Business context and reporting period
Hawaiian Electric Industries, Inc. (HEI) filed this combined Form 10-K for the fiscal year ended December 31, 2020; it also contains a separate filing for Hawaiian Electric Company, Inc. The “2020 Q4” period metadata is not the reporting period of the 10-K. HEI operates regulated electric utilities serving about 95% of Hawaii’s population, American Savings Bank (ASB), and renewable-energy and sustainable-infrastructure investments.
Financial results and key metrics
| HEI consolidated | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $2.580 billion | $2.874 billion | -10% |
| Operating income | $311.5 million | $348.0 million | -10% |
| Net income attributable to common stock | $197.8 million | $217.9 million | -9% |
| Diluted EPS | $1.81 | $1.99 | -9% |
| Return on average common equity | 8.6% | 9.8% | -1.2 percentage points |
| Common dividend per share | $1.32 | $1.28 | +3% |
HEI’s operating margin was approximately 12.1% in both years. For Q4 2020, HEI reported revenue of $652.2 million and net income for common stock of $50.5 million, or $0.46 diluted EPS; Q4 2019 figures were $726.0 million, $66.3 million and $0.61, respectively.
- Electric utility: Revenue was $2.265 billion, down 11%; net income for common stock rose 8% to $169.3 million. Operating income increased to $268.6 million from $254.4 million, an operating margin of about 11.9% versus 10.0%. Electricity sales fell 7.1%, while lower fuel and purchased-power costs, lower O&M, and higher regulatory recovery revenue supported earnings.
- Bank: ASB revenue was $313.5 million, down 4%, and net income declined 35% to $57.6 million. Net interest margin fell to 3.29% from 3.85%. Provision for credit losses increased to $50.8 million from $23.5 million.
- Cash flow: HEI operating activities provided $429 million, investing activities used $1.414 billion, and financing activities provided $1.116 billion. The investing outflow reflected, among other items, security purchases, utility capital expenditures and loan growth. Hawaiian Electric operating cash flow was $336.6 million; capital expenditures were $350.9 million.
- Balance sheet and liquidity: HEI assets were $15.0 billion. Year-end non-bank short- and long-term debt totaled about $2.25 billion; HEI also reported $129 million of short-term non-bank borrowings, including $65 million of commercial paper. HEI had $150 million of undrawn revolving capacity. Hawaiian Electric had $47.4 million cash, $50 million short-term borrowings and $1.561 billion long-term debt, with $275 million available under committed credit facilities. ASB had $8.40 billion assets, $7.39 billion deposits, $5.23 billion net loans, $293 million cash and $2.1 billion unused FHLB borrowing capacity.
- Bank capital and credit: ASB was categorized as well capitalized; its Tier 1 leverage ratio was 8.38%. Nonaccrual loans rose to $47.4 million from $29.7 million, or 0.89% of net loans versus 0.58%. The allowance for credit losses was $101.2 million at year-end.
Material changes versus the prior comparable period
- COVID-19 sharply affected Hawaii’s economy: visitor arrivals fell nearly 74%, and electricity sales declined 7.1%. HEI’s earnings decreased despite improved utility earnings, primarily because ASB earnings fell amid lower interest rates and increased expected credit losses.
- ASB deposits grew $1.1 billion, partly reflecting government stimulus and PPP proceeds. ASB secured more than $370 million of first-round PPP loans for about 4,100 small businesses.
- HEI adopted the expected-credit-loss standard (CECL) on January 1, 2020, increasing the allowance by $19.4 million and reducing retained earnings by $15.4 million after tax. A $10.8 million gain on ASB real-estate sales benefited 2019 but did not recur in 2020.
- HEI assets increased from $13.75 billion to $15.00 billion, largely alongside deposit growth and expanded investment securities. HEI’s common equity increased to $2.34 billion from $2.28 billion.
- HEI’s effective tax rate declined to 17% from 19%. The electric utilities achieved a 34.5% renewable portfolio standard (RPS), exceeding the 2020 statutory goal of 30%.
Outlook, management commentary, risks and unusual items
- Management expects Hawaii’s economy and utility sales to improve in 2021 as vaccination and reopening progress; it also anticipates improved bank credit quality. The pace and extent of recovery remain uncertain. No specific earnings guidance is provided.
- The PUC approved a new five-year performance-based regulation framework in December 2020. It includes an index-driven annual revenue adjustment, revised project-recovery provisions and performance incentives; general rate cases are not planned during the five-year period. Hawaiian Electric’s 2020 rate-case settlement provided for no base-rate increase.
- HEI’s board raised the quarterly dividend from $0.33 to $0.34 per share beginning in Q1 2021. Management said it currently expects to maintain the dividend, subject to quarterly board review.
- Utilities forecast up to $1.2 billion of net capital expenditures for 2021–2023, principally for grid maintenance, modernization, reliability and renewable integration. HEI’s discussion gives a broader estimated range of $1.0–$1.3 billion for utility capital expenditures over that period.
- Key risks include prolonged COVID-19 effects, delayed utility collections and rising customer arrears, bank credit deterioration and low interest rates, PUC recovery decisions under the new framework, fuel and purchased-power dependence, renewable-project execution and intermittency, isolated island grids, severe weather and climate impacts, cybersecurity, and concentrated Hawaii exposure. Utility transmission and distribution assets, estimated at roughly $8 billion replacement value, are largely uninsured; business interruption coverage is also not maintained.
- Notable unresolved matters include the Hu Honua biomass PPA dispute and appeal, Kalaeloa PPA negotiations, and environmental investigation/remediation. Recorded environmental reserves include $10 million for Pearl Harbor sediment and $2.7 million for the former Molokai generation site; final remediation costs remain uncertain. The utilities’ regulatory assets were $766.7 million and liabilities $959.8 million; continued regulatory accounting depends on probable recovery and refund assumptions.
- ASB recorded no goodwill impairment; estimated fair value exceeded carrying value by more than 35%, based on assumptions including forecasts and discount rates. Auditors issued unqualified opinions on HEI’s and Hawaiian Electric’s financial statements. HEI’s internal control was independently audited and found effective; Hawaiian Electric’s management also reported effective controls, but its auditor did not provide an ICFR opinion.
Most important facts for investors to verify
- Whether Hawaii’s recovery, utility customer collections and sales, and ASB borrowers’ payment performance improve as management expects.
- ASB’s credit-loss allowance, nonaccrual and deferred loans, commercial real-estate exposure, and the sensitivity of earnings to interest rates and deposit costs.
- The implementation and financial effects of the PUC’s five-year framework, including revenue adjustments, performance incentives, cost savings and recovery of regulatory assets.
- Utility capital spending, financing needs, debt maturities and available liquidity; confirm that disclosed forecasts and post-year-end financings remain current.
- Renewable-project delivery and RPS progress, including pending PPA approvals, disputes, capacity reliability and potential customer or regulatory consequences.
- Potential costs and outcomes of environmental matters, uninsured storm or wildfire losses, and other legal and regulatory proceedings.