of other borrowings and $1.8 billion of unused FHLB borrowing capacity; its regulatory capital ratios exceeded stated well-capitalized minimums.
Material changes and management commentary
- HEI’s first-half earnings comparison includes the disappearance of prior-year merger-related items. The proposed NextEra merger was terminated in July 2016; HEI received a $90 million termination fee and $5 million expense reimbursement. The 2016 results also included related tax effects and expenses. Management noted that the fee contributed substantially to higher trailing-twelve-month ROACE in 2017 versus 2016; it is not a recurring source of earnings.
- Utilities’ first-half KWH sales increased slightly year over year, but management expects full-year 2017 sales to be below 2016 as customer solar generation and energy-efficiency measures continue. The utilities’ actual ROACE for the twelve months ended June 30, 2017 was below PUC-allowed returns for each utility.
- Management forecast $420 million of net utility capital expenditures for 2017, subject to permitting, regulatory decisions and other external factors. Funding is expected from operating cash flow, debt and equity issuance, temporary short-term borrowings and existing cash. HEI said it currently expects to maintain its dividend at the present level, subject to quarterly board review. The filing gives no specific full-year earnings or EPS guidance.
- The utilities’ long-term strategy targets Hawaii’s 100% renewable-energy standard by 2045. The PUC accepted the December 2016 PSIP update in July 2017. The utilities are pursuing renewable generation and grid modernization while addressing reliability, intermittency and system-capacity constraints.
Outlook, risks, contingencies and unusual items
- Regulatory outcomes are important to earnings and investment recovery. Hawaiian Electric’s rate cases were consolidated, with a procedural schedule anticipating an interim order in December 2017 and an evidentiary hearing in early 2018. Hawaii Electric Light’s rate case remained subject to a narrowed return-on-equity issue; the parties’ proposed interim increases differed. Rate recovery, performance incentives and project approvals remain uncertain.
- Utility risks include fuel-price and supply volatility, the ability to integrate more intermittent renewable generation, generating-unit availability and potential capacity shortfalls. Maui Electric anticipated a small reserve-capacity shortfall on Maui in coming years and expects a significant need for replacement firm capacity around 2022.
- Project and contract developments include the PUC’s May 2017 denial of the proposed HEP asset purchase, which the parties terminated in July; ongoing negotiations over the expired Kalaeloa PPA, extended month-to-month while negotiations continue; and unresolved AES Hawaii arbitration/settlement matters after the PUC denied a proposed PPA amendment in January 2017. The PUC approved an amended Hu Honua PPA in July 2017, with operations expected by the end of 2018.
- Environmental matters include recorded reserves of $3.5 million for the former Molokai site and $4.9 million for Waiau PCB investigation/remediation; final costs remain uncertain. Utilities reported $22.1 million of receivables from Hawaiian Telcom for joint-pole costs, including interest, and reserved $4.9 million of accrued interest. Management expects to prevail, but collection and related proceedings remain outstanding.
- ASB’s portfolio is concentrated in Hawaii and heavily weighted to real estate lending. Rising rates can affect securities values, deposit costs and loan performance. ASB reported $1.303 billion of available-for-sale securities, including $12.6 million of gross unrealized losses, which it attributed primarily to interest rates and did not consider other-than-temporary impairment.
Most important facts for investors to verify
- Track the outcomes and timing of utility rate cases, allowed returns, RAM/decoupling recovery and PUC decisions on major capital projects.
- Assess whether higher fuel and purchased-power costs, lower electricity sales and renewable integration affect utility margins, reliability and cash generation.
- Monitor delivery against the $420 million 2017 net-capex forecast and the associated borrowing, refinancing and liquidity needs.
- Review ASB credit quality, consumer-loan charge-offs, real-estate concentrations, deposit costs and interest-rate sensitivity.
- Follow resolution of the Kalaeloa and AES Hawaii matters, environmental remediation exposure and recovery of Hawaiian Telcom receivables.