Business context and reporting period
Hawaiian Electric Industries, Inc. (HEI) filed this unaudited Form 10-Q for the quarter ended March 31, 2013. HEI’s principal businesses are regulated electric utilities serving Hawaii and American Savings Bank (ASB). The filing also presents separate results for Hawaiian Electric Company, Inc. (HECO) and its subsidiaries. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| HEI consolidated | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $784.1 | $814.9 |
| Operating income | $70.7 | $75.8 |
| Net income attributable to common stock | $33.7 | $38.3 |
| Basic and diluted EPS | $0.34 | $0.40 |
| Common dividend per share | $0.31 | $0.31 |
| Operating cash flow | $48.3 | $(15.7) |
| Investing cash flow | $(112.6) | $(80.9) |
| Financing cash flow | $107.3 | $62.7 |
HEI’s operating margin was approximately 9.0% versus 9.3% a year earlier; net income for common stock as a share of revenue was approximately 4.3% versus 4.7%. At March 31, 2013, HEI reported total assets of $10.30 billion, cash and cash equivalents of $262.7 million, and shareholders’ equity of $1.61 billion. Short-term and long-term debt excluding bank borrowings totaled approximately $1.56 billion; the balance sheet also included $193.2 million of other bank borrowings and $4.31 billion of bank deposits.
HEI’s first-quarter cash increase was $43.0 million, ending at $262.7 million. Capital expenditures were $71.0 million, and the company paid $24.4 million in common-stock dividends in cash. HEI’s $125 million revolving credit facility was undrawn at quarter-end; commercial paper outstanding was $84 million. Management said available internal and external funding was adequate for foreseeable requirements.
Operating segments and HECO
- Electric utilities: HEI segment revenue was $719.3 million versus $749.6 million; operating income was $53.0 million versus $57.3 million; common-stock income was $24.4 million versus $27.3 million.
- HECO consolidated: operating revenue was $716.2 million versus $747.9 million; operating income was $36.5 million versus $38.6 million; net income for common stock was $24.4 million versus $27.3 million. Operating margin was approximately 5.1% versus 5.2%.
- HECO operating cash flow was $53.5 million versus cash use of $10.9 million. Investing used $56.2 million, including $67.9 million in capital expenditures, partly offset by $11.7 million of contributions in aid of construction. Financing provided $22.5 million.
- At March 31, HECO had $36.9 million of cash, $1.15 billion of long-term debt, and $43.1 million of short-term borrowings. Its $175 million credit facility was undrawn.
- ASB: net income was $14.2 million versus $15.9 million. Net interest income was $43.6 million versus $45.7 million; net interest margin was 3.78% versus 4.04%. Annualized return on assets was 1.12% and the efficiency ratio was 61%, compared with 1.18% and 59% for full-year 2012.
Material changes versus the prior comparable period
- HEI revenue fell 4%, common-stock net income fell 12%, and EPS declined 15%; weighted-average common shares increased 2%.
- Utility revenue declined $31 million, largely reflecting lower fuel prices and purchased-power costs. Fuel expense fell $23 million and purchased-power expense fell $12 million, while other operation and maintenance expense rose $9 million and depreciation increased.
- HECO electricity sales declined 128 million kWh to 2,123 million kWh. The filing cites lower fuel costs and generation, alongside lower sales and increased utility operating costs, as factors in results.
- ASB’s lower loan and securities yields reduced interest income and margin. Lower funding costs and loan-loss provision partly offset the pressure; noninterest expense rose $3.5 million, primarily from compensation, technology and business-support costs.
- HEI operating cash flow improved from an outflow to an inflow. Financing cash flow increased, supported by deposit growth, short-term borrowing and a $50 million long-term note issuance that refinanced maturing debt.
Outlook, management commentary, risks and unusual items
- HEI gave no specific consolidated earnings or EPS guidance. Management expected to maintain the current $0.31 quarterly dividend, subject to quarterly board review. The Q1 payout ratio was 90%.
- Utility management projected 2013 other operation and maintenance expense, excluding specified surcharges or third-party-covered costs, to be flat to 1% above 2012. The utilities’ 2013–2017 plan forecast $2.9 billion of net capital expenditures and near-term annual rate-base growth of 5%–10%.
- Management expected utility earned returns on common equity to improve gradually from 2014 to 2016, but estimated an ongoing gap between actual and PUC-allowed returns: 80–110 basis points in 2014–2016 and 120–150 basis points in 2013. Actual utility returns remained below allowed levels for the twelve months ended March 31, 2013.
- A PUC-approved settlement addressed the CIP combustion turbine and customer information system (CIS) projects: $40 million of project costs had been written off in 2012, with $52 million of remaining recoverable costs included in rate base as of year-end 2012. The utilities expected recovery of specified remaining costs beginning June 1, 2013. HECO’s scheduled rate case was delayed until no earlier than January 2, 2014; HELCO withdrew its 2013 test-year case and was not expected to file again until its 2016 test year.
- HEI issued $50 million of 3.99% senior notes due 2023 to refinance $50 million of 5.25% notes. Separately, equity forward transactions covered 7 million HEI shares sold by counterparties in a public offering; HEI expected physical settlement before March 25, 2015. The filing stated that HEI would receive proceeds only upon settlement and that settlement could result in share dilution.
- Key utility uncertainties include PUC rate and cost-recovery decisions, renewable-project execution and permitting, fuel and purchased-power supply and prices, environmental compliance costs, and system reliability. A potential future consolidation of certain IPPs could materially affect reported assets, liabilities and results; the filing says required information for some producers had not been obtained.
- ASB risks include interest-rate and net-interest-margin sensitivity, Hawaii real-estate and borrower credit conditions, deposit competition, regulatory and capital changes, and its concentration in Hawaii lending. At quarter-end, ASB reported $67.4 million of nonaccrual loans and a $42.7 million allowance for loan losses; its capital ratios exceeded stated regulatory minimums.
- Other contingencies include environmental investigation and cleanup at the former Molokai generation site, for which the reserve was $3.6 million, and an ASB class-action lawsuit concerning debit-card overdraft fees whose probable outcome and reasonably possible loss were not determinable. The filing also identifies potentially material future environmental compliance costs, though amounts were not determinable.
Most important facts for investors to verify
- Whether the PUC permits timely recovery of utility capital and operating costs, and how the rate-case delays and RAM revenue schedule affect utility returns and cash flow.
- Whether the utilities achieve the forecast capital program and renewable-energy commitments within budget, including permitting, interconnection and supplier performance.
- ASB’s loan quality, allowance adequacy, deposit retention, net interest margin and sensitivity to changing rates and Hawaii real-estate conditions.
- The eventual cash, share-count and EPS effects of settling HEI’s 7 million-share equity forwards, and HEI’s continuing access to debt and commercial-paper markets.
- Potential environmental, legal and regulatory exposures, including the Molokai site, utility compliance requirements and ASB overdraft-fee litigation.
The filing cautions that interim results are not necessarily indicative of full-year results and that forward-looking statements depend on assumptions and are subject to risks and uncertainties.